Buy-to-let yields depressed by Stamp Duty holiday

The yields generated by investing in private residential rental property fell to 4.75% in January, a 2% decrease from last September.

The latest buy-to-let index compiled by letting agents network LSL reports that average rents fell by 0.5% last month as a result of more landlords buying up property at the end of 2009 in order to beat the end of the Stamp Duty holiday, which ended on December 31.

But it was not all bad news. Total returns, comprising the income generated by rent plus capital growth in the value of buy-to-let property, rose 16.7% on January 2009. The average landlord enjoyed a total return on their investment of £27,500, made up of £20,000 in capital growth plus £7,500 in rent.

LSL commercial director David Brown said: “Landlords moved fast to add to their portfolios before the stamp duty holiday ended in December. This has meant higher rental supply at a time of year when tenant demand is traditionally quieter. Landlords have had to cut rents in order to avoid even costlier void periods.

“Sacrificing a few pounds a month in rent to save themselves an average of £1,600 tax on each property bought was a very shrewd move as it would take years to recoup that saving through gradual rent hikes.”

Brown advises landlords to concentrate on balancing their returns between a steady rental income and long-term capital growth because, as he says, focusing on one at the expense of the other is a risky investment strategy.

“Over the long term, investment in buy-to-let must be underpinned by a strong yield,” he said.

The surge in demand for property resulting from the Stamp Duty concession led to an increase in buy-to-let lending towards the end of the year.

According to the Council of Mortgage Lenders, there were 25,800 new buy-to-let mortgages advanced in the last quarter of 2009, up from 23,700 in the previous quarter but down from 38,000 in the same period of 2008 In related news, the Building Societies Association (BSA) has said that Government plans to regulate the buy-to-let sector could damage the market.

Paul Broadhead, head of mortgage policy at the BSA said: “The decision to enter into the buy to let market is an investment decision made by the borrower.

“Including buy-to-let mortgages in the same regime as owner-occupied mortgages would not be practical. Subjecting buy to let investors to affordability and suitability assessments in the same way as owner occupiers is not appropriate, and would result in a further constraint in the supply of quality housing to the private rental sector.

“Only regulating part of the market makes no sense at all and would only serve to confuse the market and to provide a loophole that less reputable organisations could take advantage of.”