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Buy to let yields set to slide into the red

11 June 2015

Buy to let yields set to slide into the redBuy to let yields will plunge by almost two-thirds over the next year if current property market trends continue to bear down on private home rentals, says Britain’s biggest letting agent.

LSL Property Services forecasts that average yields will plummet from 8.9% - which is the yield calculated for April 2015 and the latest available statistic – to 3.4% in April 2016.

The firm expects to see a trend of slowing home values with rents making a more significant input to yields over the next 12 months.

The concern for landlords is that buy to lets could produce a negative return.

Yield is the return on investment a landlord receives in a year from a buy to let home.

The figure is based on the value of the property and the rent paid by tenants before deducting any expenses, such as mortgage interest, repairs or voids without rents.

In financial terms, the index estimates the average buy to let generated a return of £15,503 over the past 12 months. Rental income made up £8,247 of this amount, while the average capital gain came to £7,256.

In April 2016, the average landlord would see an annual cash return of 3.4%, or £6,256. Of this, rental income would yield £9,292, while property values will drop an average of £3,036, if price trends continue as seen over the past three months.

The report explained forecasting yields is difficult.

If trends continue over the next year, the average landlord would see yields drop because while rental incomes continue to increase, house prices would fall.

LSL director Adrian Gill said “Rising property prices should be seen as a bonus by landlords, who should focus on the improving prospect of a steady rental income.

"Price dips in recent months are unlikely to continue for a long time, which makes predictions for the next year more difficult than usual."