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News: Landlords invest while rents are steady

Average rents achieved on residential investment properties remain steady, and while they do, landlords continue to invest, according to a new report.

The typical landlord earns a gross rental income on each property of £10,189, or just over £849 per month, a rise of 0.8%. This compares with April’s figure of £10,113 and March’s of £10,082, the June edition of Paragon Mortgages’ buy-to-let index shows.

At the same time, investment property prices continue to edge up, rising by 2.9% over the month, from £164,247 in April to £168,935 in May. The price at which landlords purchase properties has risen by 7.7% over the past twelve months, reflecting the relative buoyancy of the residential property market in late 2005 and early 2006.

John Heron, Paragon Mortgages’ managing director, says: "With rents stable, tenant demand healthy and market confidence solid, landlords continue to purchase new properties in a generally upward moving property market. Investor activity has been increasingly strong over the past nine months."

"Investors are dispassionate purchasers and buy in response to growing tenant demand, rather than in the expectation of short term capital appreciation. They purchase properties in locations where they believe that tenant demand will remain sound over the medium to long term, paying particular regard to local amenities, transport links and the individual preferences and expectations of the people who are likely to rent the property."

Average rental yields stand at 6.0%, although there continue to be variations between regions.

Regionally, yields tend to be higher in parts of the country where property prices are lower, while Greater London and the South East, where prices average £327,139 and £184,087 respectively, consistently have lower yields (5.7% and 5.8%).

Winners and losers by region

 

Region

May 2006

April 2006

March 2006

Top yields
(property values)

East Midlands

6.6%
£136,482

6.8%
£132,683

7.0%
£136,403

 

 

North West

6.6%
£126,600

6.5%
£125,602

6.6%
£124,863

     

Bottom yields
(property values)

Greater London

5.7%
£327,139

5.8%
£310,959

5.8%
£293,630

 

 

South East

5.8%
£184,087

6.0%
£181,062

6.1%
£175,182

For the second consecutive month, the East Midlands and the North West head the table as the highest yielding regions, at 6.6% and 6.6%. Prices in these regions are respectively 19.2% and 25.1% below the national average.

While Greater London has the lowest rental yield, the total return for the capital (based on property value appreciation and rental income) is strong. London has again this month generated the highest total return, of 36.3%, on a typical property purchased 12 months ago. Greater London was followed by the North at 34.7% and East Anglia at 28.4%.

Total annual return (rents plus capital appreciation)

Region

Property value May 2005

Property value appreciation

Rental income (May 05-06)

Total gross return

Return on initial investment

Greater London

£250,826

£76,313

£14,678

£90,991

36.3%

North

£86,408

£24,039

£5,981

£30,021

34.7%

East Anglia

£111,072

£23,853

£7,644

£31,497

28.4%

Wales

£119,771

£15,101

£7,211

£22,312

18.6%

West Midlands

£118,231

£12,732

£8,067

£20,799

17.6%

North West

£119,467

£7,133

£8,977

£16,110

13.5%

South East

£175,229

£8,858

£11,610

£20,467

11.7%

Yorkshire

£130,037

£2,175

£9,416

£11,590

8.9%

South West

£187,291

-£17,211

£12,481

-£4,730

-2.5%

East Midlands

£177,535

-£41,053

£13,747

-£27,306

-15.4%

National

£156,887

£12,048

£10,534

£22,582

14.4%

National total returns stood at 14.4%, unchanged from April.

John Heron concluded: "Landlords are experiencing solid demand for rental properties as economic conditions remain sound and interest rates are stable. There is a long term structural shortage of good quality residential property in the UK, and demand for it is growing steadily."

"In addition to the demographic growth in the number of households, there is a steady influx of migrant workers, who tend to choose rented properties for their accommodation needs. Over the next five to ten years, the private rented sector is expected to grow steadily on the back of a stable economic environment."

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