Better Rental Yields in the North: Part 2

The Value of Rental Yield Data

Looking at the results shown in our previous blog, it’s clear that choosing different data sources produces very different impressions. For example, use Totally Money’s rankings and you’ll form a very different impression from someone who works with LiveYield’s data. Totally Money’s rankings might persuade you to consider Liverpool, while LiveYield might convince you that Scotland is a better proposition.

Ultimately, all that these league tables can do is act as a crude barometer of rental demand versus average property prices. However, what is apparent from all the most reliable sources is that, when it comes to seeing a regular return on your investment, the best results are undoubtedly to be found where property prices tend to be lower.

Beyond that point, league tables cease to be of use because once you have shortlisted a region, a city or even a postcode, all that matters is the likely performance of the individual property. A family home, an HMO and a one-bedroom flat might all stand on exactly the same street and yet their prices and yields could vary tremendously. Any investment decision requires detailed and specific research.

A further limitation of rental yield data is that it is necessarily backwards-looking. Like any statistics, rental yield results can only show what has happened previously. When it comes to future-gazing, there are never any guarantees. Consequently, the best that a property investor can do is to research the local market as carefully as possible and try to get a sense of the regional markets’ momentum. One useful gauge is recent rental price growth.

The HomeLet Rental Index, published in August 2020, provides a helpful review of rental price growth in each of the regions.

Region

Rental

Variation (%)

South West

£899

5.5

North West

£781

5.4

Yorkshire & Humber

£678

3.5

Scotland

£692

3.1

North East

£546

2.8

West Midlands

£739

2.6

East of England

£954

2.6

East Midlands

£670

2.3

Wales

£641

0.8

Northern Ireland

£668

0.6

South East

£1,070

0.6

London

£1,653

-2.1


When comparing these figures, it is important to consider the rate of inflation, which, according to ONS, was running at 1.1% in July 2020. Anything below this figure represents a real-terms fall in rental values. Of course, that fall might only be a short-term blip, but it’s a factor to be aware of. The more the growth rate exceeds the rate of inflation, the more of a financial safety buffer that represents.

The Characteristics of a Good Market for Rental Yield

Figuring out which destinations and properties are likely to offer the best returns demands considerable investigation. Ideally, an investor should gain a good understanding of local demand and from which market segments it originates, as well as an appreciation of what features and amenities those different segments are looking for.

One can look at historical data to see what sorts of rental yields have previously been achieved but, to get a sense of how they might change over time, it’s a good idea to consider a range of demographic and economic factors.

  • Population size: is the natural population growing or shrinking?
  • Population age: what does the age distribution look like and in what direction is it moving? Looking ahead, are the most popular properties likely to be student apartments, apartments for young couples, family homes or retirement flats?
  • Economic growth: is the local economy growing and likely to keep doing so – e.g. as a result of market confidence, inward investment and urban regeneration? Economic growth can generate new jobs that attract large numbers of new people into an area and boost demand for accommodation.
  • Average disposable incomes: are average wages rising locally, perhaps as a result of employment growth and/or the expansion of high-value industry sectors? If so, local employees might have more money to spend on their accommodation, benefiting landlords with better quality properties and creating more breathing space for further rental price growth.
  • Seasonal demand: does demand fluctuate throughout the year? For example, do students or tourists account for a significant proportion of demand? TotallyMoney has often observed that some of the best yields tend to be found in “renowned university cities.”

The other obvious factors to consider are local property prices and local rental values. Property values are easy enough to measure but rental prices are subject to competition, which can vary over time. It’s often helpful to study competing properties to get a feel for what local tenants are prepared to pay.

Ultimately, an investment choice has to be a balance. In the South West, rental prices are rising faster than elsewhere in the UK. However, that doesn’t necessarily make properties in that region a safer bet because, in terms of yield, they are currently lying well down the national league table, fifth from bottom. They have a long way to improve before they will start to compete with the likes of Scotland, the North West and Yorkshire & Humber.

It’s also worth noting that local economies are highly dynamic and that even the best investment markets can change. Manchester affords a good example. For several years, it has been one of Britain’s most popular buy-to-let investment destinations, largely on the strength of its buoyant economy and massive job growth. However, as more investors have competed to buy up property, so average prices have risen. Now, prices in many parts of Manchester have risen to the point that it’s very difficult to achieve outstanding yields, despite the strength of local rental demand. (Significantly, no Manchester postcode makes it into Totally Money’s top 25 for rental yield this year.) This is one reason why increasing numbers of landlords are seeking out lesser-known secondary destinations that have not yet attracted the attention of most investors.

Summary

Regional rental yield figures are useful for giving a broad indication of where rental demand is relatively strong and where average property values tend to be comparatively low. On their own, however, they are no basis for an investment choice.

A whole raft of other factors should also be considered, not least the investor’s own priorities. Other important considerations include, amongst others, capital growth potential, local rental demand and prospects for local economic growth. To minimise their risks, most investors will seek a good balance between them.

In this context, it is interesting to note that, when it comes to capital growth, Savills’ Mainstream Residential Price Forecast, published in July 2020, shows a price growth pattern that looks strangely familiar:

Region

5-year price growth forecast (%)

North West

24.1

Yorkshire & Humber

21.1

Scotland

20.1

North East

19.9

East Midlands

18.4

West Midlands

18.3

Wales

17.7

South West

12.9

South East & East

10.7

London

4.0


By these estimates, the best prospects for property investors tend, once again, to be found in the markets where prices have tended to be more affordable, arguably because their lower starting positions give them more headroom for continued growth.

This convergence of capital growth potential and higher yields takes nothing away from the argument that property purchases will always demand detailed local research. However, it can be regarded as a general weathervane of market conditions and its message is clear: for both capital growth prospects and rental yields, northern property markets need to be taken seriously.

Further Information

If you’re looking to take advantage of higher rental yield in the north but you’d like some help in identifying a suitable property, please call our advisory team on 01244 343 355.

Related Posts

×

My Account


×

Create an Account

×

My Details

×

Enquire About This Property

Call Us Today
01244 343355

×

Lost Password

Lost your password? No problem! Enter your email address to verify your account.

×

Subscribe to Blog

×

Documents