Buy-To-Let Rental Yields Set To Fall As Property Prices Rise

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Property analysts are warning that buy-to-let landlords could be seeing smaller yields in 2014, despite rents and property prices increasing. After the economic crisis, property prices plummeted but rents continued to increase. Now, in Berlin and London, two of Europe’s strongest property markets, buy-to-let investment doesn’t seem to be as stable as it was 6 months ago.

Berlin is currently ranked in third position among Europe’s property markets, just behind London and Rome. In Germany’s biggest cities; Hamburg, Berlin and Munich, an increasing number of Germans are moving out of rental properties. In Berlin, home owner figures were just 16% in 2007, compared to 50% in London. Renting was seen as a safe, affordable option, protected by favourable laws seemingly giving tenants more rights than property owners. So what is pushing tenants out?

Initially, the answer seems to be higher rents. Rents are rising fast in Berlin, nearly twice as fast as the rest of Germany according to Les Calvert of property-abroad.com. But with German banks requiring 20% deposits for first time mortgages, tenants are not making the switch to being homeowners. Instead, renters are choosing to move out of the cities, seeking to become tenants in more stable environments. Could these events predict what will happen in London? Will higher rents and higher house prices lead to fewer tenants?

Perhaps not, as in the UK, house prices are rising faster than rents, so much so that while people are more likely to stay as tenants rather than make the shift to homeowner, landlords could be seeing smaller returns this year. Research by BM Solutions showed that the average rental yield fell slightly in the second half of 2013, from 5.6% to 5.5%. In London the average was just 4.8%, despite the average rents here being 102% higher than the rest of the UK.

This gap is even more pronounced in property prices, with the average property in London worth £409,881, compared to £98,292 in the North East of England. With Britain’s new position on the world stage as a strong investment option, a flood of property investment this year could push up prices even further.  Consultancy firm EY described the UK as “leagues above” the rest of Europe in terms of the quality of residential and commercial property investment.

Eleanor Carroll, director of The Online Letting Agents, explains “The figures show that landlords’ average yield has remained static, despite rent rises. This is a result of the fact that the average price of a typical buy to let property has grown marginally faster that average rents.”