Rental yields are on the rise again

Buy-to-let landlords are recovering confidence as rents rise and property prices stabilise, according to the latest research.

A survey of more than 1,000 property investors visiting the recent Homebuyer Show in London showed that 81 per cent believe that the private rented sector will provide good returns, and 72 per cent are planning to buy more properties over the next year.

"After a period of uncertainty in the property market, investors are choosing now as the right time to buy, as the prospects for capital growth are good," says Nick Clark, the managing director of the Homebuyer Show. "There is still a strong and healthy rental market as first-time buyers struggle to get on to the ladder."

But buy-to-let investors are not yet back in the position they were in 2001. The latest figures from the specialist buy-to-let mortgage lender Paragon show yields wildly swinging, though overall on an upward trend.

John Heron, the managing director of Paragon, says: "Over the past two years, the trend in rents has been upwards. The fact that growing numbers of professional investors are willing to pay higher prices demonstrates that landlords are confident that levels of demand are sustainable and, indeed, are set to increase."

Paragon's figures show interesting variations in buy-to-let profitability. At the beginning of the year, Wales saw the strongest monthly increase in gross yield from 6.90 to 7.75 per cent, while other regions saw yields rise from about 6.5 to about 7.5 per cent. Greater London, however, remained at 6.05, reflecting a greater rise in property prices that erodes yields.

Annual rents have increased the most in Wales and the West Midlands, reaching averages of £10,214 and £10,254 respectively. The average rent in Greater London stands at £17,555.

The star performer is central London, says Liam Bailey, the head of research at Knight Frank. "London will outperform the rest of the UK for five years, and central London will outperform it by as much as 7 per cent," he says. "Rents will grow by 4 per cent this year, but are still 13 per cent below their 2001 peak."

The situation outside central London is less clear, says Clarissa Daulby of Property Lodge Management. "Rents have stagnated over the past five years, while prices have gone up, so the return on buy-to-let investments is nothing like it was - once you were getting a return of 14 per cent, now it is more like 5 per cent," she says. "Anybody who goes into buy-to-let now is looking to the long term."

Yields have been eroded by the boom, Daulby says. "A client has just sold a three-bedroom maisonette in Morden that she bought five years ago for £85,000 and let it at £900 a month. She is selling it for £175,000, but the rent is still only £880 a month," she says. The buyer will start off with a lower yield and is unlikely to see much capital appreciation, either.

In Wales and the West Midlands, properties are available for much less and the yield is higher as well.

One of the best areas to invest is in the old mining areas of south Wales, according to Andrew Thomas of Chris John & Partners in Cardiff. "A new two-bed flat in Cardiff will cost £165,000 to £180,000, whereas in the Valleys you can buy a two-up, two-down for short of 50 grand and it will let for £400 a month," he says.

In Birmingham, the buy-to-let market is also holding up well, says David Coleman of Hollier Browne.

"The stigma attached to renting has gone and a new class of people are taking advantage of the flexibility of short-term lets."

As in Wales, however, the best returns are found in traditional suburban properties," he says. "Rent does not increase proportionally to the price of the property," he points out. "Properties in the £100,000 to £150,000 bracket tend to offer the optimum in both rental and capital-growth terms, and that buys you a good Edwardian terrace house or a good flat in a nice suburb."