Better Rental Yields in the North: Part 1

Differences in rental yields in the north and south of Britain are one of the property sector’s most obvious patterns. For several years now, there has been a clear north-south divide. Rental demand is high in most parts of the country but, in recent years, yields have tended to be far better in more northerly destinations where property prices are generally more affordable. In this article, we’ll take a look at those patterns and consider how they might develop in the future.

Why Yields Matter

Rental yields are usually one of the most important selection criteria for any property investor who’s seeking out a new acquisition. In essence, they’re a measure of how efficiently an investment is working to produce a return.

Yields aren’t the only important factor, of course, and plenty of investors prioritise prospects for long term capital gains instead. However, we’ve been living through a period when average UK house prices have been rising only relatively slowly, and with more economic turbulence to come, there’s considerable debate over where property values might go next. As a result, many landlords are choosing to concentrate primarily on their rental incomes or, at the very least, to seek a good balance between yields and capital gains.

This shift in priorities has prompted something of an exodus on the part of investors who might previously have reserved their money for London and the South East. Once, these were unquestioned safe havens, where both yields and capital values seemed set to rise forever. However, for the last several years, properties in London have been languishing at the bottom of the performance league tables, with prices falling and yields lagging in comparison to most other regions.

Seeing better prospects further north, thousands of investors – both British and international – have increasingly moved their money into alternative property destinations. Some have favoured the obvious big-city candidates – the likes of Manchester, Birmingham, Liverpool and Leeds – but some have ventured into lesser-known secondary and tertiary destinations, where prices tend to be more affordable still.

For any investor considering a new purchase, it’s always worth reviewing where in Britain investment money has been working the hardest, and trying to gauge how those markets might change in the coming months and years.

Yields: Definitions and Examples

Before we embark on this whistle-stop tour of UK property investment markets, it’s worth just taking a moment to remind ourselves what we mean when we talk about yields.

Gross yields are simply a measure of the returns that a property is delivering; a function of rental income divided by the cost of the investment. The calculation is simple: take the sum of annual rental payments for any given property, divide that figure by the cost of the purchase, and multiply the result by 100. That gives the annual gross yield.

Net yields involve a slightly more complicated equation that also takes account of landlords’ costs. It’s essentially the same calculation, except that those costs are first subtracted from the annual rental income. Costs will vary from property to property, so regional and national averages tend to cite gross values.

To illustrate a gross yield calculation, let’s consider the current UK average. To do this, we have to decide which figures we plug into the equation. Unfortunately, this is easier said than done because there is no single definitive source of information. There are several alternative data sets that we could use – from the ONS/Land Registry, various high street lenders, or one of the national estate agencies or property marketing platforms. They all produce different data and reports, and this is one reason to be slightly wary of news headlines about the latest yield results from a particular body. The results of any calculation will always depend on which figures you choose to put in.

For the purposes of this illustration, we’ll take property prices as listed by Zoopla, and rental prices as listed in the August 2020 Homelet Rental Index. We’ve chosen these figures simply because they were the newest available at the time of writing.

Working with these two sources, the numbers look like this:

  • Average price paid (UK): £283,576.
    (Source: Zoopla, 4th September 2020)
  • Average monthly rental income (UK): £985.
    (Source: HomeLet Rental Index, August 2020)

Average annual income (£985 x 12) is £11,820, which is then divided by the average price (£283,576) and multiplied by 100 to give a gross yield of approximately 4.18%.

What’s important here is that this figure – 4.18% - is the result of two particular choices about what data to use. Instead, we could have taken Homelet’s monthly rental figure of £825 for “UK excluding Greater London”, which would have produced a gross yield of 3.49%.

Alternatively, we could have used statistics from Nationwide; its house price index was published just a few days before Zoopla’s and it gives a UK average price of £224,123. If we had combined that with the same original rental figures from HomeLet, then our average gross yield would have worked out at 5.27%. But if we’d taken HomeLet’s lower figure of £825, then the yield would have been 4.42% – and so the argument goes on.

In short, there is nothing definitive about any of the rental yield data that different agencies publish throughout the year. They are all a function of the data sets they have chosen to adopt, and they only provide a general indication as to whether a regional property market is worth shortlisting.

Gross Yields and Regional Trends

If we take our original two data sources (i.e. Zoopla and HomeLet’s Rental Index) and if we then apply the same calculations for each region, we can produce the following league table of gross rental yields across the UK.

Area (August 2020)

Price paid

Rental

Gross Yield

Northern Ireland

£141,426

£668

5.67

North West

£196,789

£781

4.76

Scotland

£182,223

£692

4.56

Yorkshire & Humber

£180,244

£678

4.51

Wales

£187,438

£641

4.10

West Midlands

£228,895

£739

3.87

East Midlands

£218,681

£670

3.68

South West

£296,632

£899

3.64

North East

£188,499

£546

3.48

East of England

£341,246

£954

3.35

South East

£392,465

£1,070

3.27

London

£659,749

£1,653

3.01


There is nothing ‘official’ about these figures but they are as valid as any other. They also broadly reflect the same regional patterns that have appeared consistently in other recent reports.

Back in January 2020, Seven Capital produced a similar table using what was then the latest data from HomeLet and Zoopla. The numbers have changed a little since January but, although the company’s data omitted Northern Ireland, the basic pattern has otherwise remained the same.

Area (January 202)

Price paid

Rental

Gross Yield

North West

£195,227

£711

4.37

Scotland

£182,415

£671

4.41

Yorkshire & Humber

£178,111

£634

4.27

Wales

£182,382

£625

4.11

West Midlands

£228,290

£695

3.65

East Midlands

£217,538

£635

3.50

South West

£290,968

£845

3.48

North East

£188,969

£530

3.37

East of England

£337,939

£917

3.26

South East

£384,320

£1,035

3.23

London

£635,919

£1,611

3.04


One could take data from ONS, Nationwide or a host of other sources and, in all likelihood, the same trends would emerge, with the lower-priced regions tending to deliver better yields than the higher-priced markets further south. The North West has always been a good, reliable performer in recent years, and Scotland has been making significant headway this year.

However, different patterns emerge if we look at the numbers at a more granular level – i.e. if we consider towns or individual postcodes rather than broad regional averages. The LiveYield website does precisely this, and its results (which are regularly updated) currently show that nine of its top 10 locations for yield are to be found in Scotland.

Rank
Location

Yield

1
Comhairle nan Eilean Siar

9.50%

2
Buteshire

8.20%

3
Glasgow

7.90%

4
East Ayrshire

7.40%

5
Shetland

6.80%

6
Orkney Islands

6.80%

7
South Ayrshire

6.80%

8
North Ayrshire

6.60%

9
Windsor and Maidenhead

6.60%

10
Moray

6.60%

(Source: LiveYield.co.uk)

There’s an important point here, which is that the more closely you focus your search, the less important regional averages become. In the North West, for example, a gross yield of 4.76% is a respectable result by national standards, but within that region there is considerable variation. At one end of the spectrum, there are highly-sought city centre properties in places such as Manchester and Liverpool, but at the other, there are run-down properties in parts of East Lancashire and Greater Manchester that are all but unsaleable. There are also some very highly-priced markets in each of the northern counties (Cheshire being a good example) and, here, as a result of those higher prices, yields are likely to be considerably lower.

Looking in more detail at LiveYield’s data for the North West, we find that the top 5 sub-regional markets for yield include:

Rank
Location

Yield

1
Liverpool

6.3%

2
Salford

6.2%

3
Hyndburn

6.1%

4
Manchester

6.1%

5
Trafford

5.9%


The Rental Yield Map

One of the most often referenced sources of yield data is the Rental Yield Map by Totally Money. It uses information from the residential data specialist REalyse and publishes results on a postcode by postcode basis.

It’s UK top 10 for 2019/20 include:

Rank
Location

Yield

1
Liverpool L1

10.00%

2
Falkirk FK2

9.51%

3
Glasgow G52

8.71%

4
Liverpool L11

8.67%

5
Cleveland TS1

8.50%

6
Kilmarnock KA1

8.30%

7
Liverpool L6

8.12%

8
Leicester LE1

8.00%

9
Leeds LS2

7.92%

10
Sheffield S1

7.83%


It’s worth noting that Liverpool postcodes make three further appearances in the top 25, while other high-performers include Cardiff, Cleveland, Sunderland, Paisley, Gateshead, Lancaster, Glasgow and Aberdeen. Amongst the top 25 rental destinations, the southernmost is Leicester.

Totally Money also lists “the 10 worst-performing postcodes for buy-to-let investments.” Here, yields range from 2.28% in London WC1X, to 1.95% in St Albans AL5. Perhaps surprisingly, Sheffield’s S7 and Birmingham’s B73 postcodes also rank very poorly (2.19% and 2.18% respectively) but otherwise, the worst offenders are all destinations in the south: Reading, Gloucester, Guildford, Ipswich, Kingston upon Thames and London W8.


Read Part 2 of this blog [here].

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