Paragon Mortgages’ May buy-to-let index reveals a continued pick-up in rental incomes, which have now risen for three consecutive months.

Rents rose from £9,651 in March to £9,953 in April, giving an 11% increase over the past three months. This increase in rents translated into an increase in landlord yields from 7.22% in March to 7.27% in April – the highest level since December 2003.

Average property values are now £136,973, as compared with £124,128 in January, a significant average increase of over 10%.

John Heron, managing director of Paragon Mortgages, says: “Landlords have been seeing steadily rising rental incomes since the beginning of the year, helped by good levels of tenant demand which is in part attributable to the ongoing impact of affordability constraints on first time buyers. This is now feeding through into higher yields, which have risen for the last two consecutive months, despite the fact that house prices continue to rise steadily in a robust housing market.”

House price inflation on properties purchased by landlords has now firmly overtaken the rate of increase in the housing market generally, as landlords compete to purchase houses in a market that is much more buoyant than it was a year ago. Paragon Mortgages’ data shows property values 25% higher than 12 months ago.

“With solid returns on their lettings businesses and strong levels of capital appreciation over the past year,” explains John Heron, “landlords continue to benefit from good overall returns – taking into account both rental income and capital appreciation. Overall returns have now reached 33.2%, up from 30.5% last month and just under 20% in January this year.”

This month, the highest overall return on investment occurred in East Anglia, where landlords have generated a return of 48.6% on a typical property bought 12 months ago, while the East Midlands also produced returns in excess of 40%. Yorkshire & Humberside showed a significant increase from 24.7% in March up to 41.8% in April.

Higher yields were seen in six out of the ten regions, the North remains the highest yielding region at 8.73% despite a drop from 8.93% in March. The South West has moved in to second place with yields increasing to 8.06% on the back of a rise in rents of £2,147 since March.

The West Midlands also saw a strong increase in yields, rising from 7.73% to 8.00% as rents grew from £8,907 to £9,145.

The South East remains the part of the country with the lowest yield, although it did experience a slight rise in yield, rising from 6.62% to 6.64%. Greater London also saw an increase from 6.73% to 6.90%.

In summary, John Heron says: “After some softness in the autumn and winter, the trend in landlord yields now seems to be clearly upward as investors achieve higher rents in 8 out of 10 regions. This reflects strong tenant demand in most areas for the right type of property, which tends to be the modest home targeted at young professionals, sharers or key workers. Prices paid by landlords continue to climb, but the average rental property continues to be cheaper than the national average.”