Paragon reveals healthy BTL market

Amanda Jarvis

April 26, 2006

Investors continue to snap up properties at attractive prices
As activity in the buy-to-let sector remains strong, the average price at which landlords acquire investment properties eased slightly in March, reflecting the sustained tenant demand particularly for properties at the lower end of the price spectrum and a surge in activity on the part of smaller scale investors.

After three months of rising house prices, March saw a 1.5% drop in the average price paid by landlords, from £163,417 to £161,039. Nevertheless, property values are still 5.5% higher than they were a year ago.

John Heron, managing director of Paragon Mortgages, commented: “At the end of 2005 and especially the start of 2006, we witnessed a significant pick-up in activity in the buy-to-let sector, with professional and smaller scale landlords alike purchasing additional properties in response to identified demand from tenants. Since November, property values had been rising steadily, but this month saw an easing in prices paid. This reflects the fact that tenant demand is strongest for smaller homes, as singletons and young couples look for clean, simple rental properties to fill their accommodation needs. As serious investors buy in response to actual tenant demand, average prices paid have eased a little.”

In line with the easing of property values, rents are slightly lower, at £10,082, while yields now stand at 6.26%.

“What is important,” continues John Heron, “is that at these yields landlords are confident to buy — and they are buying with a vengeance. Landlords typically have a 10+ year perspective on the market. Over the long term they are convinced that a combination of rental income and capital appreciation will make these additions to their property portfolios an attractive investment proposition.”

The London market, in particular, has enjoyed a significant boost — notwithstanding the fact that the Capital typically offers lower yields than the rest of the country. John Heron explains: “Regions, like London and the South East, where average property values are much higher tend to generate lower yields — hence in London yields are just 5.80%, based on an average property value of in excess of £293,600. Even so, landlord activity currently seems to be particularly strong in London and the South East. After a period of some uncertainty, economic confidence is back, interest rates look stable, there are plenty of jobs available in London and the Home Counties, and with this comes greater demand for rented accommodation among all categories of tenant. For investors this as a sure signal that the time is right to increase their involvement in the private rented sector.”

This month, the East Midlands has taken over from Wales as the region offering the highest yield, pushing the Principality into second spot. John Heron continues: “There tends to be an inverse correlation between property value and yield — so that lower value properties tend to generate higher rental yields. Thus, property values in both the East Midlands and Wales are well below the UK average, £136,403 and £133,297 respectively compared with an average of over £161,000.”

Looking at total returns (property appreciation plus rental income), the North offered the best return on a property bought 12 months ago, of 39.5%, followed by the West Midlands, Wales and Greater London (in each case approximately 29.5%).

In terms of property type, terraced homes continue to be the most popular with tenants and thus command the highest yield, of 6.65%, followed by semi-detached and detached at just over 6.4%.

John Heron concludes: “We have identified a significant upsurge in landlords’ confidence and activity over the past three months or so. They are actively growing their portfolios and indeed in our landlord survey they tell us that over the next 12 months they plan to increase their property holdings by around 6%, on the back of growing tenant demand and an expectation that rents will rise.”

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