Rents soar, yields rise and total returns hit 21%

Growing demand for rented accommodation has spurred strong growth in rents paid by tenants, contributing to a healthy increase in rental yields and total returns, according to Paragon’s January Buy-to-Let Index.

Rental incomes rose by 2.5% during the month, bringing the annualised rate of growth to 19.4%. Tenants are paying on average £965 per month for their rented properties, compared with £808 a year ago.

The buoyancy of rents, combined with a slight cooling in the rate of house price increases, has led to an increase in yields at year-end. Having been steady at 6% for five months, December saw a gross yields rise to 6.2%.

Last year was very positive for established residential property investors, notwithstanding the disruption of the financial markets since September. Total investment returns, including both rental income and capital appreciation, stood at 21%, substantially more in both percentage and actual terms than either 2005 or 2006.

John Heron, managing director of Paragon Mortgages, said: “There’s been fall in consumer confidence in recent months, but this appears to be to the benefit of established landlords. In fact, 2007 proved a strong year for landlords, who generated very healthy investment returns averaging over 21% - three times the level of the previous year. Rents have been rising at the fastest rate we have seen since the Buy-to-Let Index was first published in 2001 – by 8% in the last quarter of 2007 and 19% over the year. With a cooling in the rate of increase of house prices, yields have also picked up this month and we expect that trend to continue throughout 2008.”

Buy-to-let provides accommodation for many people, particularly in the current environment with people choosing not to buy but rent instead. This presents a good buying opportunity for investors, who remain upbeat about the future. A massive 90% of them plan to hold on to their portfolios for the long-term - 17 years according to ARLA’s latest research1 - and 40% of them intend to invest more in the private rented sector this year.

Heron adds: ”That provides solid evidence from the sharp end that landlords remain confident about the long-term prospects of residential property investment, as the UK population continues to grow on the back of inward migration and other demographic factors. Buy-to-let has certain counter-cyclical characteristics which mean it will remain resilient, and indeed will outperform the market, at times of lower economic confidence and growth.”