Investing in property? Look for a spot in demand

Although rental incomes have not risen in line with sales values, there is still money to be made, writes Mary Wilson

Investing in property is a capital idea, providing you buy wisely in a good location. Although rental yields - the annual rental as a percentage of a home's value - have not risen in line with sales values over the past 18 months, they still represent a good return compared with money in the bank.

In general, yields are currently around 7 or 8 per cent gross, but there are pockets all around the country where higher returns are achievable. And although yields might be down compared with two years ago, the value of your property will have risen significantly.

The secret is to buy a property for which there is a huge demand. This might be one- or two-bedroom flats in London, a five-bedroom house in Surrey or a three-bedroom terraced house in the North-west. Good prospects should be had in a city where there is a continual turnover of employees, all looking to rent while they are on short-term contracts; somewhere with a university or college or an up and coming area, where purchase prices are low enough to produce a high percentage return.

In London, the traditional investment areas - Knightsbridge, Kensington, Chelsea, Mayfair - will produce a steady, but at the most an 8 per cent, return on your money. "It is difficult now to get double figures in London, but there are little pockets such as the Docklands and the City where it is still possible," says Jonathan Vandermolen of Blenheim Bishop. "Small apartments with one or two bedrooms will produce the best results, especially good one-bedders".

He is selling a new development in Warren Street, W1, which should produce a higher than usual rental return. "It is not in a prime residential area, so capital outlay is lower, but it is close enough to Oxford Circus to achieve 10 per cent," he says.

There is also a shortage of genuine loft space (former industrial properties with large open spaces) in London available for rent. "Gross investment yields on this type of property in City fringe areas such as Clerkenwell and Shoreditch are often in excess of 12 per cent," says Clive Martin, residential lettings manager with Stirling Ackroyd.

City suburbs that are well located should produce satisfactory returns and sometimes a good quality, newly built development in an area that is easily accessible to London and the airport will see higher than usual rental returns. But remember when agents quote possible yields to take account not only of all charges and expenses, but also possible void periods, which make a considerable dent in your income.

At Wentworth Gate, a Barratt development of apartments, town houses and large detached houses in Ascot, Surrey, some properties are set to achieve up to 12 per cent returns. "Homes in certain parts of Surrey which are near to the American schools are achieving very good premiums because of the high demand and lack of supply," says Lynne Mayell of Knight Frank, which is letting some of the properties.

"People who have bought early in the development will do best. Although returns might be a bit lower to start with because of the building, once that has finished the rents will go up" she says.

The good news for all those people who do not live south of Watford is that areas in the north are hot spots, too. According to a recent survey conducted by Mortgage Express, the North-west is currently the best place in the buy-to-let property market.

"These areas are popular because of the rental incomes that can be achieved," says Tim Dawson, deputy managing director. "The North-west leads the field because it has the added attraction that the investment required to buy properties is lower than many other regions across the UK."

The survey shows that the most popular property to buy for investment in general across the UK is a two- or three-bedroom terraced house. Two- or three-bedroom post-1960 terraced houses come second, followed closely by flats and maisonettes.

"There is a lot of investment around Manchester," says Paul Heath of broker Langmore James Association. "Three- to five-bedroom terraced properties are all showing net returns of around 10 per cent. In Warrington, it is the two-up two-downs which are showing the highest. Hamptons has been monitoring rental properties around the county and the top spots are the Cotswolds, where a two-bedroom cottage in 1997 produced a gross yield of 6.75 per cent (with a 10 per cent increase in capital value); Beaconsfield where four-bedroom houses achieved over 10 per cent and Amersham, where a two-bedroom house achieved an 8 per cent yield.

"These good returns are largely led by the number of applicants in the area," says Annabel Barnes, director of country lettings. "Certain parts of Surrey and Berkshire are particularly popular with relocating employees, mostly Americans, who all want the right house on the right bus route near the right school. There isn't enough to go round, so they will pay big premiums".