By Lucy Warwick-Ching

Property investors are returning to the London new-build market in droves, tempted by a sharp rise in rents and an expanding buy-to-let loan market.

Sales of new developments to investors have been in decline since 2007, when the buy-to-let boom turned to bust. But Barratt Developments said this week that in London, in particular, the downward trend has reversed.

It revealed that unit sales of new-build properties between January and September have been 179 per cent higher than in the same period last year, as investors seek opportunities for higher returns in a period of prolonged low interest rates.

?Rental returns and the potential for capital gain in the London property market have been convincing motivators for both domestic and international investors to add new-build homes to their portfolios,? says Gary Patrick, regional sales director, Barratt London.

He reports that the most popular London new-build sites with investors are in Dalston, Pontoon Docks in Docklands, Deptford, Lewisham and Putney Square.

?Docklands is one of the hottest areas for buy-to-lets,? confirms Tony Gambrill, area director at estate agent Chesterton Humberts. ?The yields have increased due to the strong increase in rents and the lenders have become a little less stringent in lending criteria – which has made for a healthier environment for the buy-to-let investor. While international investors remain the bedrock for central London sales, UK investors are the mainstay in the Docklands.?

Property analysts say buy-to-let is experiencing a revival, as investors are attracted by rising rental demand.

Average UK rental income has risen for seven consecutive months ? reaching a new high of ?713 per month in August. Investment activity is also fuelled by a wider choice of loans for investors.

Research by the National Landlords Association (NLA) found that the number of buy-to-let mortgages provided during the second quarter of 2011 grew by 25 per cent, compared with the first three months of the year.

Average loan sizes also increased to ?138,525, up 6.4 per cent since January.

?Wider choice and better products for landlords mean that the overall buy-to-let market is improving,? says Paul Rockett, managing director of NLA Mortgages. ?Although demand for finance still outstrips supply, buy-to-let lending is gradually increasing – giving property investors a reason to be optimistic.?

This week, State Bank of India became the latest provider to enter the UK buy-to-let mortgage market.

The lender, owned by the Indian government, is set to offer a lifetime tracker deal at 3.99 percentage points above the Bank of England base.

It will be available to borrowers with a deposit of 40 per cent or more, and carry a ?1,990 arrangement fee. It will compete with the current market-leading rate of 3.48 per cent from Woolwich with a ?1,999 fee.

Chesterton Humberts says demand from international students is driving competition for new-build buy-to-let properties in areas close to top London universities. Its report, published this weekend, Home away from Home, the impact of foreign students on London?s residential property market, reveals these areas have outperformed other areas over the past decade.

?Property prices in areas immediately surrounding these institutions have, on average, increased 1.6 times more than properties in the wider borough over the past 10 years,? says Nick Barnes, head of research at Chesterton Humberts. ?Rental accommodation in the same areas commands an average premium of 27 per cent over the borough average.?

Property around the UCL campus in Euston showed the most dramatic differential, with average price growth of 246 per cent, compared with 104 per cent in the wider Camden borough area, closely followed by the accommodation around the University of Westminster, which increased 247 per cent compared with 116 per cent throughout the City of Westminster.

? The Financial Times Limited 2011