Investors beat rising prices with buy-to-let property acquisitions

Mortgage

Paragon, the buy-to-let specialist lender, has estimated just over 29,000 landlords entered the buy-to-let market for the first time last year, 19 per cent more than in 2011 and 80 per cent more than in 2010. The figures are based on a survey of brokers and data from the Council of Mortgage Lenders, the trade body. Landlords account for more than one in 10 new mortgages.

Rents continued to climb in March and hit record levels in London, fuelled by demand from young workers unable to get on the property ladder. The average rent in the capital was £1,106 in March, up 7.9 per cent on a year ago, compared with £735 for England and Wales, up 4.2 per cent over 12 months, according to LSL Property Services, which owns Your Move, the estate agents. It said gross yields were 5.1 per cent in the capital and 5.3% in England and Wales.

Buy-to-let is looking increasingly attractive to cash-rich investors, as opportunities to find returns that beat inflation dwindle. The average rate on a tax-free cash Isa is 1.82 per cent, down from 2.65 per cent a year ago, according to Moneyfacts, the data firm. Retail prices index inflation was 3.3 per cent in March.

Jonathan Harris of Anderson Harris, the broker, said: “Plenty of investors are moving into property because other assets, such as cash or government bonds, are producing such poor returns.”

House prices grew 1.9 per cent in February compared with the previous year, while prices in London were up 5.9 per cent, according to figures from the Office for National Statistics, boosting total returns on buy-to-lets.

The total annual return, including rent and capital growth, on a buy-to-let property rose to 6.3% in March, compared with 4.5 per cent in the previous year, according to LSL.

However, investors need to be careful and take into account that buy-to-let can be a lot of work. LSL said 8.5 per cent of all rent was in arrears last month. John Heron, of Paragon’s mortgage division, said: “It is important that prospective landlords understand that investing in buy-to-let property is a long-term investment — they need to ensure they have done their homework before becoming a landlord.”

Where are the best yields?
Rents will rise 18 per cent across the country over the next five years and 26 per cent in London, said Savills, the estate agent.

David Newnes, director of LSL, said: “With only modest improvements in the UK’s housing supply, rents will keep being forced upwards.”

A report by HSBC bank released last week showed that gross rental yields are now highest in Southampton, where they have reached 7.82 per cent on average. Homes cost £138,311 on average in the city and monthly rents are £901.

Blackpool came second with 7.81 per cent yields, followed by Kingston upon Hull at 7.77 per cent, Manchester at 7.6 per cent, Nottingham at 7.55 per cent and Coventry at 7.13 per cent.

Mark Harris of broker SPF Private Clients, said: “Different investors want different things — some are after yield and others are after capital growth. It is rare to find both. Always buy in areas you know and understand.”

Knowing what sort of property to buy is important. A report by Countrywide, the lettings agent, last week showed that one or two-bedroom investments provide the highest returns — despite larger properties being able to command much higher rents. Average yields for one-bed properties are 6.8 per cent compared with 5.6 per cent for four-beds.

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