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Landbay Key findings

A comparative analysis of returns for buy-to-let and other major asset classes since 1996 shows buy-to-let returned just under 1,400%

1996 was the year the buy-to-let mortgage initiative was launched by the Association of Residential Letting Agents (ARLA) and buy-to-let mortgage lenders, opening residential rental property to ordinary investors.

Buy-to-let has been the outstanding investment of the past 18 years, providing average returns that easily outstrip those of other major asset classes.

Every £1,000 invested in an average buy-to-let property purchased with a 75% loan-to-value (LTV) mortgage in the final quarter of 1996 would have been worth £14,897 by the final quarter of 2014, a compound annual return of 16.2%. The same investment in UK commercial property would have grown to £4,494 (see Table 2 for compound annual return); in gilts (UK government bonds) to £3,329; in UK equities (shares) to £3,119; and in cash to £1,959 (see also Chart 1).

A buy-to-let purchaser buying entirely with cash would have seen each £1,000 invested grow to £5,071 by the end of 2014 – a compound annual return of 9.4%.

2014 was a good year for buy-to-let investors with property prices rising by an average 8.3% over the course of the year. Our index shows that mortgaged landlords achieved average returns of 18.3% for the year, 81.9% of which was comprised on capital gains. Our un-mortgaged index achieved returns of 7.9%.

Rob Thomas, Director of Research at The Wriglesworth Consultancy and author of the report says: “Last year for the first time we produced what we believe is the most detailed analysis of long term buy-to-let returns undertaken to date. Today we release the results updated for 2014 – meaning we have 18 years of comparative data on investment returns.

“It should be invaluable for investors seeking to understand the relative performance of different investments over the longer term and shows the outstanding average returns enjoyed by buy-to-let investors over the past 18 years.”

John Goodall, Chief Executive of Landbay, says: “The phenomenon of buy-to-let as an asset class only goes to underline the stable personal finances of landlords. The stability of returns shown in this paper underlines why this group of borrowers can be so attractive for lenders. In fact the history of buy-to-let can be viewed as a history of opportunity for those offering the financial backing to landlords.

“However – the bigger trend underlined here is the democratisation of such investments, which started a generation ago, and is far from complete. Buy-to-let itself is only one example of this shift. Now new models of peer-to-peer finance can give access to the returns involved in lending to such industries. Since 1996 ordinary investors have been able to be landlords, but now in 2015, ordinary investors can play the role of the bank.”

Other approaches to reinvesting income produce very different results:

The findings outlined above use conservative realistic reinvestment assumptions for buy-to-let. The alternative of the investor who remortgaged to release equity to expand his/her portfolio more quickly would have turned £1,000 into an astonishing £34,732 (see Chart 2).

Graph

Future Projections

The report includes an updated 10 year projection for buy-to-let returns assuming house prices rise 4% a year, rents by 2% a year and mortgage rates rise to 5.5% by 2022.

Our projections suggest that every £1,000 invested at the end of last year using a 75% LTV mortgage would be worth £2,874 by the end of 2024 – an average annual return of 11.1% (see Table 1). The corresponding annual return for an un-mortgaged investor would be a more modest 6.1% (but not far short of the rate of return from equities over the 1996-2014 period).

If these projections prove to be broadly correct buy-to-let looks set to maintain its reputation as a superior investment.

 

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