March 2, 2007 2:00 am

Rise in rental demand to cheer landlords

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Tenant demand for residential property is rising at its fastest pace for nine years, according to a new survey that will bring much-needed relief to Britain's many landlords.

Landlords have faced several sluggish years in which rents barely moved in many parts of the country, despite the rapid growth in house prices. Residential yields – rent as a proportion of the cost of a home – have fallen to record lows and are now often below the cost of borrowing.

But 30 per cent more chartered surveyors reported a rise than a fall in tenant lettings in February, according to the report by the Royal Institution of Chartered Surveyors (Rics). This has translated into some rises in rents in certain markets. The figure was an increase on the 21 per cent recorded in October.

Although anecdotal, the rise suggests conditions are improving for many landlords at a time when buy-to-let has never been so popular.

"Rising household incomes are leading to increased rental demand for larger properties," said Rics. "Affordability conditions continue to prevent would-be buyers from purchasing a home."

Surveyors reported a firm increase in rental levels, said Rics, although expectations of further growth were "less than optimistic".

The report follows a survey this week by Paragon, a buy-to-let lender, suggesting a big rise in average rents in the year to January.

Duncan Owen, chief executive of Invista, a listed company that is planning to float a £450m residential real estate investment trust this spring – Britain's first – said rent rises varied between regions. "There are rises but there is a diversity; in Docklands they are falling while in other parts of London they are rising fast," he said.

Optimists believe the buy-to-let market is supported by strong economic fundamentals and high levels of immigration, in particular from EU accession countries.

However, gross yields are as low as 5 per cent on average, according to a recent survey by the Association of Residential Letting Agents (Arla). This means the "net yield" on a home – after stripping out management costs, repairs and empty periods – is as low as 3.5-4 per cent.

Rics said gross yields had fallen for a second consecutive quarter across all locations in the UK, reflecting recent house price inflation. "Amid declining gross yields and rising interest rates, the appetite for property from investors is likely to be tested in the coming six months," it said.

The institution's estimate for average gross yields for the UK, as of January, is even more modest than Arla's at just 4.6 per cent – equating to a net yield as low as 3.2 per cent, far below borrowing rates.

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