Rental yields have been falling across Europe with prices growing fasting than rents, reports www.globalpropertyguide.com...

The Global Property Guide has reported that at the start of 2007, in European locations rental yields are lower than they have been for at least 20 years.  This is because property prices have been rising faster than rents meaning that the net effect is that yields - which are annual rental income as a percentage of the property price - are falling.

The Global Property Guide observes that there may be a relationship between rental returns and risk.  For example, most of Europe’s ‘high yielding’ countries are in the East.  Apartments in four Eastern European capitals earn above 10% rental returns: Chisinau, Moldova (14.13%); Warsaw, Poland (13.28%); Sofia, Bulgaria (10.56%); and Bratislava, Slovakia (10.06%).  Risks such as high corruption and political risks may therefore have an influence, keeping rents higher relative to price.

But risks are not the only factor.  The Global Property Guide believes other key factors include recent arrival of the market economy, high interest rates and relatively undeveloped mortgage markets.  To illustrate, it would surely be hard to label the historic city of Bratislava, Slovakia, as a high-risk location, yet the rental income returns are excellent.

And to the West...

Western Europe generally suffers from a different problem - high taxation.  There are high rental income returns to be earned in Amsterdam and Paris (8.25% in both), in Munich (7.80%) and Brussels (7.53%).  But all four cities are high tax environments (although Poland and Moldova also have high tax regimes for rental income).

Property in Prime Central London returns surprisingly high rental yields, at 7.13%.  Note that this “Prime” category encompasses a relatively narrow group of super-luxury apartments in absolutely prime areas (Belgravia, Chelsea, and Knightsbridge).  The high returns in these select locations contrast with the significantly lower rental yields (5.79%) available in Central London’s other luxury areas (Kensington, Bayswater, Notting Hill Gate, St Johns Wood, Highgate, Islington, Highbury, and Primrose Hill).

Rental returns cannot fall forever

Rental returns on owning apartments in Europe currently vary greatly - from around 14.13% in Moldova’s capital Chisinau to a low of 2.43% in Monaco.

The Global Property Guide consider rental returns of around 4% or below as a danger signal.  Several European capitals offer rental income yields around or below this 4% level.  An example is Madrid, where rental returns are now at only 3.15%.

For the full listings of rental income on apartments around Europe, please refer to Global Property Guide.