Buy to let returns rise to 16.3% in 2007

The average total gross return for a buy to let (BTL) investor was 16.3% in 2007 (exclusive of fees and mortgage interest costs), this is up from a total gross return of 13.5% recorded for 2006, according to research from Birmingham Midshires.

Across all regions of the UK capital values on BTL properties increased. So too did rental values (up 13.1% in year to December). Much of the growth in capital values occurred in the first half of 2007. The impact of the five Base Rate increases between August 2006 and July 2007 led to a more subdued BTL market. Capital growth slowed to 1.6% in quarter four of 2007. We expect the slowdown in the BTL market to continue into 2008. As a result, average total returns for BTL investors in 2008 are not expected to be as strong as in the recent past.

Buy to Let Property Prices

The average price of a BTL property in 2007 was £154,795, an increase of 10.9% on 2006. Average price of a BTL house is 27% lower than the average price paid for an owner occupied property (£197,039 in December 2007). This is largely because BTL properties are typically smaller with a majority being flats and terraced houses.

BTL investors in Northern Ireland had the strongest growth in capital value as property prices rose by 39.2% during 2007. Greater London recorded the next largest increase of 15.8%. Only two other regions saw double-digit increases in BTL average property price, these were the South West (10.7%) and South East (10.5%).

Prices in Northern Ireland have been driven up sharply by a combination of several factors, such as a strong local economy, high levels of immigration, high demand for properties from second homebuyers and interest from investors in the Republic of Ireland.

The smallest regional increases over the past year were in the East Midlands (5.7%) and the North West (7.2%).

For BTL property investors, Greater London still commands the highest average price of £290,830. This is 2.90 times higher than in the North where the average price is the lowest at £100,345.

There are four regions where the average price of a BTL property is above £150,000. These are Greater London (£290,830), South East (£180,859), South West (£164,686) and Northern Ireland (£158,711). There are no regions where the average price of a BTL property is below £100,000.

There are signs that the 5 Base Rate increases to July 2007 are having an impact on BTL property values after capital growth slowed to 1.6% in Q4 2007.

Buy to Let Rental Values

Average rental values in the UK increased by 13.1% to £698 per month in 2007 compared to £617 per month during 2006.

Regionally the largest increases in rental values in 2007 were in Scotland (22.6%), North (18.2%) and Greater London (15.4%). Besides East Midlands (8.9%) and South West (9.2%) all other regions experienced double digit rent increases.

Average rent in Greater London was £1,293 during 2007 – close to £300 per week. Monthly rent in Greater London is 63% higher than the average rent in the second highest price region, the South East (£791).

Average monthly rent in the North is £494, the lowest in the UK and the only region below £500 per month.

Buy to Let Rental Yields

BTL rental yields nationally increased marginally over the year to 5.4% in December 2007 from 5.3% 12 months earlier.

Rental yields are highest in Scotland (6.1%) and the North (5.9%).

Yields are lowest in Northern Ireland (4.1%) and South West (5%).

In Q4 2007 growth in rental yields slowed to 4%.

Buy to Let Total Returns

The average total return for a UK BTL investor was 16.3% for 2007 (exclusive of fees and mortgage interest costs). This is up from an average total return of 13.5% recorded in 2006.

By region, total returns for BTL investors were highest in Northern Ireland (44.3%) in 2007. Greater London had the second largest increase with returns of 21.2%, followed by the South East and South West (15.8%).

The smallest total return for BTL investors in 2007 has been in the East Midlands (11%), North West (12.6%) and West Midlands (13.2%).

In 2006, BTL returns were again highest in Northern Ireland (34.9%), followed by the North West (17%) and the North (15.1%).

Tim Hague, Managing Director of Mortgages at Birmingham Midshires, said: "Total gross returns in the buy to let sector were a healthy 16.3% in 2007. Buy to let house price growth has edged higher over the past year. Rents continue to rise across the country, boosting returns.

The fundamentals underpinning the buy to let sector are sound. They include strong demand from higher immigration levels and housing affordability concerns for first time buyers. However, we expect house price growth to be more subdued in 2008, largely reflecting the impact of higher interest rates."