Most regions have seen a drop in annual rental yields, with the North West registering the highest fall of 120 basis points compared to the same quarter last year — the area’s average rental yield in Q3 2022 was 6.5%.

Only two regions — Wales and the South West — have seen annual rental yield increases of 20 and 30 basis points, respectively.

While the North East retains its top regional rental yield figure for the ninth consecutive quarter, Wales has now moved up into second place, while Yorkshire and Humberside, and the North West remain joint third.

Comparing the latest results with the Q2 2022 rental barometer figures, Greater London has seen a quarterly increase in rental yields — up from 4.4% to 4.6%.

East Anglia has also seen a quarterly rise in average rental yields, reaching 5.1% in Q3.

According to Fleet, the quarterly increases are a result of an acute shortage of rental accommodation in these specific regions, particularly in Greater London.

The lender also predicted that the recent increase in the cost of mortgage finance might see further landlords exiting the private rental sector, which was likely to exacerbate the shortage of property in those regions.

Looking ahead, Fleet said that the increased cost of BTL mortgages — specifically as a result of the recent market turmoil — was bound to impact on rental yields, as landlords were unlikely to be able to recoup all of these greater finance costs via an increase in rents. 

The lender also claimed that the higher interest rates would see landlords bide their time when making future investment decisions.

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Steve Cox, CCO at Fleet Mortgages, said: “These new set of rental yield figures have to be viewed in the context of the period they cover and what has happened to the mortgage market since then.

“It is clearly positive that a number of regions have seen a quarter-on-quarter increase in yields, and that the figure for England and Wales is down only very slightly on the Q2 2022 results. 

“Tenant demand remains very strong right across the country, and in a number of regions, the supply of property available within the private rental sector is not enough to satisfy this.

“However, we now have to take into account a very different interest rate environment, the pulling of many BTL products following the mini-Budget, and lenders having to make difficult decisions around product ranges and pricing.

“To that end, it’s an obvious point to make that the cost of BTL mortgages has increased, and landlords will need to factor that into their profitability and what they might charge for rent in order to cover these increased costs, which is not an easy task, given the cost of living crisis.

“Our outlook is that rates will remain high for the short-term, although it is our hope that recent attempts to calm the markets will provide greater certainty to lenders who will be able to return products to market — particularly in areas, such as two-year fixed-rates options.

Despite the current market challenges, Steve stated that the BTL market remains an attractive, long-term investment opportunity.

“Tenant demand is not going to drop and supply is needed in considerable numbers — if landlord borrowers and their advisers can square the finance circle, and we can see a greater degree of competition coming back to the BTL mortgage market and more competitive rates, then it is likely that activity will improve and landlords will continue to secure strong yields,” he added.