Rental yields and tenant demand are holding firm for landlords’ property investments, however profitability of portfolios was slightly down on the previous quarter, according to the latest Q4 2022 BVA BDRC Landlord Panel research report.

The research, comprised of 752 online interviews with landlords, was undertaken on behalf of Foundation Home Loans, the intermediary-only specialist lender in November and December last year.

It reveals rental yields held firm at the tail-end of 2022, softening by just 0.1% to an average of 5.7% across the country, with rental properties in Wales securing the strongest yield figures of 6.4%. HMO properties went back to the top spot to offer the strongest yield by property type, at 6.4% for the quarter, followed by multi-unit blocks at 6.2%.

Landlords’ perception of tenant demand remained stable in the last quarter, with net demand holding firm at 65%. Regionally, Central London landlords reported the highest strength of current tenant demand, however demand appears to have fallen, on a net basis, across a number of regions including the North West, West Midlands, the South East and Outer London.

There was good news in terms of rental void periods – the incidence of voids reported by landlords fell to a historic low with only one in four landlords reporting a property without tenants in the preceding three months. Also, the typical void period fell by an average of 12 days to 70, suggesting it was easier for landlords to fill properties than at any point in the last six years.

81% of landlords said they were making a profit from their letting activity, down 5% on the figure from the previous quarter, however for those landlords who have four to five properties, 90% said they continued to make a profit. Overall, however, the Landlord Profitability Index fell six points quarter-on quarter, with this result down to a larger number of landlords now reporting they are ‘breaking even’ financially on their investments.

Foundation said the impact on profitability might lead to a greater number of landlords choosing to raise rents in 2023. Larger landlords were likely to be the most aggressive in this – they are 20% more likely than average to levy an increase in the first half of the year but while typical rents are likely to increase by 7.7%, landlords with the smallest number of properties are likely to seek the highest increases at 8.7%.

Landlords said that ‘increased running costs’ were the most common driver for rental increases, while 61% said they would be increasing rents to align with their local market, and 47% saying it was rising mortgage costs that would require them to raise rents – this was up from 41% in Q3 2022.

Foundation said there was good news for mortgage advisers with a significant number of existing landlords – one third – saying they plan to remortgage over the next 12 months. Of those who intend to remortgage, one in three are unsure, at this stage, what product they might opt for, with many saying they will take advice from their broker on what is the best option for them.

George Gee, managing director (commercial) at Foundation Home Loans, said: “There are some very positive fundamentals here, particularly for professional and larger portfolio landlords, in terms of stable rental yields, strong tenant demand, and ongoing profitability of portfolios. However, as we might expect, landlords who have a small number of properties are being hit hardest by the rising cost of letting a property including potentially increased mortgage costs.

“It is for these reasons, and the continued low supply of properties in the private rented sector, that many landlords are likely to raise rents in 2023, as they also seek to realign their properties for the local market, and make sure these properties can continue to make a profit.

“This research was undertaken soon after the ‘Mini Budget, and we’ve already seen the market much calmer since then, which we hope will feed into landlords’ views looking forward.

“Overall, the market for refinance in particular remains strong, and as many more landlords will require the insight of their mortgage advisers when they come to remortgage their properties. Understandably many landlords are unsure about what product is best for them, and this presents a clear and obvious opportunity for advisers to touch base with existing clients as well as those who might ordinarily seek to secure their next mortgage via direct means.”