Yield is now the focus for buy-to-let investors

With minimal savings rates on offer from the banks and equities still volatile, more investors view a housing market perceived to have passed its lowest ebb as offering
Both a decent return on their money and a degree of certainty over the long term.

Letting agent DJ Alexander this week reported that interest from property investors has grown significantly over the last three months. It claimed investors are enjoying annual yields of up to 6.5 per cent on Edinburgh properties and that there had been a return to a more traditional approach, where yield rather than potential capital growth was the defining attraction of an investment.

Founder David Alexander said: "Tenanted and income- producing properties are really all that investment buyers will consider at the moment.

"The amateur buy-to-let landlord who entered the rental market for the first time with a new-build flat in an untested location has gone."

It was this preoccupation with capital growth that did for many amateur landlords over recent years, said Jim Parker, chairman of the National Landlords Association in Scotland. "I think some of the amateur landlords got caught up in the frenzy and they piled into the market too quickly. People thought they could buy a new build for any price, rent it to anyone and make a profit."

Now this bubble has well and truly burst, Parker said investors were again focusing on the numbers, researching the kind of tenants they want and looking for the properties that would be most attractive to them.

Indeed, he believes that by taking a more considered view, landlords are coming to better decisions on the long-term viability of potential investments.

"You should not look at the capital price but the income to cover the mortgage. It is a numbers game and is all about maximising rent and keeping down voids," he said.

Although investor selectivity may have gone out of the window when buying property, the more discerning approach will stand those coming into the market in good stead.

Les Deans, founder of estate agency Leslie Deans & Co, highlighted some longstanding advice for property investors that is now playing a much greater part in their decision-making process.

"You should identify in advance what you want to do and then find the right type of flat in the right type of area," Deans said. "There is considerable demand for traditional tenant flats and that is all down to their letability."

The focus may have fallen squarely on rental yield and the returns that investors can make, but most have also kept a close eye on deflated values and feel that buying in at the bottom provides them with better security and increased opportunities over the long term.

Figures from the Halifax House Price Index would suggest this is a sound approach. Between the first quarter of 2008 and the first quarter of 2009 there was a fall of 14.3 per cent in average property prices across Scotland. However, in the ten years between the first quarter of this year and the first quarter of 1999, average values have more than doubled. Indeed, since the index started back in 1983, average values have gone up by more than four times.

But trying to second-guess property prices in the short term is a risky business. Struan Douglas, partner at solicitors Purdie & Co, likened calling the bottom of the market to "trying to catch a falling knife".

However, he believes market values are flattening out. "If there is a further decrease in prices then it is likely to be relatively small and there is a very good chance that they will begin to rise again perhaps later this year, but if not then in 2010."

While now would seem an opportune time for investors to enter or re-enter the property market, many may struggle to find finance. Figures from financial data provider Moneyfacts show that between June 2007 and this month, the number of buy-to-let mortgage products dived from 3,493 to 229.

However, like the more prudent approach that investors are taking, the handbrake on buy-to-let finance will prevent investors from stretching themselves inappropriately, Deans pointed out.

"Mortgages have had some sanity brought back to them, so people now have to get a deposit, and that's the way it should be."

THE SCOTSMAN, 20 June 2009