Expected Rental Yields across the UK
If you’re considering your first property investment or you’re building a Buy-to-Let portfolio, there are a number of factors to keep at the front of your mind, although your primary concern should always be: Is this the right investment for me?
One of the best ways to measure how suitable an investment is for you is via rental yields. In the simplest terms, rental yields are the returns you make on a property investment from the monthly rent in comparison to the overall value of the property.
What is a Good Rental Yield in the UK?
While you will find varying rental yields depending on the market, anything over the UK average of 3.53% can be considered over-performing, typically ranging from 5% to 7%. Don’t forget to bear in mind that these yields have the potential to also increase over time.
How did we work out the average rental yield for the UK? By taking the recent performance of all of the major UK regions into account, we find the average property price is around £274,000 and an average rental price of £9,708 per annum. This delivers a yield of 3.53%.
Now consider that the average yield in Birmingham, for example, is around 5% and certain city-centre postcodes are even hitting around 6%, putting property in the second city way ahead of the national average. The same can be said for emerging markets like Bracknell, which are using regeneration to transform amenities and drive rental yields. As a rule of thumb, always consider the rental yield you’ll achieve but also the affordability of property in the region and the surrounding amenities that are either in place or on the horizon. This is what drives rental demand and thus, yields.
What Impacts Rental Yields?
There are a number of elements that can affect a rental yield – both prior to investing and as you hold the property over the long-term.
Rental yields are heavily dependent on supply and demand, as well as the quality of the location you’re investing in. This makes detailed preparation key. By researching the right location that is forecasting consistent demand and an exciting pipeline to keep that demand fulfilled, you stand less of a chance of experiencing void periods and missing out on vital rental income. Things to look out for include nearby career opportunities, regeneration, residential undersupply and excellent connectivity, as well as softer more lifestyle-led amenities that are massively attractive to tenants.
This is why cities such as Birmingham and the wider London Commuter Belt are such exciting locations for investors. Rental demand is at an all-time high in these areas due to the affordability they offer and the world-class career opportunities these areas are creating.
These areas are attracting more ambitious professionals, encouraging a competitive market where investors can utilise higher asking rents – resulting in 16,000 people moving from London to the West Midlands in 2018 and nearly 46% of homes in Slough in the Commuter Belt let to London renters.
Void periods, on the other hand, can have a major impact on rental yield during the investment hold and are generally considered a potential challenge associated with property investments. When an apartment is empty and not returning income, it may require extra repayments potentially out of your own pocket. Many investors will consider keeping a ‘rainy-day’ fund to ensure void periods will be less damaging financially, using the emergency fund rather than dipping into their own finances.
Finally, ‘ready-made’ investments are growing in popularity due to the immediacy of the returns they can provide investors. The rental market is rapidly growing and many investors are opting for pre-let residences so they can ensure immediate and hassle-free returns in the prime locations they’ve identified.
Net vs Gross Rental Yields
Gross yield is everything before expenses. Net yield is income after expenses.
Gross yield = (weekly rental x 52) – property value x 100
Net yield = (weekly rental x 52) – costs / property value x 100
Net and Gross rental yields are widely affected by a number of costs of being a landlord. See Fig.1.0 for the average split of costs a typical landlord incurs.
Rental Yield Formula – How to calculate rental yield?
Understanding how to work out your potential returns is a vital aspect of your property investment. Rental yield can be calculated by taking the annual rental income of a property, dividing it by the price paid and then multiplying this number by 100. So, using an example similar to what we found earlier, we can see a property that costs £274,000 with a monthly asking rent of £800 will offer a yield of 3.5%.
£800 (monthly rental income) x 12 = £9,600 (annual rental income)
£9,600 / £274,000 (property price) = 0.035 x 100 = 3.5% (rental yield)
The formula, therefore, is: Annual rental income / Value of the property x 100
Best Rental Yields in the UK – Comparing Regional Performance
We’ve compared the current performance of regions around the UK to understand where investors have identified as top locations and where they might look to invest next year. What follows are the best predicted rental yields in the UK for 2020.
Some of the top performers include Scotland, buoyed by Edinburgh’s exceptional performance, and the North-West of England, led by huge regeneration projects in cities such as Manchester and Liverpool.
At the same time, we’re seeing regions such as the West Midlands and the East Midlands deliver a lower rental yield collectively, despite better performance than most of the UK in key cities such as Birmingham (5%).
|Region||Average Paid Prices||Rental asking prices (monthly)||Rental asking prices p.a.||Rental yield|
|North West England||£195,227.00||£711.00||£8,532.00||4.37%|
|Yorkshire and The Humber||£178,111.00||£634.00||£7,608.00||4.27%|
|South West England||£290,968.00||£845.00||£10,140.00||3.48%|
|North East England||£188,969.00||£530.00||£6,360.00||3.37%|
|East of England||£337,939.00||£917.00||£11,004.00||3.26%|
|South East England||£384,320.00||£1,035.00||£12,420.00||3.23%|