Investment Overview: Should I stay or should I go?

The buy-to-let market is hard work at the moment - but at least rents are continuing to rise

The end of the property boom has made buy-to-let investors understandably nervous. Are their portfolios about to plummet in value? Should they sell up or stick it out? Greedy speculators and get-rich-quick amateurs have already left, scared off by dire predictions from some economists of a crash worse than the early 1990s.

So far, at least, the slump has failed to materialise. Property prices have continued to rise slowly overall, with the exception of some very specific areas of the market, such as high-value properties in central London. Most analysts expect residential property prices to rise very slowly during the next 10 years, outstripping general inflation by only a percentage point or two. The saving grace for buy-to-let investors is that rents are, on average, going up and will continue to rise.

Richard Cotton, of Cluttons, believes the easy money has gone for good. "At the moment, we are looking at net yields of 3 to 4 per cent across the board, and capital growth of between 1 and 4 per cent depending on where you are," he says. "Neither of these are exciting figures. The argument for investing in residential property is not as strong as it was." But the rentals market is buoyant, he adds. "We are seeing rental growth and a shortage of property across the south, which is a precursor of rental growth," he says.

The reason for the strength of the rental market is that first-time buyers are being forced to wait longer to take the plunge because of sky-high prices. And they are also beginning to appreciate the low cost of moving among rented accommodation, at a time in their careers when they are likely to be changing jobs every few years. "One thing I am certain of is increasing demand for letting from young professionals," says Cotton. "We have full but not continuous employment, so young people have to move more often."

Jim Ward, research director at Savills, says residential property investment will make sense eventually. "In the long term, there is money to be made, but it is a matter of getting the timing right," he says. "We are forecasting 4 per cent house-price inflation for the next five years, and over 10 years it will be slightly higher, when it starts to add up."

Many buy-to-let landlords went into it the business to build up a nest-egg for their old age, so it is ironic that many of them may sell up and put the money in a conventional pension, only to find the fund itself has big property holdings. "We see a lot of interest in residential investment, but from institutions rather than individuals, so you may still be investing in property, but through your pension fund," Ward says.

Next year, property will be eligible for inclusion in self-invested personal pension plans (SIPPs). This has created great excitement with buy-to-let landlords, especially those who regard their property holdings as their pension in any event. Predictions of the impact this may have on the property market vary from some who believe it will kick-start a new boom to those who think it will have very little effect at all.

Certainly, many investors go off SIPPs when they discover that putting a property into a SIPP involves selling it to a trustee, which may mean paying capital gains tax as well as effectively losing control of the property. It is also very difficult to release the property from the trust once established (except, of course, by dying, but that is not part of most buy-to-let landlords investment plan). However, the arrival of property-based SIPPs may cause a blip in the market in the middle of next year, as the high-rate taxpayers who will mainly benefit from them acquire stock.

The modest revival of the London market provides the basis for optimism, as movements in the capital tend to wash out to the rest of the country in following years. The latest residential research report from Knight Frank says: "Despite the media's negative coverage, the London new homes market has seen renewed interest, particularly during the summer months. Whilst transaction levels remain some way short of the heady heights of 2001/2, they have proved resilient, particularly within the middle-price bracket (£500,000 to £2.5m)."

A lot of this activity has been from owner-occupiers, but investors are still around. The report concludes: "The London investment market, whilst cool, continues to tick over. Investors remain price-conscious and discriminatory, but deals are being done."

However, developers are being forced to offer bulk discounts of up to 20 per cent, and areas such as the Isle of Dogs, where huge numbers of two-bed flats have flooded the market, have been hard hit, the report says. Overall, the message is that the time when you could make a lot of money simply by buying a property and sitting on it are well and truly over. Savills figures show that from 1974 to 2004, residential property investments were as profitable as stocks and shares, but far less risky.

But now buy-to-let landlords have to work for their living, like everyone else.