investment returns on buy-to-let properties have increased for the first time since 2001, research showed.

Paragon Mortgages said average rental yields, which have been steadily falling since 2001, had risen slightly during the first three months of the year.

The group said an increase in the number of properties coming on the market, combined with a drop in demand among potential buyers, had enabled landlords to get good deals on new properties.

This helped boost average yields to 7.99 per cent of a property's value in March from a low of 7.91 per cent at the beginning of the year.

The group said the increase may mark the end of a long period of decline, which has seen yields fall from 10.02 per cent in November 2001.

During the 15 months to January, the average price landlords paid for properties rose by about 30 per cent, and averaged £109,424 last month.

Despite rental yields falling due to high property prices, the actual amount of rent landlords are collecting has increased by 2.48 per cent during the past year to an average of £8,745 a year, although this is down from a peak of £9,200 in September.

Terraced houses emerged as the best investment for buy-to-let landlords, producing average annual rental yields of 7.38 per cent in the South East.