The private rented sector index by Knight Frank, encompassing key city markets across the UK, shows that initial gross yields have fallen slightly but capital growth has stepped up, resulting in higher total returns in the year to Q2 2014.

Grainne Gilmore at Knight Frank says: “There has been a recovery in residential property prices across the UK over the last year. The pick-up in demand across the market is also reflected in our private rented sector (PRS) index, with the pace of capital growth for investment-grade rented blocks advancing to 7.3% in the year to the end of Q2 2014, up from 6.4% in the year to the end of Q4 2013.

“Capital growth has accelerated in every area we monitor over the last six months, with the exception of central London, where annual growth slowed from 9.5% in Q4 2013 to 7.6% in Q2 this year. However, the outer zones of London experienced the biggest growth in capital values, with an average 13.5% rise in zones 3-6 and blocks in zones 2 and 3 rising by an average of 12.9%.

“Rental growth has not quite kept pace with the rise in capital values however, with average rents increasing by 2.6% in the year to Q2. This is down from a rise of 2.9% in 2013.”