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Investing in residential units could beat banks

Falling bank deposit rates and the recovery in rents are combining to make investment returns on residential properties look attractive. This is especially the case in the areas of low prices and healthy rental demand.

One way to identify areas and types of properties which are offering attractive returns is to look at the quarterly rental report from Daft. As well as showing average asking rents it also includes yields.

Its latest survey for the three months to April shows how such returns can vary. For instance in Dublin North county a five-bedroom house may offer a rental return of only 3.2pc, whereas a two-bedroom property in the same area could offer more than double that, or 7.5pc.

Furthermore, with demand for rental accommodation increasing while supply declines, rents may continue to rise and this, in turn, may attract investors and thus generate upward pressure on prices at least in parts of Dublin and some other cities.

So investors entering these growth sectors may look forward not only to improved rental returns but also to improved capital gains, especially if they buy before the end of this year when they could benefit from a tax-free return on profits from properties held for seven years.

The Daft report suggests that in some city markets sales prices are rising faster than rents while in other sectors rents appear to be rising faster than prices.

For instance in Dublin city centre, one- and two-bedroom flats saw their yields fall over the last 12 months by as much as two percentage points, in the case of one-bedroom units to 6pc, and by 0.4 percentage points in the case of two bedroom units to 7.7pc.

In contrast three-bedroom houses in this area saw their yields increase by 1.2 percentage points to 9.1pc suggesting that rents for such homes are rising faster than prices, although it may also suggest that prices are continuing to fall. Then again, in Dublin south city, one-bedroom units saw their yields to 7.7pc.

As this area seems to be affected by the removal of bedsits from the market, it appears that rents for small flats in this area are rising faster than prices for one-bedroom apartments.

In the same area three beds saw their yields shorten 0.2 percentage points which suggests that prices for these house types in this Dublin 4 and 6 area may be rising faster than rents.

This trend was reversed in Limerick City where one-bedroom flats saw their yields drop by a sharp 1.3 percentage points to 9.2pc, which, despite the drop, is still the most attractive yield in the country. Yields for three beds in the Treaty city increased by 1.2 percentage points to a still modest 6.5pc.

At a time when deposit accounts offer little returns and stock markets are looking increasingly risky, then some property yields offer investors attractive returns.

However, these are gross yields and landlords are incurring a range of extra costs such as property tax and curtailed mortgage interest tax relief. Consequently the net yields may be less attractive as reflected in the exodus of investors who bought during the boom.

On the other hand if rental demand puts upward pressure on rents, such a trend may put pressure on the Government to increase the supply of rental accommodation and this in turn may cause the Government to ease the range of penalties imposed on landlords and thus encourage investors to provide more accommodation for the rental market.

Irish Independent