Investing for High Rental Yields

Historically, investors have always hoped that their chosen property would deliver two key results: a high rental yield and strong capital appreciation. And there have been good reasons for that.  In the long term, property has always been a reliable asset class that has tended to gain significant value.  However, house price  growth is never constant or uniform. We saw values rise markedly in 2010, 2014 and 2016, when, according to ONS, year-on-year appreciation rose to over 9%. But there are other times when prices rise more slowly.

At present, most lenders and leading industry commentators are expecting only modest capital growth across the country. Some areas should still perform well (and we'll be looking at some of these in future blogs) but looking at nationwide averages, most forecasts are ranging between zero and 3% growth. At a time when inflation is hovering around the 2% mark, it's therefore natural that investors will want to prioritise properties that make their money work harder. This is where the question of yield comes in.

What is Rental Yield? 

Yield is a measure of how efficiently an asset is able to generate a cash return. In the case of a buy-to-let property, we are talking specifically about how much rental income it generates as a percentage of its purchase price.  It's a simple enough equation. The ideal high-yielding investment would, of course, be a very low priced property that commands very high rental returns.  Price and rental returns are equally important variables in this equation, but the matter of price is essentially the reason that the traditional North/South divide has been turned on its head in recent years.  In London and parts of the South East, prices rose to such levels that rents had to be exceptionally high in order for landlords to achieve any sort of acceptable rental yield. Rents are indeed high in those areas, but there is a limit to how much people can or will pay, so yields became increasingly constrained. For some investors, this wasn't an immediate problem; they had chosen London in the expectation of achieving high capital growth rather than good yields. However, when average prices also began to stagnate and fall, this represented a double-whammy. The London honey-pot was losing its appeal.

The Midlands and the North

Elsewhere in the UK, the prospects for buy-to-let investors have been much better. A number of factors make high rental yields much more achievable here.  The first factor is, of course, affordability. Many parts of the Midlands and the North had seen only a very slow recovery from the economic crisis of 2007. What was once seen as a weakness by investors has now become a strength. Properties here are much more affordable than in the South and because the markets have not become overheated as they have in London, there is still room for continued price growth.

The next factor is rental demand. Many towns and cities in the Midlands and northern England have been enjoying the benefits of major inward investment projects. Their populations and employment rates are rising, and they have been drawing increasing numbers of young graduates away from the capital. Numerous commentators have noted something of a 'youth exodus' from London as people have recognised the appeal of cities such as Birmingham, Sheffield, Manchester and Liverpool. Here, ambitious professionals can count on excellent career prospects, coupled with much lower property and rental prices, all of which means more money in their pockets.

Many of these fast-redeveloping cities are also seeing big investment in high-tech, high-value growth sectors. This is important because such industries support better paid jobs. That, in turn, translates into better-paid prospective tenants, and more demand for higher quality properties.

Where to Invest for High Rental Yields

This has been a popular subject amongst property journalists in recent months, and though calculations vary, there is a general consensus that the hardest-working properties tend to be located far north of the Watford Gap.

According to a December 2018 report by TotallyMoney, Nottingham is one to watch, with two NG postcodes ranking in the top 5 for buy-to-let yields. By the company's calculations, NG1 topped the table with average rental yields of 11.99%. In the same report, Liverpool also took two of the top 5 places, and a total of 5 postcodes in the top 20. Liverpool 7, (which is home to Liverpool University) delivered average yields of 9.79%.

It's notable that both Nottingham and Liverpool have large and successful universities. Other university towns also feature in TotallyMoney's top20, and the company's press release makes specific mention of the fact. It notes: "With students flocking to university cities year after year and looking for a place to live, it’s no surprise the student market is a dependable one for landlords."

Accompanying TotallyMoney's Buy to Let Yield Map 2018/2019 is the following recommendation:

"For a buy-to-let safe bet, start looking for properties in university cities. Locations with a high student population, like Nottingham, Liverpool, Manchester, Leeds and the North East, boast some of the UK’s highest rental yields."

Manchester also ranks in the top 20, with two postcodes averaging around 7% for yields. Preston, which we'll be featuring in a future post, also has a large university population and appears in the top 20. It is currently delivering average yields of 6.89%.

The report also notes that five of the country's worst-performing postcodes are in Greater London. The lowest is in the N6 postcode where average rental yields are only 1.93% and average purchase prices exceed £1.5 million.

A slightly older report (November 2018) by LandInvest attempts to rank investment destinations by a weighted balance of yield, capital gains and rental price growth. Colchester bucks the North/Sound trend thanks to rental price growth of 6.5%, but Stockport, Manchester and Birmingham all appear in the top 5. By these figures, Manchester had delivered average yields (across all postcodes) of 5.29%, and average capital growth of 4.26%.

A limitation of some of these reports is that they tend to neglect Scotland and Wales. However, a regional study by the lender Shawbrook Bank suggests that there are good yields to be achieved here, too. According to its November 2018 figures, the top ranking region for yields was the North West of England, but Scotland took second position and Wales came in at number 5.

Its top 5 regions for buy-to-let yields scored as follows:

North West: 5.4%

Scotland: 5.3%

North East: 5.1%

Yorks/Humber: 5.4%

Wales: 4.7%


Summary

Yield isn't everything, but in a market in which average capital growth is not expected to exceed 3 or 4% in the near future, yield is likely to be the focus of most BTL investors' strategies.  The North and the Midlands tend to offer the most affordable properties, and when combined with strong rental demand, these often translate into higher rental yields.  University towns and cities are currently delivering most of the country's best yields, but it's important to do more detailed research. Look at specific postcodes and properties, because results can vary considerably, even between neighbourhoods.

In forthcoming posts, we'll be looking at individual investment destinations where prospective investors can be confident of achieving not only high yields, but significant capital appreciation, too.

If you have questions about property investment options, please call one of our advisory team on 01244 343 355 (option 1) or visit our contact us page.

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