There have been steady yields, good total returns and surging tenant demand for private rented accommodation. With Bulgaria and Romania set to join the European Union on 1 January, there will be a further influx of inward migrants who will need a roof over their heads – and most will live in rented accommodation.
John Heron, Paragon Mortgages’ managing director, said: “At Paragon, we’ve seen impressive growth in our business volumes over the past year, as confident investors add to their portfolios. Our book of buy-to-let mortgages, which we generate predominantly through the intermediary market, grew by a spectacular 24% between 2005 and 2006. That has helped Paragon to announce record results this month; it’s also good news for intermediaries, who benefit from buoyant growth in commissions generated, which now average £428 per case.”
The confidence among residential property investors reflected the positive trend of both total returns (based on capital appreciation and rents received) and rental yields.
In October, the average total return across the country stood at 13.3%, up from 10.5% in September. The general trend has been steadily upward, from just 12.0% one year ago, in October 2005.
Heron said: “Landlords benefit from a combination of rental income and the uplift in the capital value of their properties. Total returns are highly attractive, and are following an upward trend. The total return in October of 13.3% is up from 10.5% in September and is the highest we have seen for four months. There are not many forms of investment that combine safety and control with that level of return.”
Regionally, the North and the South East offer the highest total returns, of 26.1% and 24.2%, followed by Greater London and the West Midlands (16.9% and 10.1% respectively).
Heron added: “There is some regional variation in terms of total returns, with a different mix of return from capital appreciation and from rental yield depending on the area. This reflects the different rental strategies pursued by landlords in different parts of the country, where the target tenant market and type of property tends to vary.
"Looking at rental yields, the picture is one of stability, with yields steady at around the 6% mark for the past six months. The expansion of the private rented sector on the back of growing tenant demand has kept rental yields underpinned, notwithstanding the buoyancy of house prices in many parts of the country,”
Latest figures published last week by the Department for Communities and Local Government (DCLG) showed the private rented sector has grown strongly over the past five years. In 2006 2.5 million households are renting privately. This is a 4% increase over 2005, a 12% rise since 2004 and a 22% rise compared to 2001 (Survey of English Housing Provisional Results: 2005/6).
Heron explained: “Government figures show that 12% of households now live in privately rented homes, up from 10% in 2000. They illustrate how the private rented sector is a growing and increasingly important provider of accommodation to a wide variety of types of tenant: for example, lower income households who cannot afford home ownership and need decent, affordable accommodation; foreign migrants who rent when they arrive in this country; students who tend to share rented accommodation while they study; and also young professionals who choose to rent because they appreciate the flexibility that rented accommodation can offer.”
The average price at which landlords purchased new investment properties rose by 0.7%, from £166,417 in September to £167,560 in October, reversing a slight easing in national prices over the summer period.
Regionally, property values have been particularly buoyant over the past quarter in the West Midlands (up 10.1% from £131,462 in July to £144,789 in October); in Yorkshire (up 4.7% from £127,061 to £133,075); and the South East (up 3.3% from £184,877 to £190,977).
Heron concluded: “On the back of underlying demographic trends, the number of households that require flexible rented accommodation can only continue to rise. Recent forecasts indicate that the number of tenancies could rise by up to 30,000 annually for the next 10 years – that means, quite simply, that for buy-to-let, the only way is up.”
