Rental yields highest for 2 years

Landlords in the UK buy-to-let sector saw their rental yields continue their upward trend during February, with returns now at their highest level for two years.

According to the monthly Paragon Buy-to-Let index, average yields increased to 6.3 per cent during January – the highest level recorded since March 2006.

The figure represents a 0.3 per cent increase over the six per cent recorded in December.

The specialist buy-to-let lender also finds yields have increased largely in line with rising rents – which were up 0.2 per cent in January – to an average of £11,604.

The increase in rents follows a steady upward trend since last summer, with tenants paying on average eight per cent more for a rental property than they did in September 2007.

However, this has been partially offset by a moderate easing of house prices – with average prices down 1.5 per cent to £184,908.

“Commentators who predicted that the current economic climate would translate into stronger demand for rented homes and higher rents are being proved right,” said Paragon’s director of mortgages, John Heron.

“Since September, we have seen one of the strongest periods of rental growth ever. This, together with the easing of house price inflation, has translated into higher yields.”

It is thought demand for rented property has increased in response to turbulence in the wider property market, which may be encouraging buyers to bide their time before committing to a purchase – in the hope prices may fall further.

Wales has been among the regions with the highest yields, with a figure of 7.5 per cent recorded, along with the north and north-west, both of which are generating yields of 7.2 per cent.

In terms of the type of property, terraced homes have shown the best yield performance on an annualised basis, growing 8.6 per cent, followed by detached property and semi-detached property, growing 3.6 per cent and 1.6 per cent respectively.

However, these gains have been offset by the yield generated by flats, which has fallen by 1.4 per cent over the year to January.

“Many landlords who have been in residential property investment for a considerable time have low levels of gearing – on average 36 per cent – and significant amounts of equity in their portfolios.

“They know at times like this, when people are reluctant to commit to home purchase, there is growing tenant demand combined with plenty of opportunities to buy extra rental properties in a less competitive mark,” concluded Mr Heron.