Investment yields from prime London buy-to-let properties don’t reflect the risks involved, Hadrian’s Wall Capital (HWC) has claimed.

The London-based specialist debt adviser said many buy-to-let property investors operating in the capital’s prime market are earning insufficient reward for the increased risks of a downturn in the residential property market.

Property investment currently yields an average of 2% in prime buy-to-let London, which is only 0.71% more than 10-year Gilts (bonds issued by the UK government) at 1.29%.

Before, when house prices were rising, buy-to-let investors could feel confident that even low yielding properties had the potential to deliver strong returns in the long-term once capital appreciation was taken into account. This assumption, however, has been undermined by the recent drop in London property prices and question marks over rental demand after Brexit.

HWC says that concerns over Brexit and a gradual increase in mortgage costs, engineered by the Bank of England lifting interest rates, have ‘widely increased the threat’ to buy-to-let returns.

What’s more, with tax benefits on buy-to-let investment being steadily reduced by the phasing out of mortgage interest tax relief, investors will need to see property prices or rents increase in order to maintain current returns.

According to Nationwide’s House Price Index, house prices in London have now fallen for the last five quarters, with the average London house price dropping by 1.7% to £614,271 in November 2018, down from £625,064 the month before. The average London rent also declined in the third quarter of last year, down by 0.4% to £1,992.

High yields are still possible, though, if investment is made in the right areas. The parts of the capital with the highest average yields in 2018 were East Ham (4.81%), Plaistow (4.52%) and Thamesmead (4.48%). By contrast, the lowest average yields were Highgate (1.50%), East Finchley (1.54%) and South Lambeth (2.03%).

One of the reasons for lower yields could be the costs involved in managing a buy-to-let property. HWC says running costs for a buy-to-let investment have run at an average of between 5% and 20% of gross rental income in recent years, depending on the use of a lettings agency.

It claims that the low raw yields reflect a combination of the number and type of investors (including international investors) and their expectations for growth in property prices.

“Net yields on London BTL property at present, do not look generous enough to balance out the risks,” Mike Schozer, chief investment officer at Hadrian’s Wall Secured Investment Limited (HWSIL), said.

“The outlook for house prices or rental growth do not look promising.  According to Bloomberg, there is a large overhang of unsold new homes – which increased 50% in 2018 – not considering the large number of uncompleted new apartment buildings in several areas such as Nine Elms. The property market is particularly volatile in the lead-up to Brexit as the Government attempts to conclude a deal.”

He added: “Instead of property, investors should consider other fixed income asset classes, which can offer more liquidity and better diversification, with less risk. For those with more of an appetite for risk and high potential returns there are plenty of other investment options.”

For many, though, property investment is still seen as the most reliable, stable asset class, despite the pressures of Brexit and falling house prices. Recent research by Rightmove found that low stock levels are sending asking rents in London soaring, while HomeLet’s latest rental index found that the rental sector is remaining resilient despite various housing concerns.