Investor landlords in Greater London and the South East have seen rising yields on their rental properties for the third month in a row, the June edition of Paragon Mortgages' buy-to-let index reveals.

Traditionally, the south-eastern corner of the country has offered lower yields on rental properties, as higher property prices are not matched by higher rents to the same extent, while the Midlands and North offer higher yields. However, so far this year yields in the capital have risen, from 6.42% in February, to 6.73% in March, 6.90% in April, and 6.95% in May. Meanwhile, in the South East they have risen more modestly, from 6.45% in February, to 6.62% in March, 6.64% in April and 6.66% in May.

John Heron, Paragon Mortgages' managing director, comments: "Over the past few months, we've seen some firming of yields in those parts of the country where they have tended to be consistently lower. In fact, London landlords have seen an increase of over 50 percentage points over the past quarter, reflecting lower prices paid by landlords for the properties they add to their portfolios. The average price for a rental property bought in London in May was £229,899, down from £237,950 in March."

At the same time, there may be signs this month that the nation-wide surge in landlord property values has started to stabilise, with prices paid by residential property investors up only fractionally by 0.10% this month.

Continues John Heron, "The unrelenting rise in property prices since the end of last year, as investors found themselves competing with owner-occupiers to buy houses, meant that by April landlords were paying 11% more than in December 2003 for a property and 25% more than they were 12 months before. This month, we've seen an almost negligible rise of just 0.10% - the equivalent of just over £100 on a property worth £137,000."

House price inflation gap for investors narrows

Year-on-year, the rate of increase of landlord property values has also declined, from over 25% in April to 22.7% in May. Paragon's data continues to show house price inflation for investors at higher levels than the latest figures published by Halifax and Nationwide (an effect of the shortage of properties on the market and competition to buy), but the gap is now starting to narrow.

Nationally, both yields and rental incomes have registered small declines this month, with yields standing at 7.20% and rents at £9,867, down £86 as compared with the previous month.

Average total returns (calculated from the capital appreciation on an average property bought one year ago plus rental income over the same period) slipped from 33.2% in April to 30.7% in May, but remain healthy.

Best region

As last month, East Anglia was the region offering the highest overall return, of over 60% (helped by a surge in prices in the month), while the North, Yorkshire and South West all exceeded 40%, at 42.7%, 40.7% and 40.1% respectively.

Higher yields were seen in half of the ten regions, with declines particularly in northern regions of the country: the North remains the highest yielding region at 8.67%, down slightly from 8.73% last month. The West Midlands saw another increase in yields, which rose from 7.72% in March to 8.00% in April to 8.06% in May.