Who'd be a landlord?

Is it worth renting out grandma's house? Clifford German reports

The growing number of property owners inheriting homes from parents and the slump in property prices has helped to create a new class of landlords who prefer to let the extra home on shorthold tenancies rather than sell at what they see as giveaway prices.

Some of those homes will start to filter back on to the market now that prices have started to rise and estate agents are complaining of a shortage of properties to sell. But many landlords have found that property-owning can be a profitable activity, and may look to renew the tenancies and wait for some capital gain rather than reclaim them and cash in the asset at the earliest opportunity.

But while most property owners have a shrewd idea of what their properties are worth, few amateur landlords know what kind of return they can expect by renting, and the rental market is still much narrower than the market for properties to buy and sell.

The first comprehensive quarterly guide to rents and the yield landlords can expect on their investment has just been published by the Joseph Rowntree Foundation, in collaboration with the Association of Residential Letting Agents, the Rent Officer Service and the Halifax.

They have identified two distinct markets: local rent officers offer guidance on rents and property values mainly for cheaper properties in what they call the valuations market, while local estate agents who specialise in letting properties provide guidance in the mid to top end of the market which they refer to as the transactions market. These are the kind of properties that housing investment trusts are expected to target when they start to raise cash from investors in the next few months.

The first edition of the JRF report shows that in the valuations market the average weekly rent of furnished properties in the UK is now pounds 97 a week, and of unfurnished properties pounds 86 a week. Based on current property prices this provides landlords with a gross return of 9.3 per cent on furnished properties and 8.2 per cent on furnished properties. Allowing for the operating costs, which tend to be higher on furnished premises, the net (pre-tax) yield drops to 5.3 per cent compared with 5.8 per cent on unfurnished.

Rents are naturally highest in London and the South-east, and lowest in Scotland and Wales, and rents relative to property values show gross yields ranged from a high of 10.1 per cent in Greater London and 10 per cent in Northwest England down to 7.9 per cent in Yorkshire and 6.7 per cent in Scotland. Net yields ranged from 6.3 per cent in London and the Southeast down to 5.2 per cent in Yorkshire and 4.4 per cent in Scotland, which perhaps tells us something about the way the Scots still manage to buck the market.

Urban rents are generally 10-15 per cent higher than rural rents, but countrywide the type of property is even more important than the location. Average rents range from pounds 94 a week for houses, pounds 92 a week for flats and pounds 48 for bedsits, but from the landlord's point of view furnished bedsits generate the highest yields, averaging 19.1 per cent gross and 10.9 per cent net, followed by one bedroom self-contained flats at 12.6 per cent gross and 7.2 per cent net for furnished flats and 12.1 per cent gross and 8.6 per cent net for unfurnished, then two-bedroomed flats at 11.6 and 6.6 per cent respectively for furnished and 11.3 per cent and 8.0 per cent for unfurnished.

The yields on terraced houses, semi-detached and detached properties fall away progressively, with four-bedroomed detached houses yielding just 6.8 per cent and 3.9 per cent furnished and 6.1 and 4.3 per cent unfurnished.

In the transactions market the variations (based on actual reported rents) are much greater. Furnished rents average pounds 203 a week, offering landlords 12.1 per cent gross and 6.9 per cent net, unfurnished rents average pounds 145, giving a gross yield of 10.3 per cent and 7.3 per cent net. Rents are highest but yields are lowest on detached houses, but rents on terraced houses and flats are higher than on semis, and yields on flats at 12.5 per cent gross and 7.6 per cent net are highest.

Rents in Greater London average pounds 293 a week, and London is unique in having unfurnished rents at pounds 342 a week compared with furnished rents at pounds 279. Within London average rents ranged from pounds 436 a week in the NW postal districts, pounds 363 in SW and pounds 357 in W to pounds 189 in N, pounds 158 in SE and pounds 149 in E postal districts. The London average was almost three times the next most expensive region, pounds 105 in the South-east, pounds 99 in Scotland, pounds 97 in Wales and pounds 91 in England outside London, with a low of pounds 80 in the East Midlands.

Landlords made their highest returns of 13 per cent gross and 7.7 per cent net in Greater London and the lowest yields were 9.3 per cent gross and 6.1 net in East Anglia and 9.4 per cent gross and 6.2 per cent net in Yorkshire.

The full report is available from the Centre for Housing Policy, University of York, YO1 5DD.