New research from Birmingham Midshires shows that the average total return for a buy to let (BTL) investor was 13.0% over the past year to June 2007 (exclusive of fees and mortgage interest costs). This is up slightly from a total return of 11.9% for the year to June 2006.

The price of the typical Buy to Let property in the UK increased by 7.3% over the year to June 2007 to an average of £141,776. BTL house price growth has risen slightly over the past year from 6.0% in June 2006.
 
UK BTL rental yields have fallen marginally over the past year to 5.5% in June 2007 from 5.7% in June 2006. Nationally, the average rent increased by 4.5% over the past year to £651 per month in June 2007, compared with £623 per month in June 2006.

NI rules the BTL roost

By region, total returns for BTL investors were highest in Northern Ireland (35.9%) over the year to June 2007, followed by Scotland (16.6%) and the South East (13.9%). The lowest total return for BTL investors over the past year has been in the East Midlands (9.6%).

Terraced houses have been the best performing property type for BTL investors over the year to June 2007 with an average 15.9% total return. Terraced properties also have the lowest prices by property type with an average price of £116,884 for BTL investors at June 2007.

The BTL market is expected to see slower house price growth over the remainder of 2007. Higher interest rates, subdued real earnings growth and easing economic growth are predicted to cause house price growth to moderate.

Lower capital appreciation, together with mortgage payments rising more quickly than rental income, are likely to constrain demand for BTL properties.

Rental demand set to remain high

Demand for private rented accommodation is expected to remain high due to a combination of the difficulties many young people face in being able to buy their own property, the ongoing significant increase in the student population and the substantial rise in immigration.

These factors are expected to push rents higher in the short term and lead to continued capital appreciation over the long term.

Tim Crawford, Group Economist at Birmingham Midshires, said:

"Total returns in the buy to let sector were a healthy 13.0% over the past year. Buy to let house price growth has edged higher over the past year, while rents continue to rise across the country, boosting returns.

The fundamentals underpinning the buy to let sector remain sound. While house price growth in the sector is expected to be more subdued near term, reflecting the impact of higher interest rates, the potential for further increases in rents should encourage long term investors.

There also remains the potential for healthy long term capital appreciation in the buy to let sector, particularly given the backdrop of more households being formed each year than there are new properties being built."