24 June 2003
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The ARLA Buy to Let Index published today (June 24th) shows that the Cash Purchase Index fell from 98.2 to 96.7 over the past quarter and the Geared Investment Index fell from 99.4 to 97.3. This was described as providing ample evidence of the stable nature of Buy to Let investments.
Both indices combine the rental returns with the capital appreciation and take account of various costs and empty periods. This allows the ARLA Panel of Mortgage Lenders to express the movement of Buy to Let investments in a manner that is comparable to stock exchange and commodity indices.
Taking all factors into account, in the three months to the end of May, the Buy to Let Cash Purchase Index showed a rate of return of 9.3%, down from 9.45%. The Geared Investment Return was 18.65%, down from 19.06% in the previous three months.
Changes over the last quarter include marginal increases for both Cash Purchase and Geared Investments in London and the South West. There were marginal falls throughout the rest of the country producing an average fall in cash purchase returns of 0.15%. On a Geared Investment, the Index reflected an average fall of 0.41%.
Announcing the latest figures, John Crossley, Chairman of ARLA, said “This quarter’s indices provide ample evidence of the stable nature of Buy to Let investments. The Indices have fallen only by some three points during a period of worldwide hyper-volatility and tension and many differing reports about house prices. Overall, Buy to Let returns have continued at broadly the same level since the ARLA Index was launched last September. ”
The quarterly Buy to Let Indices take average rents and void periods from the quarterly survey of ARLA member letting agents and the average mortgage interest rate is assumed to be Base Rate plus 1.75%. For the purpose of the current indices, this gives an average mortgage of 5.50%.
The Index of Rental Returns is supported by the ARLA panel of lenders. This panel is formed by Birmingham Midshires, GMAC Residential Funding, NatWest Mortgage Services, Paragon Mortgages, Standard Life Bank and The Mortgage Business.
Returns on Buy to Let investments either purchased outright for cash or geared with a 75% mortgage were highest in the North West with returns of 10.12% on cash purchases and 20.83% for geared investments. Prime Central London showed the lowest returns at 9.02% on a cash purchase and 17.87% for geared investments.
These figures are based on an assumption of average house price inflation of 6%. Other elements in the calculations include average gross rental returns and void periods taken from the latest ARLA survey, the assumption of a mortgage rate of 5.5% and rent inflation of 2%. Acquisition and selling costs are also included.
Although projections for the Indices are calculated for a minimum five year period, ARLA always recommends that Buy to Let investments should be considered for the medium to long term, a period of 10 to 15 years. Commented John Crossley, “Today’s investors should have a very clear idea of how the property side of their personal finance portfolio compares when they re-examine their investments with the help of the ARLA Index a decade or so down the road.”
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