Paragon reports BTL bounce

Amanda Jarvis

April 4, 2006

February has seen increases in key indicators with yields, property values and rents all rising.

Investors have seen rents rise by 6.39% over the last three months increasing from £9,954 in November to £10,590 in February.

Property values also increased over the month (up by 0.50%) and the average property price now paid by landlords stands at £163,417. Over the quarter, values have increased by 5.72%, up £8,849 from November’s figure of £154,568. Yields in England and Wales currently stand at 6.48% which is up from February’s figure of 6.45%.

Managing Director of Paragon Mortgages John Heron explained: “Increasing yields, rents and property values are only part of the positive story surrounding the buy-to-let market. The beginning of 2005 was relatively slow, but activity picked up in the second half of last year and 2006 has seen momentum gather and investor confidence grow. At Paragon we are seeing application flows significantly ahead of last year, with completions some 60% higher than a year ago, and data from the Council of Mortgage Lenders (CML) shows that gross buy-to-let mortgage lending in H2 2005 reached a record high, of £14.6 billion, 47% higher than in the previous six months.”

Tenant demand has been a key factor contributing to rising rental income, which in turn served to increase yields. Recently the Royal Institute of Chartered Surveyors (RICS) reported that tenant demand had increased by 24%, the largest increase in the last four and a half years. A number of sources indicate that this upward trend is likely to continue. The Office of the Deputy Prime Minister (ODPM) recently announced that it expects the number of households in the UK to increase by 209,000 a year for the next ten years, rising from 20.9 million in 2003 to 25.7 million by 2026.

John Heron commented: “The number of households in the UK is growing steadily. Many of these new households will not be able afford to buy their own home and will be reliant on rented accommodation. This reliance is likely to increase as house prices continue to rise, and buyers (particularly first time buyers) find it harder to get on the property ladder. This will ultimately lead to an increase in the demand for rented accommodation which is good news for the buy-to-let market.”

A regional perspective shows that six out of ten regions saw increases in yields during February. The East Midlands experienced the largest increase in yields (from 6.22% to 6.65%) followed by East Anglia (from 5.67% to 5.99%). Smaller rises were seen in the South West (from 6.34% to 6.41%), North West (from 6.38% to 6.49%), South East (from 6.34% to 6.41%) and Yorkshire (from 6.72% to 6.73%). This month’s highest yielding regions are Wales (7.66%) and the West Midlands (7.22%)
Five out of ten regions saw the property values grow this month.

The South East saw the largest rises, as prices reached an average of £172,361. Wales, the South West, Greater London and Yorkshire also experienced property value increases.
Rents increased in 7 out of 10 regions, the largest increase being in the East Midlands where rental income reached £9,545 from £8,993 in January. The South East and South West also saw rises, with rental incomes up 5.80% and 5.39% respectively. Smaller percentage increases were seen in Wales (1.56%), East Anglia (0.47%), Yorkshire (0.42%) and Greater London (0.05%).

John Heron commented: “Wales and the West Midlands are the highest yielding regions for the second month in a row. Strong tenant demand in these areas has enabled landlords to achieve higher rental incomes, which has had a positive impact on yields. Both regions have seen significant increases in yields over the last few months. However, Wales has experienced the greatest change with yields rising from 6.41% in November 2005 to 7.66% in February 2006.”

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