Paragon Mortgages’ March buy-to-let index reveals a further increase in yields, which rose for the second month in a row to 6.82%, up from 6.76% last month. Yields have risen steadily over recent months, from 6.61% in September 2004.

This steady rise in yields comes on the back of a significant pick-up in rents achieved by landlords since last summer, and a stabilisation of property values. The average rent has risen from £9,524 in August 2004 to £10,520 in February 2005 – an increase of just under £1,000 in 6 months.

John Heron, managing director of Paragon Mortgages said, "With demand for rented accommodation from tenants steady or growing in many areas and this demand not matched by supply, landlords have been able to achieve higher rents and therefore higher rental yields."

At the same time, the rate of increase in property values has stabilised over the past 3 months, with a rise of just over £1,000 or 0.7% since November, compared with 22% over the 12 months from November 03.

"Prices have clearly stabilised over the past 3 months," continues John Heron. "If the current rate of increase is sustained over the rest of the year, we could expect annual house price inflation to decline to less than 3% by the end of 2005."

Landlords are frequently able to negotiate more attractive prices than owner-occupiers. People buying their own home are inevitably more emotionally involved in the deal than are investors, who treat property purchase dispassionately, as a pure business transaction. Identifying the growth in demand from tenants, investor landlords have been taking advantage of the good supply of properties on the market at competitive prices.

"Whilst owner-occupiers have been biding their time, investors have been growing their portfolios from an average of 11 properties last May to a current average of 13," said Mr Heron.

 Across the UK total returns over the past 12 months reached an average of 27.8%, equating to a total of £35,559, or £26,454 in capital appreciation plus £9,105 in rental income, on a property worth £127,880 at purchase one year ago.

Across the regions

In terms of the regions, Yorkshire topped the tables this month with total returns of over 68%. Over the past three months the region has consistently ranked amongst the top three regions with the highest total returns. The region also experienced one of the highest increases in rental incomes, rising by 6.0% to achieve rents of £9,905. This rise in rents, combined with a slight fall in property values, meant that Yorkshire was also the highest yielding region, with a yield of 7.54%.

Rents increased in three other regions across England in February, with the East Midlands up by 21.7%, the South East up 1.3% and the North West by 0.7%. Yields increased across six of the ten regions with the largest rise seen in the North, where they hit an average of 7.27% (the second highest to Yorkshire). This was attributable to a sharp drop in property values. Yields in the East Midlands and the North West also rose strongly, up from 6.94% to 7.28%, and from 7.14% to 7.30% respectively. Smaller rises were also seen in East Anglia, the South East and Greater London.

John Heron said, "The North-South divide has lessened this month as yields in the South East and Greater London have improved quite significantly, which is welcome news for landlords in the capital, where the buoyancy of house prices has tended to erode rental yields."