In the first half of 2006, the private rented sector performed strongly, with renewed demand for rented homes from inward migrants and other types of tenant, leading investors to grow their portfolios. According to recent data from the Council of Mortgage Lenders (CML), the value of new buy-to-let loans extended to landlords reached a record £17.5 billion in the first 6 months of 2006, 20% higher than in the second half of 2005.
Average yields achieved by landlords remained steady at 6.04%, despite a slight seasonal slowdown this month in terms of property prices, which eased marginally between June and July 2006 – down from £172,772 to £171,996.
John Heron, managing director of Paragon Mortgages, commented: “The first half of 2006 has proved a particularly buoyant time for residential property investors, who have grown their portfolios strongly on the back of an upsurge in tenant demand, particularly from inward migrants. Recent official figures show that 600,000 migrants from EU Accession States have come to this country since the enlargement of the EU, and the majority of these look to the private rented sector for their accommodation needs.”
“Sustained demand leads to a general firming of rents. We’ve seen rental incomes rise by almost 2.8% over the past quarter, while yields have remained stable over recent months. With these positive trends repeated in most parts of the country, buy-to-let lenders have lent over 152,000 loans to investors in the first six months of this year.”
“We have seen solid activity up and down the country, with landlords making their investment decisions on the basis of attractive yields combined with the expectation of capital appreciation over the medium to long term. With the UK continuing to face a structural shortage of accommodation and steady expansion in the number of households, demand for rented (and indeed owner-occupied) housing will continue to grow.”
This month, the East Midlands is the landlord’s ‘hot spot’ in terms of yield, offering an average yield of 6.60%, pushing last month’s leader, Wales, into second place at 6.41%.
“With relatively low property values (15.4% and 21.7% below the national average), the East Midlands and Wales are attractive regions for investors. Good demand for rented accommodation in the towns and cities of these regions keep the market underpinned.”
On the other hand, yields are lower in Greater London and the South East, where property values are highest.
“Of course, yield does not tell the full story,” John Heron points out. “Landlords look both for income – the yield on their investment as a percentage of its value – and capital appreciation. Historically, it has tended to be the parts of the country where property prices are higher that have seen the strongest house price inflation. Thus Greater London and the South East are in second and fourth position in terms of overall return – the return on investment calculated by adding the rent received on a property purchased one year ago to the capital appreciation over that same period.”
“It is vital, however, that landlords take a long term view of the private rented sector. The success of buy-to-let as a business is based not on short term speculative considerations but rather a long-term investment horizon of perhaps five or ten years. In my experience, successful buy-to-let investors have a clear, focused investment strategy, concentrating on a specific market segment and a geographic area with which they are very familiar.”
