Residential property investors continue to enjoy stable yields and strong overall returns, in a private rented sector that has grown steadily over recent years and is set for further expansion in the future.

Figures from the Department for Communities and Local Government published last week show that in 2006 2.5 million households are renting privately.  This is a 4% increase over 2005, a 12% rise since 2004 and a 22% rise compared to 2001.

Growing demand from tenants for rented accommodation had led to this expansion in the private rented sector, with 12% of households now living in rented homes.  There are 14.6 million owner occupiers (70% of the total) and 3.7 million social renters.

Nigel Terrington, chief executive of specialist buy-to-let lender, the Paragon Group of Companies said: “We have seen steady activity on the part of residential property investors, who are growing their portfolios in response to additional demand from a variety of different types of tenants, including foreign migrants, young professionals, families and students.” 

“With this solid demand, rental yields have remained steady over the past 6 months at 6% despite house price increases.”

“Landlords regard property as a stable, long-term asset class allowing investor control to a greater degree than many other investment vehicles, such as equities.  Many of them treat buy-to-let as a key element of their pension provision, offering strong overall returns over the long term.”

Indeed, total returns (based on capital appreciation and rental income on a property bought 12 months ago) rose from 10.5% in September 2006 to 13.3% last month.

“With landlords benefiting from both rental income and the uplift in the capital value of their properties, total returns are very attractive,” continued Nigel Terrington.  “There are not many forms of investment that combine long term stability with that level of return.”

The price at which landlords purchased new investment properties rose by 0.7%, from £166,417 in September to £167,560 in October, reversing a slight easing in national prices over the summer period.

Regionally, property values have been particularly buoyant over the past quarter in the West Midlands (up 10.1% from £131,462 in July to £144,789 in October); in Yorkshire (up 4.7% from £127,061 to £133,075); and the South East (up 3.3% from £184,877 to £190,977).

This month, Wales continued to be the highest yielding region, at 6.6%, up from 6.4% in September, while the South West, at 6.5%, took over from the East Midlands in second place.