Rental yield data recently released by Landlord Mortgages (LLM) reveals that UK residential rental yields hit a five-year annual low in 2006. Scottish residential rental returns showed the largest drop, from 8% in 2002 down to 6.46% in 2006. Less dramatic declines were recorded over this period in England (7.1% to 5.74%) and in London (6.37 to 5.81%). Whilst declining rental yields are not such great news for investors, this should be set alongside the very healthy capital appreciation that many existing residential investors have enjoyed over that period.

Lee Grandin of LLM comments: "According to Halifax Bank the cost of the average UK property has risen by 66% over the last five years, while residential rents have risen slightly above or in line with UK inflation. This phenomenon has created an environment where private investors need to be less concerned with high rental yield figures and more concerned with achieving sufficient rental income to cover their mortgage repayments. "Savvy investors need to concentrate on finding the right balance between the prospect of long-term capital growth, rental coverage and profit when they search now for the ideal buy-to-let investment."

LLM say that 2006 saw moderate gains in rental yields recorded in London (increase from 5.53% to 5.96%) and England (increased from 5.54% to 5.82%). However, Scotland, which traditionally boasts one of the strongest rental markets, experienced a significant quarter on quarter increase in yields (5.91% to 6.88%) in the period to Q4 2006.