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Buy-to-let returns will plunge by 60% in the next 12 months, according to a new index
Buy-to-let returns will plunge 62pc in the next 12 months, according to Britain’s biggest network of letting agents and property valuers.
LSL Property Services predicts that by April 2016 total returns on buy-to-let, taking into account a combination of both rental income and capital growth, will be just 3.4pc, down from almost 9pc today.
That return, which would be the lowest in at least four years, would be before mortgages, maintenance and tax are factored in, all of which could push landlords’ investments into the red.
LSL owns 500 estate agent outlets under brands including Your Move, Reeds Rains and Marsh & Parsons. It is also Britain’s biggest surveyor through its e.surv division. Its warning comes as enthusiasm for buy-to-let surges on the back of relaxed pension rules and a rising confidence in the housing market following the election.
LSL’s pessimistic outlook is buried in the latest of the monthly updates to its buy-to-let house price index, an authoritative database of landlord returns stretching back to mid-2008.
The firm declined to explain its methodology, but bases its data and predictions on price and rental data of approximately 20,000 properties on its books.
The general trend it depicted was of sharply slowing property price growth turning into actual falls in value, with rental income thus becoming a more significant part of investors’ total returns.
It said: “Total returns on an average rental property stand at 8.9pc over the 12 months to April 2015, compared to 11.5pc a year ago.
“Looking ahead is particularly difficult but less upbeat. If trends continue, then over the next 12 months, to April 2016, the average landlord would see a total return of 3.4pc.” This is because while rental incomes are rising, “capital growth would be negative”.
At the moment, it says landlords’ total returns average £15,503. “Within this figure, rental income makes up £8,247 while the average capital gain amounts to £7,256.” In 12 months’ time it predicts total returns averaging £6,256, a drop of well over 50pc. “Of this, rental income would be £9,292 while capital growth would be negative, amounting to an average drop of £3,036.”
LSL director Adrian Gill, who oversees the estate agency division, said rising prices “should be seen as a bonus” by landlords, who should focus on “the improving prospect of a steady rental income”.
He said: "Price dips in recent months are unlikely to continue for a long time - which makes predictions for the next year more difficult than usual."
The company’s downbeat message comes as other data shows a surge of interest in the sector. It emerged this week that the proportion of property purchasers paying with cash, rather than using a mortgage, was at an all-time high, reflecting increased buy-to-let investing.