Paragon survey reveals stable buy-to-let yields

Paragon Mortgages says yields generated by residential property investors have been relatively stable over the past quarter, remaining steady at around 6.5% since July.

John Heron, managing director of Paragon Mortgages, says: “Yields seem to have stabilised in the past quarter, after some easing earlier in the year.

“This is clearly good news for landlords with existing property investments or who are considering increasing the size of their portfolios.

“From recent research, we know established landlords plan to grow their property holdings by around 5% over the next 12 months.”

The average price at which landlords purchased investment properties continued to edge down in October, to 156,879, with rental incomes following a similar downward trend, easing from 10,835 in July to 10,152 in October.

Heron adds: “Theres clearly an element of opportunism as landlords pick up properties at attractive prices.

“In our experience, tenant demand is strongest for smaller properties which offer simple but decent accommodation at a reasonable cost.

“Thus its no surprise that the astute landlord will often prefer to buy basic homes at the lower end of the price spectrum. Clearly theyve been doing some good deals recently which has brought average prices down to some extent.”

This month, the highest yielding regions in the country are East Anglia (7.1%) and the South-West (7.0%), knocking Yorkshire and Wales off the top two spots.

Heron adds: “Earlier this year we recorded the highest yields in northern regions of the country the North, North-West, Yorkshire and East Midlands were consistently among the top performers. Now those regions have been overtaken by more southerly parts of the country such as East Anglia and the South-West.”

Yields in London continue to lag behind the national average, reflecting the much higher level of property prices. However, over the past few months, there has been a gradual rise in yields in the capital, from 5.8% in August to 5.9% in October.

Heron says: “Landlords in Greater London should take heart from the firming of yields, which have been following this favourable trend since the summer.”

The average total return generated by landlords this month stood at 12.0% across the country. In terms of regional differences, Wales took over from Yorkshire as the region offering the highest overall annual return to the average landlord (based on capital appreciation plus annual rental income on a property purchased in October 2004). Total return in Wales was 32.6%, compared with 30.3% in Yorkshire, 26.5% in the North and 24.9% in the North-West.

In October, yields on terraced properties averaged 7.0%, while semi-detached stood at 6.7% and detached at 6.2%. Flats trailed behind at 5.6%.

Heron adds: “With buy-to-let driven by demand and the terraced home typically the most popular among tenants, it is to be expected that terraced homes will consistently outperform other types of property in terms of yield.

“The perennially popular terrace, at 135,745, is also the cheapest type of property. Recently, we have seen landlords making property acquisitions at attractive prices in response to growing tenant demand for this type of home.”