Paragon Bank's latest report reveals a notable increase in the average gross rental yield reported by landlords, marking its highest level since the second quarter of 2018.

After rising for three consecutive quarters, average gross rental yields reached 6.1% in Q1 2024. This is the first time the average has surpassed the 6% mark since the end of 2021, and the highest since Q2 2018, when it stood at 6.2%.

The research, conducted by Pegasus Insight and based on responses from nearly 800 landlords, sheds light on the current state of the rental market.

Among the findings, the study highlights the potential for houses in multiple occupation (HMOs) to yield higher returns compared to single self-contained properties, with HMOs averaging 7.0% and single properties averaging 5.8%.

The report also underscores regional variations in rental yields. Landlords in North East England reported the highest average yields at 7.0%, followed by Yorkshire & The Humber at 6.6%. In contrast, landlords in areas with higher than average property prices, such as Outer London (5.2%) and Central London (5.7%), reported more modest returns.

Richard Rowntree, managing director of mortgages at Paragon Bank, commented on the findings, stating: "Against what has been a challenging economic backdrop, landlords are naturally looking for ways to maximise returns, but they are also attempting to mitigate the impact of a tax burden that has increased in recent times."

Rowntree further noted the appeal of HMOs to investors due to strong demand for affordable housing, particularly in areas where tenants may struggle to afford entire properties. He emphasized the significance of stabilizing house prices in contributing to improved yields.

"While strong yields are good news for landlords," Rowntree continued, "we recognise that this rental inflation poses a very real challenge for tenants so are buoyed by reports of improving levels of housing stock in the sector."

He concluded by stressing the importance of a balanced rental market, where landlords can operate profitable businesses, to encourage further investment in housing stock and provide more options for renters.