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News: Private rented sector demand remains solid

In and around London, average rent achieved by buy-to-let landlords on their new property investments has continued to rise more rapidly than the prices they pay for these properties, according to the February edition of Paragon Mortgages’ Buy-to-Let Index.

Recent CML figures show the fastest growth in buy-to-let investment over 2006, and the beginning of 2007 looks set to continue along the positive trend. 

Across the UK, sustained tenant demand in late 2006 and early 2007 helped push rents achievable up by 0.4% in December and by a further 2.5% in January.  Average annual rental incomes stood at £9,942 (£829 per month) in January, up from £9,665 (£805 per month) in November and £9,700 in December (£808 per month).

John Heron, managing director of Paragon Mortgages, said: “Activity in the overall housing market has been somewhat subdued over the New Year period, largely the effect of the seasonal slowdown.” 

“However, demand for properties in the private rented sector remains solid, which is feeding through into higher rents.  Rents are up 2.9% on their level in November last year.”

The south eastern part of England has seen particularly positive trends, with Greater London, the South East and East Anglia all benefiting from the strength of the capital’s economy and a particularly good year for bonuses in the financial services sector.

John Heron explained, “Demand from tenants is particularly strong in London and its hinterland. The capital sees the largest influx of inward migrants and continues to enjoy a buoyant economy notwithstanding the impact of rising inflation and borrowing costs.  At the same time, investors have been actively growing their portfolios in response to higher rents and rising yields.”

East Anglia has seen particularly strong growth in rents and yields: the region now has the highest average yield in the country (along with the South West and Yorkshire) at 6.4%, and indeed also enjoys the highest total annual return, of 18.3%, ahead of the North (16.9%) and the South East (16.0%).

Mark Alexander, managing director of the Money Centre, specialist buy-to-let intermediary based in East Anglia, said: “Buy-to-let in East Anglia is booming.   An influx of central and eastern Europeans has created unprecedented demand in the area.” 

“There is a simple supply issue that has been forcing up house prices, meaning landlords in the area are benefiting from high capital gain.  In addition, these tenants tend to live in shared houses.  From a landlord’s point of view, renting property as shared accommodation is a lucrative option.  The combined rent from a shared house pays dividends in terms of rent received as set against the capital invested in the property. This is why East Anglia is seeing such high yield figures, and consequently, high total returns on investment.”

Buy-to-let continues to benefit from concerns that the Bank of England will raise interest rates at least one more time this year, and younger people are choosing to enjoy the flexibility of rented accommodation for longer whilst they weigh up the future cost of a mortgage.

Inevitably, this places further pressure on the supply of rented homes, with people who would like to purchase their own home holding off until the interest rate outlook becomes more certain. This demand is in addition to that generated by people who would in any event be unwilling to purchase a home, such as those who have recently arrived in the UK, students and young professionals.

“Fortunately, investors who understand the long term dynamics of the market are not spooked by recent modest rises in borrowing costs, and are continuing to grow their portfolios in response to growing tenant demand and rising rents,” added Mr Heron.

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