Be wary of high-yield, low capital growth

Buy-to-let property investors should be cautious of investing in higher yielding properties, experts have warned, as they are likely to be in areas that will experience relatively low capital growth over the long term, writes Tanya Powley.

The highest yielding properties across the UK are currently in Nottingham, Tyne and Wear, Merseyside and Greater Manchester, according to research from Savills, the estate agent.

Nottingham has an average yield of 6.08 per cent, compared with a yield of 4.67 per cent in Bristol – an area that is forecast to be among the first to see sustainable capital value recovery.

Lower value London boroughs are also offering higher yields. The average gross yield in Barking and Dagenham is 6.38 per cent, compared with 3.87 per cent in the City of Westminster.

“For buy-to-let investors, the temptation will be to look to the higher yielding markets, where costs of purchase are lower and there is a greater ability to fund a moderate level of gearing out of net rents,” says Lucian Cook of Savills.

But he warns that these markets are expected to experience a slower economic recovery – with the risk that capital growth will be constrained by lower owner occupier demand.

Graham Gould of Coba, the property fund manager, says investors should buy properties that they can eventually sell to an owner occupier.

“A property is high-yielding because the property is cheap and it’s probably cheap because it’s not in a great location.”

Capital growth rather than income has provided the largest return for buy-to-let investors in the past decade and Cook says this is unlikely to change – in spite of the recent fall in prices. Gross yields fell from 8.1 per cent at the beginning of 2000 to just 4.6 per cent prior to the recent downturn, in mid 2007.

But buy-to-let investors continue to struggle with obtaining mortgage finance. Some lenders are offering 75 per cent loan-to-values but the rental incomes necessary to qualify are ruling out all but the highest yielding properties.

Clydesdale Bank and Natwest both have 75 per cent mortgages but require a rental yield of at least 6.3 per cent.