Buying to let in Scotland might be more profitable, but it’s also more risky

A press release arrives from Zoopla. They want me to know that the best possible yields on buy-to-let properties for students are in Scotland.

Edinburgh comes top with an average rental yield of 6.1%, while Aberdeen (5.6%), Dundee (5.1%), and Glasgow (5%) also make the top ten in the list of the most lucrative places to buy in the UK.

Zoopla thinks this is great. “Scottish university cities are currently offering fantastic returns for UK landlords”, it says. “Many Scottish universities are now internationally renowned, with thriving undergraduate and graduate environments. This means demand for rental accommodation in university areas is very high, as throngs of students compete to live near their campuses. Combined with Scottish house prices still remaining relatively low, this equates to excellent yields.”

Best student buy-to-let towns – gross yield

Best student buy-to-let towns – gross yield

But I suspect it might be missing the point. There’s a reason why prices are lower and yields are higher in Scotland. It is that Scotland comes with a higher risk premium than cities in the rest of the UK.

We know pretty much what is going on with the structure of taxation in England and Wales; in Scotland, however, we don’t. There is talk of higher rates of income tax and of new income tax bands. There is talk of property taxes, of local income taxes, and of land-value taxes. And, of course, high-value properties in Scotland (such as those in central Edinburgh) are already subject to higher stamp duty rates than those in the rest of the UK.

Worst student buy-to-let towns – gross yield

Worst student buy-to-let towns – gross yield

And there’s another huge risk floating out there for landlords: rent controls. The SNP’s programme for government includes a Private Tenancies Bill which includes measures “to provide more predictable rents and protection for tenants against excessive rent increases including the ability to introduce rent controls for pressure areas.”

There are also to be new tenancy agreements that will increase “security of tenure” – landlords will not be able to evict tenants just because their legal contract has come to an end. See why landlords might demand a slightly higher yield in Scotland than in the rest of the UK? Quite.

Scotland might be more profitable, but with rent controls a given and new taxes almost a dead cert, it is rather more risky too. The one and a half percentage points of yield you get in Edinburgh (an obvious “pressure area”) over Oxford simply reflects that risk premium.

The same goes for the commercial sector. The risk premium is lower than 1.5% there (no rent controls on the horizon, I suppose) but I am told that it is somewhere in the region of 0.65%. The lesson? First, don’t buy in Scotland without reading the SNP’s programme for government. And second, it takes remarkably short time to distort an economy.

PS These numbers might be of interest to those who wonder how much more Scotland might have to pay to borrow money via bond issuance than the UK as a whole does. Might it be somewhere between 0.65 and 1.5 percentage points?