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Written by Emma Lunn

A new report has shown how buy-to-let has produced returns of over 1,200% since 1996.

2014 is the 18th anniversary of the launch of the buy-to-let mortgage initiative by the Association of Residential Letting Agents (ARLA) and buy-to-let mortgage lenders including Paragon Mortgages. To mark this ‘coming of age’ the Wriglesworth Consultancy has issued a major report – commissioned by Paragon – on how buy-to-let investors who purchased in 1996 have fared relative to investors in the other main UK asset classes.

The key findings are:

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 £13,048 by the final quarter of 2013, a compound annual return of 16.3%. The same investment in UK commercial property would have grown to £3,654; in UK equities (shares) to £3,082; in gilts (UK government bonds) to £2,924; and in cash to £1,949.

Around a third (32%) of the total return to the mortgaged buy-to-let investor was income (rent less costs), and 68% capital gains.

A buy-to-let purchaser buying entirely with cash would have seen each £1,000 invested grow to £4,791 by the end of 2013 – a compound annual return of 9.7%.

The report includes a 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 5.75% by 2020.

The projections suggest that every £1,000 invested at the end of last year using a 75% LTV mortgage would be worth £2,910 by the end of 2023 – an average annual return of 11.3%. The corresponding annual return for an unmortgaged investor would be a more modest 6.3% (similar to the rate of return from gilts and equities over the 1996-2013 period).

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

Rob Thomas, director of research at the Wriglesworth Consultancy and author of the report, said: “We believe this is the most detailed analysis of long term buy-to-let returns undertaken to date. 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 or so.”

John Heron, director of mortgages at Paragon, said: “Buy-to-let mortgages have become such an integral part of today’s mortgage market that you easily forget that the product didn’t exist prior to 1996.  Buy-to-let has increased the number of properties available to rent in the UK, providing homes for over 4 million householders. The private rented sector remains an important and growing sector and now represents 18% of the UK’s housing market.”

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