With millions of savers languishing on savings rates of less than 1%, residential investment property could potentially offer significantly better returns, according to Heron, as long as investors are careful about choosing the right property.
Paragon Mortgages’ PRS Trends Report showed that the average annual yield was 6.2% in the first quarter of 2009, up from 5.7% in the first quarter of 2008. The Trends survey also found that nearly a quarter of buy-to-let investors (23.2%) are planning to purchase investment property in 2009, with 28.6% of those funding their purchase from cash savings.
Paragon Mortgages’ managing director John Heron says: ‘There are opportunities for cash rich individuals to generate better returns in the current environment through residential investment property. Savings returns are poor because of the reduction in Bank of England Base Rate and equities remain unpredictable and erratic.
‘The outlook for house prices in the short-term is still uncertain, but yields are strengthening because tenant demand is strong and property investors are able to pick up bargains. Experienced buy-to-let investors already appear to be taking advantage of low property prices and are adding to their portfolios, but we may see investors that have never considered property before purchasing rental investments.’
However, Heron stresses the need for potential investors to thoroughly research their prospective market and to only buy property with proven sustainable rental demand. A good quality property that will let through economic cycles will always represent an attractive investment proposition.
He adds that investors also need to take a long-term view. According to the Association of Residential Letting Agents, the average property investor plans to hold their investment for 16.2 years.
‘The ‘accidental landlord’, where somebody who intends to sell their property but lets it out instead, is a short-term phenomenon as they are most likely to sell when the property market returns to normality,’ says Heron. ‘These individuals also need to live somewhere, so many end up renting elsewhere. Therefore, the expansion that the private rented sector needs is likely to come from existing landlords increasing their portfolios and new investors attracted to residential property because of the solid long-term returns.’
Heron concludes: ‘Investors should avoid areas of oversupply, such as new build city centre apartments, and look to locations where there is proven and sustainable rental demand. Speak to letting agents to get a clearer picture of a local market. ’