London Yields Well Below 4%, Less Than Cash And Gilts

[AvidFan]

http://www.ft.com/cms/s/2/07a8ac5a-67fc-11...144feabdc0.html

Landlords see London yields fall below 4%

By Sharlene Goff

Published: July 3 2009 19:06 | Last updated: July 3 2009 19:06

Landlords with rental properties in prime central London have seen their return slip below 4 per cent for the first time in nearly two years, according to the latest data from Knight Frank, the estate agent.

The group said the average gross yield in prime central London dropped to 3.79 per cent in June, from a peak of 4.17 per cent in September. Yields have been eroded in recent months as oversupply in the lettings market has caused rents to fall, while property prices have started to recover.

[the flying pig]

is that net of everything, i.e. voids, maintenance, and so on?

in any case, relative to the cost of borrowing, it makes a clear nonsense [as if it wasn't obviously implausible anyway] of the stupid lie that landlords don't care about capital appreciation & that it's 'all about the yield'...

[AvidFan]

is that net of everything, i.e. voids, maintenance, and so on?

in any case, relative to the cost of borrowing, it makes a clear nonsense [as if it wasn't obviously implausible anyway] of the stupid lie that landlords don't care about capital appreciation & that it's 'all about the yield'...

Indeed. The whole business is loss making in capital appreciation terms and most likely in yield terms as well. Maybe we'll just see the most determined BTL'ters selling the odd property off at firesale prices to raise capital to keep the plates spinning. That only works if they're not upside down on their mortgages...

[Executive Sadman]

Isnt it the same thing with stock markets?

Foward earnings projected to be the worst in history, but the private investors just cant get enough of those scumptious green shoots.

[grizzly bear]

Indeed. The whole business is loss making in capital appreciation terms and most likely in yield terms as well. Maybe we'll just see the most determined BTL'ters selling the odd property off at firesale prices to raise capital to keep the plates spinning. That only works if they're not upside down on their mortgages...

I saw thisin the FT, and was interested as we would really like to buy our rented house from our landlord. Its in a nice NW suburb in a good road. He bought in 1992 as a BTL and has never lived there.

Based on the peak price of the house his GROSS yield is exactly 3% but based on his offer (ie when we asked him if we could buy it rather than let it) in Aug 08 the gross yield is 3.4%, based on his suggested price and the rent we are paying (bargained down).

Based on his original purchase price he is getting a gross yield of 17% so would have a CGT bill if he sold. He has no incentive to sell - we thought the price based on 3.4% yield was a bit high, but at 4% we would jump buy it (ie 25% off peak - but he would have a bidding war at that price and he knows it).

Its in prime area we are very fussy, and its the perfect house, we have a good STR deposit (85% of a purchase price at 4%) - I know he cash rich and has other BTLs - mainly expensive prime houses in NW London some also bought ages ago but others bought more recently so am sure some must be mortgaged. When I asked in AUg he was very happy being BTL landlord as all houses full. He is probably quite near retirement. He seems to have no incentive to sell.

Ideas please on how I can persuade him. Am thinking best to just keep on renting it for another year (ie wait for him to be annoyed by tenants negotiating down and voids and more falls in house prices and then ask???

Don't want to derail thread - just using this as illustration that yields of 3% don't matter if you bought ages ago.

[the flying pig]

...yields of 3% don't matter if you bought ages ago.

you, ahem, apologies if this is a bit of a basic point but you do obviously have to use current market prices when calculating a yield, otherwise the figure you calculate can't be used to compare with what you'd get if you sold up and invested the money elsewhere.

if you're renting at 3.4% then i would strongly advise you to keep renting unless you have a particularly large amount of cash that you're struggling to get a return on.

Edited July 6, 2009 by the flying pig

[Selling up]

Ideas please on how I can persuade him.

I would think you probably can't. Best you can do is sit tight and hope that events shift the game in your favour (he may need to sell at some point, he may not).

[Damik]

Don't want to derail thread - just using this as illustration that yields of 3% don't matter if you bought ages ago.

they do matter! if the yield is above 15% you should buy, if it is under 5% you should sell ...

your landlord is right now wasting his money by thousands every months!

[abharrisson]

I saw thisin the FT, and was interested as we would really like to buy our rented house from our landlord. Its in a nice NW suburb in a good road. He bought in 1992 as a BTL and has never lived there.

Based on the peak price of the house his GROSS yield is exactly 3% but based on his offer (ie when we asked him if we could buy it rather than let it) in Aug 08 the gross yield is 3.4%, based on his suggested price and the rent we are paying (bargained down).

Based on his original purchase price he is getting a gross yield of 17% so would have a CGT bill if he sold. He has no incentive to sell - we thought the price based on 3.4% yield was a bit high, but at 4% we would jump buy it (ie 25% off peak - but he would have a bidding war at that price and he knows it).

Its in prime area we are very fussy, and its the perfect house, we have a good STR deposit (85% of a purchase price at 4%) - I know he cash rich and has other BTLs - mainly expensive prime houses in NW London some also bought ages ago but others bought more recently so am sure some must be mortgaged. When I asked in AUg he was very happy being BTL landlord as all houses full. He is probably quite near retirement. He seems to have no incentive to sell.

Ideas please on how I can persuade him. Am thinking best to just keep on renting it for another year (ie wait for him to be annoyed by tenants negotiating down and voids and more falls in house prices and then ask???

Don't want to derail thread - just using this as illustration that yields of 3% don't matter if you bought ages ago.

Not that it applies to all BTL landlords by any measn but some are just happy bubbling along if they are in a low mortgage situation...... as you say the house is yielding him about 17% P/a on his initial investment even in these depressed rental times... he may well think (rightly) thats jolly good and can't see the point in selling especially if he has worked out his IHT position through some trusts etc.

[grizzly bear]

you, ahem, apologies if this is a bit of a basic point but you do obviously have to use current market prices when calculating a yield, otherwise the figure you calculate can't be used to compare with what you'd get if you sold up and invested the money elsewhere.

if you're renting at 3.4% then i would strongly advise you to keep renting unless you have a particularly large amount of cash that you're struggling to get a return on.

I know you have to use market prices, was making the point that many of these landlords didn't pay that. Clearly he could get the same gross return elsewhere without hassle of tenants, voids, agency fees and other costs.

The large sum of money is the the problem for us - we would have deposit of around 85% of value of house - until November its getting 6.4% gross - ie 3.84% net which is above the 3.4% rental. However after November when our net yield will be less and so renting only attractive if prices still falling by material amounts.

[Si1]

Not that it applies to all BTL landlords by any measn but some are just happy bubbling along if they are in a low mortgage situation...... as you say the house is yielding him about 17% P/a on his initial investment even in these depressed rental times... he may well think (rightly) thats jolly good and can't see the point in selling especially if he has worked out his IHT position through some trusts etc.

and in terms of its 1864 purchase price (when his distant third cousin Lizzie owned it as a guesthouse for coachmen) it has a 2000% yield and he's the richest man in Britain... except he isn't

Edited July 6, 2009 by Si1

[Si1]

I know you have to use market prices, was making the point that many of these landlords didn't pay that. Clearly he could get the same gross return elsewhere without hassle of tenants, voids, agency fees and other costs.

The large sum of money is the the problem for us - we would have deposit of around 85% of value of house - until November its getting 6.4% gross - ie 3.84% net which is above the 3.4% rental. However after November when our net yield will be less and so renting only attractive if prices still falling by material amounts.

no - you need to calculate the yield on the whole value, including your deposit. otherwise it isn't the yield and can't be compared to other yields.

[grizzly bear]

and in terms of its 1864 purchase price (when his distant third cousin Lizzie owned it as a guesthouse for coachmen) it has a 2000% yield and he's the richest man in Britain... except he isn't

true - we had friends round and they were saying that their parents had inherited their grandmothers house - worth > £1m at the peak, been in family for 50 years. They were saying no point in selling, planning to spend a bit on it and rent it out. I pointed out that yield would be around 3% based on similar houses and this would require at least £100k outlay due to state of the house. I said it would take 3 years worth of rent just to cover these costs. They said well no mortgage bought 1960 (no doubt for less than £5000), so yield doesn't matter.

I think the problem is that many middle class families see houses as being safe holding of money in long run, and it will yield some sort of return - but they can't see other safe haven for the money that will yield any more. Also why should they sell into a depressed housing market when they can wait?

[Si1]

true - we had friends round and they were saying that their parents had inherited their grandmothers house - worth > £1m at the peak, been in family for 50 years. They were saying no point in selling, planning to spend a bit on it and rent it out. I pointed out that yield would be around 3% based on similar houses and this would require at least £100k outlay due to state of the house. I said it would take 3 years worth of rent just to cover these costs. They said well no mortgage bought 1960 (no doubt for less than £5000), so yield doesn't matter.

I think the problem is that many middle class families see houses as being safe holding of money in long run, and it will yield some sort of return - but they can't see other safe haven for the money that will yield any more. Also why should they sell into a depressed housing market when they can wait?

true - depends on how long your rolling averages are, and transaction costs

yield can be calcualted against anticipated future income on that basis - but never directly against past values, which are irrelevant

[Si1]

I think the problem is that many middle class families see houses as being safe holding of money in long run,

I think this is the reason why they will remain overvalued for some time, engrained sentiment.

[the flying pig]

...I think the problem is that many middle class families [think]... why should they sell into a depressed housing market when they can wait?

only if they are very foolish indeed.

as people will soon remember, when the halifax average price to average male FT earnings ratio is hovering somewhere just below 5.0, the housing market is, from a seller's perspective, anything but "depressed", on the contrary it is offering fantastic value for sellers by any sensible yardstick [outside of the recent bubble].

[grizzly bear]

no - you need to calculate the yield on the whole value, including your deposit. otherwise it isn't the yield and can't be compared to other yields.

ok then - we have around 85% deposit which will get 2.4% net yield in bank on post november

we would need to borrow 15% which I estimate would cost 5%.

so yield on whole value is 2.8%, currently paying rent at 3.4%, so looks like its better to buy (although if we had to borrow the money would not be the case). will try to renegotiate rent of course.

however if house prices fall by more than 0.6% next year, better to keep on renting.

[Si1]

ok then - we have around 85% deposit which will get 2.4% net yield in bank on post november

we would need to borrow 15% which I estimate would cost 5%.

so yield on whole value is 2.8%, currently paying rent at 3.4%, so looks like its better to buy (although if we had to borrow the money would not be the case). will try to renegotiate rent of course.

however if house prices fall by more than 0.6% next year, better to keep on renting.

no, you are comparing a long term purchase (house) with short term cash yield

compare like with like

long term yield on the stockmarket is about 8% above inflation long term historically. knock this down to 6-7% for low performance over next decade. not sure what bond market yields are long term, think prices look frothy, not sure tho

also consider likely approx 1% ish to come off property yield for maintenance over the long run, so your real yield on your property looks closer to 2.4% making it look poor even compared to cash.

[Neverland]

I think the problem is that many middle class families see houses as being safe holding of money in long run, and it will yield some sort of return - but they can't see other safe haven for the money that will yield any more. Also why should they sell into a depressed housing market when they can wait?

You've hit the nail on the head there

These people will hold on to their houses and only sell:

- if they HAVE TO

- if they get an offer they regard as attractive

After all they have done fabulously well holding onto houses for the last fifty years etc. etc.

I'm a bear but I think house prices will fall slowly for this reason or get their real value ground down by inflation

Most people aren't really badly affected by this recession and (probably) wont be, therefore they fall into the second camp, ie. they will only accept offers they find attractive

[Si1]

You've hit the nail on the head there

These people will hold on to their houses and only sell:

- if they HAVE TO

- if they get an offer they regard as attractive

After all they have done fabulously well holding onto houses for the last fifty years etc. etc.

I'm a bear but I think house prices will fall slowly for this reason or get their real value ground down by inflation

Most people aren't really badly affected by this recession and (probably) wont be, therefore they fall into the second camp, ie. they will only accept offers they find attractive

+1

I think renting will likely prove very lucrative over the coming decade as landlords hold on for these spurious reasons and rents remain low. I would love to be a homeowner but not at these prices

[THE BALD MAN]

You've hit the nail on the head there

These people will hold on to their houses and only sell:

- if they HAVE TO

- if they get an offer they regard as attractive

After all they have done fabulously well holding onto houses for the last fifty years etc. etc.

I'm a bear but I think house prices will fall slowly for this reason or get their real value ground down by inflation

Most people aren't really badly affected by this recession and (probably) wont be, therefore they fall into the second camp, ie. they will only accept offers they find attractive

I think you may be under estimating the recession. We are being supported buy government spend . This has to reduce taking money oout of teh economy forcing sales of property as people try to save money

[grizzly bear]

no, you are comparing a long term purchase (house) with short term cash yield

compare like with like

long term yield on the stockmarket is about 8% above inflation long term historically. knock this down to 6-7% for low performance over next decade. not sure what bond market yields are long term, think prices look frothy, not sure tho

also consider likely approx 1% ish to come off property yield for maintenance over the long run, so your real yield on your property looks closer to 2.4% making it look poor even compared to cash.

not applicable as we are going to buy in the medium term. not prepared to rent in long term even if cheaper. its a question of buying now, or next year or the year after.

re: stockmarket, would dispute 8% above inflation invested £3k in 1999 in a FTSE 100 tracker and its worth the same now in nominal terms, would have been just as good with money under mattress. also bought flat in 1997 and although now sold if i still owned it would be even with HPC at least 2x - 2.5x what I bought it for (the flat sold at peak (not by us) for 3x times what we bought for, 50% more than we sold for in 2001.

[Si1]

re: stockmarket, would dispute 8% above inflation invested £3k in 1999 in a FTSE 100 tracker and its worth the same now in nominal terms, would have been just as good with money under mattress. also bought flat in 1997 and although now sold if i still owned it would be even with HPC at least 2x - 2.5x what I bought it for (the flat sold at peak (not by us) for 3x times what we bought for, 50% more than we sold for in 2001.

this is no position to dispute what I said given the credit boom. whatever, good luck.

[IntoTheStorm]

I think you may be under estimating the recession. We are being supported buy government spend . This has to reduce taking money oout of teh economy forcing sales of property as people try to save money

I do +1 the original statement to some extent. And feel this will definitely limit the extent of house price falls over the next 12-18 months initially and over the medium term.

Your statement is correct to, but its going to be a long drawn out process for slowly reducing government spend to start to squeeze down property prices. Its certainly not going to happen the next 12 months with the current knobhead in charge.

I suspect the market is really going to dry up in the first part 2010 as buyers and sellers wait for the outcome of the election and what policy angle the new (surely Tory) government is going to take.

If i was selling i would be trying to get out in the next few months, because once government changes hands and someone gets an fresh book to start to reigning in spending, that will put pressure on property prices (as well as other parts of the economy). This could though slowly play out over 5-10 years though if the incoming government makes the cuts targeted and carefully rather than hard and fast.

[grizzly bear]

this is no position to dispute what I said given the credit boom. whatever, good luck.

i am not saying at all that housing will now outperform the stock market clearly not, just saying that no guarantee stock market will make 7% per year above inflation over next 10 years, although as starting from a lower base clearly more chance of that that housing making 7% above inflation.