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News: Landlord glee as rental yields rocket

Mon, 25 Feb 08

Residential rental yields have reaching their highest level for almost two years, Paragon Mortgages’ February Buy-to-Let Index has revealed...

The Index showed average yields rose to 6.3% in January - their highest level since March 2006 - up from 6.2% in December. This increase followed a long period of yield stability at around the 6% mark throughout 2007 and 2006. 

Yields are up this month on the back of rising rents, up 0.2% in January to £11,604, combined with a moderate easing of house prices, down 1.5% to £184,908.  The increase in rents follows a steady upward trend since last summer, with tenants paying on average 8% more for a rental property than they did in September 2007.

Regions with the highest yields include Wales, at 7.5%, and the North and North West, both of which are generating yields of 7.2%. On an annualised basis, terraced properties have shown the best yield performance, growing 8.6%, followed by detached property and semi-detached property, growing 3.6% and 1.6% respectively. However, the yield generated by flats has fallen by 1.4% over the year to January.

Strong cash-flow

Healthy yields are important to landlords as it suggests they are generating strong cash flow, or rental income, from their property and many property investors will use the yield to judge the financial viability of a potential buy-to-let purchase.

Paragon’s Director of Mortgages John Heron says: “Commentators who predicted that the current economic climate would translate into stronger demand for rented homes and higher rents are being proved right.  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.

”Many landlords who have been in residential property investment for a considerable time have low levels of gearing – on average 36% – and significant amounts of equity in their portfolios.  They know that 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 market.”

Heron adds: “But I can’t stress too strongly the need to know your market place, to understand what tenants want, to do your sums and buy judiciously. Many landlords are reaping the benefit of a sound, long-term investment strategy and are avoiding the pitfalls that speculative buyers are prone to.”   

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