New rental yield data released by Landlord Mortgages reveals that rental yields hit a five-year annual low in 2006.
Scottish rental returns showed the largest drop, falling from 8% in 2002 to 6.46% in 2006.
Less dramatic declines were recorded in England, a fall from 7.1% to 5.74%, and London where yeild decreased from 6.37% to 5.81%.
While falling rental yields in themselves are not great news for investors, Landlord Mortgages points out that the decline in yields results from the very healthy capital appreciation investors have enjoyed over that period.
Lee Grandin, managing director of Landlord Mortgages, says: The cost of the average property has risen by 66% over the last five years while rents have risen slightly above or in line with inflation.
This phenomenon has created an environment where investors need to be less concerned with high rental yield figures and more concerned with achieving sufficient rental to cover their mortgage repayments.
Savvy investors need to concentrate on finding the right balance between the prospect of long-term capital growth, rental coverage and profit when they search for the ideal buy-to-let investment.
Despite the overall trend towards falling rental yields, the market rallied in Q4 2006 and we saw a small quarter on quarter increase in rental returns for England, London and Scotland from Q3 2006 to Q4 2006.
Moderate gains were recorded in London, which saw an increase from 5.53% to 5.96%, and England where they increased from 5.54% to 5.82%.
However, Scotland, which traditionally boasts one of the strongest rental markets, saw a far more significant quarter on quarter increase in yields from 5.91% to 6.88% confirming its spot at the top of the profitability ladder.
Grandin adds: Despite an annual decrease, rental yields rose slightly on a quarter on quarter basis.
We saw the most dramatic increase in Scotland, which has traditionally shown the best returns as well as the greatest amount of fluctuation in yields.
2006 ended on a high note with a healthy buoyant market and an increase in rental yields in the last quarter.
This bodes well for this asset class in 2007 and we expect to see continued healthy returns as the new year unfolds.