Investment: Terraced houses

Forget chic inner-city apartments. Ignore detached executive homes. The emerging star for buy-to-let investors is the humble terraced house.

Terraces increase in value the fastest, rent out quicker and achieve better yields than other classes of property. But they tend to be overlooked in favour of more glamorous properties such as top-of-the-range houses that photograph well in glossy property mags, and smart new blocks of flats promoted by huge marketing campaigns.

The figures tell a different story, however. The latest Halifax index shows that prices of terraced houses are growing faster than other home types, with values rising by 113 per cent over the last five years. Semi-detached houses rose by 95 per cent in the same period, but flats rose by a less spectacular 87 per cent.

For investors, though, increasing capital value is only part of the equation. The total return, including the rent, is just as important.

According to new figures from buy-to-let mortgage lender Paragon, terraced houses now give the highest yields as well. Over the 12 months to April, the yield on terraced houses averaged at 6.4 per cent, closely followed by semi-detached houses, at 6 per cent. Yields on detached houses now stand at 6.2 per cent, while flats achieve the lowest yields at 5.6 per cent.

Yolande Barnes, research director at Savills, believes that the Government's planning policy of favouring construction of flats is the reason for the change. "Much less in the way of houses is being built, so the prices of houses are going up faster," she says.

Barnes has also discovered that the rents attainable for houses do not rise in proportion to their value. "An interesting feature of yield is that rents vary much less than the value, so tenants pay the same in rent for a cheap property as they do for a more expensive one," she explains.

Buy-to-let guru David Lawrenson, of www.letting focus.com, believes that buy-to-let purchasers may themselves have contributed to the situation by plunging, lemming-like, into the new flat market.

"In the initial boom, landlords were buying up new flats because they cost relatively small amounts of money and they got discounts for buying off-plan," he says. "At the same time, owners of houses are not selling because stamp duty makes it much more expensive, which is throttling supply of houses."

Detached houses are unpopular with tenants because they are more work to maintain, especially if the garden is large. "The thin market leads to voids and the yield is not that great anyway," Lawrenson says. "Terraced houses appeal to the widest market."

Terraced houses are suitable for many groups, including families, house sharers and students, maximising the pool of potential tenants, Lawrenson points out.

Couples with young families prefer terraced houses with a small, secure garden for the kids. Location is important, too, in a quiet area with good nursery and primary schools and easy transport to work. Good parking is also vital.

Changing demographics are likely to reinforce the terraced house's position as a top buy-to-let investment. New research by the think tank Centre for Future Studies, for the Alliance and Leicester, shows that the decline of the nuclear, couple-with-2.4-children, family points to increasing demand for smaller properties for childless couples and single parents.

The study also indicated that up to six million adults are renting not because they cannot afford to buy but because they don't want the commitment. They are predominantly youngish and expect to move with work. When these people begin to cohabit – the Alliance and Leicester is rather gloomy over the future of wedlock – they both expect to move for work, with or without their partner.

With the fastest rising values, the best rental yields, an appeal to the widest number of tenants and the potential for refurbishment all paying dividends, the terraced house looks like a good bet for buy-to-let for the foreseeable future.

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