2007 marks another strong year for buy-to-let investors

Buy-to-let investors enjoyed another strong year in 2007 as total returns generated by the average residential investment property reached 21% – the highest level for 28 months. With a combination of buoyant house prices, strong rental income and stable yields, the typical landlord generated more than £34,500 over the past year, according to the latest Buy-to-Let Index from Paragon.

Growth in rental incomes has been exceptionally healthy over the year, reflecting the strength of demand for rented homes, with rents rising by 6% over the past quarter and 17% in the past 12 months to reach a new record level of £11,300. The average value of buy-to-let property has also been strong, rising by 15.3% over the year, but yields have remained at 6% or above throughout 2007 as landlords have been able to increase rents in line with property values.

Regions that have enjoyed the best total returns in 2007 are London, the East Midlands and the South West, with the East Midlands achieving the fastest annual growth in rents over the year. Yorkshire and the North West achieved the best yields during the year, with both regions at 6.8%.

John Heron, Paragon’s director of mortgages, said: “Returns generated by landlords are very good and compare favourably with alternative investment classes. An investment linked to the FTSE All Share made a year ago would have yielded just over 7.4% from both capital appreciation and dividend yield, while the highest yielding internet savings accounts earn around 6%. In comparison, the return of 21% on buy-to-let looks particularly attractive.”

Heron continued: “Both rents and property values have grown strongly over the past 12 months. Looking forward, we can expect further upward pressure on rents to continue as first-time-buyers remain in rented accommodation for longer. At the same time, property prices are expected to ease in some parts of the country, which will represent an opportunity for astute landlords who can acquire additional properties at attractive prices and let them out at a good return.”

The MPC’s decision to cut Bank base rate by 0.25% is seen as a positive factor for home buyers and for the wider economy, but is unlikely to lead to a major change in investor behaviour. Heron explains: “The rate cut will help boost confidence for consumers and contribute to an easing of the wholesale credit markets, and as such will be welcomed by landlords too. However, they base their investment decisions not on short-term interest rate signals but rather the long-term trend for tenant demand. With ONS forecasting the UK population will reach anything from 85 to 108 million by 2081, there will be no let-up in the pressure on the housing stock. Over the medium to long term, the proportion of the population living in rented homes will grow, leading in turn to further expansion in the private rented sector.”