Investors looking to re-enter the lettings market are being urged to tread carefully as some properties have suffered severe falls in rents as well as capital values.

Estate agents say a clear split is emerging in the level of returns offered by different types of properties as rents on some have fallen by as much as a quarter while others have held fairly firm.

“Investors may have thought that rapid falling capital values would mean that yields would rise and the investment story would be straightforward,” says Liam Bailey, head of residential research at Knight Frank. “But it is more complicated because rents have fallen in the past 12 months.”

New figures from Knight Frank show that larger, more expensive properties in London have been the worst hit.

Bailey says homes worth £1.5m or more are letting for around 25 per cent less than they were a year ago. These properties are now offering an average yield of just 3.88 per cent, the lowest on record, according to Knight Frank. Two years ago, £1.5m-plus properties were achieving yields of 4.3 per cent and in 2005, 5.3 per cent.

Rents on cheaper properties have remained more stable so the returns have improved as values have fallen. Bailey says properties worth less than £1.5m are offering an average yield of 4.54 per cent, the highest since 2006. Meanwhile, homes worth £750,000 or less in outer London are yielding closer to 5 per cent, while some new-build properties, where the most significant price reductions have been, are achieving yields of more than 8 per cent.

“The stock-picking element must come into it now,” says Bailey. “There are opportunities due to the capital discounts but the market is splitting into two. Yields on properties that rent for sub- £500-£1,000 per week have held up much better.”

However, he points out that values in the lower end of the market may take longer to recover than those of more expensive properties.

Savills, another agent, says flats in London are now offering better returns than houses. In central London, the typical yield on a flat is now 4.8 per cent, compared with 4.3 per cent on houses.

Charles Peerless, at the Winkworth chain, believes there are still healthy yields to be had in the luxury apartment market. “Properties maintained to a very high standard, with all the right toys, smart kitchens and décor, are renting out well,” he says.

The location of properties is also becoming more important. Returns have come down in most areas of London, according to Winkworth.

It says that Hackney, in east London, is still offering yields of 6.5 per cent, although these have narrowed from 7.5 and 8.5 per cent last year. Meanwhile, in Notting Hill, yields have fallen back from 5.5 per cent to around 4.5-5 per cent and in the West End they have also come under pressure following sharp rent falls.

Savills has found that the areas susceptible to City job losses have suffered the most severe falls in rents. In areas of east London, such as Wapping, St Katharine’s Dock, Limehouse and Shad Thames, they are down almost 20 per cent from their peak. Meanwhile, in north London areas such as St John’s Wood, Regent’s Park and Hampstead, rents have fallen around 7 per cent.

In other areas of the country, rent falls have been less severe. Savills says its Cambridge office, for example, is short on stock, so rents and yields have held up.

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