Where to invest in the U.K. for the best rental yields is a hot topic as investors seek profitable investment opportunities in the 2023 real estate market.
Rental yield is a critical indicator for property investors. It measures the return on investment of a rental property. Therefore, it is crucial to know the factors that affect it, what is considered a good rental yield, and the best U.K. cities for rental yields. This analysis will help investors make informed decisions when investing in the U.K. real estate market.
Key Takeaways:
- Rental yield measures the return on investment of a rental property, represented by the annual rental income generated as a percentage of the property’s total value.
- The U.K. property market has experienced growth in rental yields across all regions, with specific areas such as Birmingham, Leeds, and Manchester experiencing significant increases in the last year.
- The factors affecting rental yields in the U.K. are property type and size, location and proximity, condition and quality of the property, age of the property, demand and competition, and economic and demographic trends.
- Investors must prioritise maintaining the condition and quality of their properties and monitor economic and demographic trends to set competitive rental rates that yield optimal profits.
What Is Rental Yield and Why Does It Matter?
Rental yield is a financial metric used to measure the return on investment of a rental property. It represents the annual rental income a property generates as a percentage of its total value. In other words, it calculates the rental income the landlord earns as a proportion of the property’s market value.
A high rental yield implies that a property generates a substantial amount of rental income to its purchase price, making it an attractive investment opportunity. In contrast, a low rental yield suggests a property may not generate enough rental income to justify the investment.
Rental yield is a valuable tool for property investors looking to compare and evaluate the potential profitability of different investment opportunities in the real estate market. However, to earn this yield, you must be one of the following: real estate investor, landlord, or property owner.
Overview of the U.K. Property Market in 2023 and the Current State of Rental Yields
The U.K. property market has seen strong growth following the 2008 financial crisis. In fact, the rental yields have since increased across all regions, with specific areas such as Birmingham, Leeds, and Manchester experiencing more significant increases than others. The rental profit for all properties in England and Wales increased annually and quarterly, rising from 5.9% in the previous year and 5.4% in Q3 2022 to 6.2%.
While this is a sign that property investors should be excited, the property market has been experiencing a slowdown since Q4 2022. Notably, house prices fell four consecutive times (between September – December) during that year, with the most significant drop occurring in November. According to a Forbes’ report, analysts forecast house prices to plummet further to 8 percent in 2023.
The same report shows that stability has returned to the U.K. housing market in January after a fall in the value of a distinctive property in the closing months of 2022. The January 2023 figure of £281,684 edged down from £281,713 in December. This indicates that the U.K. housing market has started recovering from the recent slump, but it’s early to judge.
Factors Affecting Rental Yields in the U.K.
The following are the factors affecting the rental yields:
- Property Type and Size
The type and size of a rental property are significant factors affecting rental yields in the U.K. Smaller properties, such as studio flats or one-bedroom apartments, typically have higher rental yields than more extensive properties due to lower purchase prices and higher demand for affordable housing.
However, properties that can accommodate families, such as three or four-bedroom houses, tend to have more stable and longer-term tenancies, making them a solid investment in the long run.
Additionally, properties with unique features like outdoor spaces or modern amenities tend to attract higher rental rates, thus increasing the rental yield.
- Location and Proximity
The location and proximity of a rental property to amenities, transportation links, and popular attractions are significant factors that can impact rental yields. Properties in desirable areas with good transport links and access to facilities, such as schools and shopping centres, tend to have higher rental yields than those in remote or less desirable areas.
Additionally, properties near universities or employment hubs can provide a consistent stream of tenants, leading to a stable rental income.
- Condition and Quality of the Property
The condition and quality of a rental property can significantly affect rental yields in the U.K. High-quality, well-maintained properties with modern amenities and high-end finishes tend to command higher rental yields and attract long-term tenants. In contrast, rental yields will be lower if a property is not well-maintained, requires substantial repairs, or is in disrepair.
The cost of maintaining and refurbishing the property may outweigh the benefits. As such, investors should prioritise maintaining the condition and quality of their properties to maximise rental yields.
- Age of the Property
The property’s age is an essential factor affecting rental yields in the U.K. Older properties tend to have lower rental yields due to high maintenance costs and lower tenant demand. As properties age, they require more repairs and renovations, which increases the costs for landlords.
In addition, newer properties offer better amenities and modern features that attract more tenants, resulting in higher demand and, therefore, higher rental yields. As such, landlords must consider the age of a property when deciding the rental value to ensure that the rent charged is competitive, attractive, and profitable.
- Demand and Competition
The level of demand and competition in the rental market is another crucial factor affecting rental yields in the U.K. Areas with high demand and low competition tend to have higher rental yields. In comparison, those with low demand and increased competition tend to have lower rental yields. Landlords can charge higher rents in high-demand areas, resulting in higher rental yields.
The competition among landlords also ensures that rental rates remain competitive, providing tenants with affordable housing options. On the other hand, landlords may struggle to find tenants in low-demand areas, resulting in lower rental yields.
- Economic and Demographic Trends
Economic and demographic trends significantly influence rental yields in the U.K. Changes in the economy, such as fluctuations in interest rates, can affect the affordability of rental properties. In a booming economy, people tend to have more disposable income, and landlords can charge higher rents, resulting in higher rental yields.
Demographic trends, such as population growth, migration patterns, and employment opportunities, also affect rental yields. Areas with high population growth and low unemployment tend to have a higher demand for rental properties, resulting in higher rental yields. Therefore, landlords must monitor economic and demographic trends to set competitive rental rates that yield optimal returns.
What Is Considered a Good Rental Yield in the UK in 2023?
Rental yield varies from property to property and from area to area. In general, rental property investors can expect a good rental yield if the annual rent is higher than the property’s estimated capitalisation rate. The capitalisation rate is essentially how much return on investment (ROI) you can earn from your property; it is calculated by dividing the net operating income by the purchase price.
For instance, if you purchase a property for £200,000 with an annual rent of £20,000 and NOI of £15,000 (net operating income), your ROI would be 7.5%. However, in this case, the average rental yield of all the U.K. rental properties will determine a good rental yield. If the percentage value of the average U.K. rental property is below or similar to your percentage, you can consider it a good rental property.
According to Joseph Mews, the average U.K. rental yield in 2022 is 4.71%, meaning anything above this can be considered a high rental yield. Comparing the example above, where the rental yield is 7.5%, this shows that this property has a high rental yield and can be considered a good investment property. In this case, all factors affecting rental yield work positively for the property.
Best U.K. Cities for Rental Yields in 2023
A high rental yield indicates a high demand for rental properties in a particular area, while a low rental yield suggests that the demand for rental properties is relatively low. Therefore, investors should use the rental yield as a guide to determine the need for rental properties and make investment decisions accordingly.
So, with the data in the following sections, let’s look at the U.K. cities that will offer investors the best rental yields in 2023.
#5 Sheffield
- Population: 685,368
- Rental Yield: 5.4%
- Average Property Price: £169,100
Sheffield is a city in South Yorkshire, England, with over 685,000 people. Historically, Sheffield was known for its thriving steel industry, which helped the town grow into a significant industrial hub. Today, the city’s economy is much more diverse, focusing on the service sector, creative industries, and advanced manufacturing.
The property market in Sheffield has seen steady growth over the past few years. The city has become an attractive destination for students, with two major universities and many student accommodation developments. This has increased demand for rental properties, particularly in the city centre and surrounding areas.
In addition, Sheffield has seen a rise in the number of young professionals and families moving to the area. This has created a demand for rental and purchase properties, particularly in popular suburbs such as Ecclesall, Fulwood, and Dore. This is particularly true when you compare the 556,500 population size in 2021 to the city’s current population.
#4 Liverpool
- Population: 864,122
- Rental Yield: 5.4%
- Average Property Price: £152,300
Liverpool’s economy is diverse and vibrant, with key industries including tourism, finance, digital media, and healthcare. The city has seen significant regeneration in recent years, with the redevelopment of the Liverpool One shopping district and the creation of the Knowledge Quarter, a hub for science, innovation, and research. Liverpool’s population has grown from 486,100 in 2021 to over 860,000 in 2023, which is expected to continue.
The property market in Liverpool has been on an upward trend in recent years, with average house prices increasing by over 20% since 2015. The city has a high demand for rental properties, particularly in the city centre and areas with good transport links. The buy-to-let market is famous among investors, with yields averaging around 5-6%. There are also significant opportunities for commercial property investment, with new developments being built in the city centre and surrounding areas.
The city has a large student population, and the demand for quality accommodation is high. Purpose-built student accommodation has become an attractive investment opportunity, with average yields of around 7-8%. However, potential risks for property investors in Liverpool include Brexit-related uncertainty and rising interest rates which could impact the city’s economy and property market.
#3 Birmingham
- Population: 984,333
- Rental Yield: 5.5%
- Average Property Price: £202,400
Birmingham is the second-largest city in the U.K. after London and an important economic centre. The city has a diverse economy with a mix of industries, including manufacturing, financial services, retail, tourism, and digital technology. In recent years, it has experienced strong economic growth; it is attractive to investors due to its relatively low property prices compared to other major UK cities and its solid rental yields.
One of the critical areas of growth in Birmingham’s economy is the property market. The city has seen significant investment in recent years, particularly in the commercial property sector. The development of new office buildings, hotels, and retail spaces has transformed the city centre. This has attracted many businesses to the area, including major financial services companies, technology firms, and retailers.
However, there are also potential risks associated with investing in Birmingham’s property market. One risk is the potential for oversupply in the residential property market, particularly in some city regions. If too many new developments are built, this could lead to a glut of properties on the market and downward pressure on prices, among other reasons.
#2 Manchester
- Population: 395,515
- Rental Yield: 6%
- Average Property Price: £215,700
Manchester is the most significant economic hub in the North West of England and has become a key player in the U.K.’s economy. Its economy is diverse, with strengths in various sectors, including financial and professional services, retail, tourism, and creative and digital industries. In recent years, Manchester has also attracted significant infrastructure investments, such as the city centre’s redevelopment and the airport’s expansion.
The property market in Manchester has been booming in recent years, with solid demand for residential and commercial properties. This demand has been driven by the city’s growing economy, population, and infrastructure investment. According to data from Zoopla, the average property price in Manchester was £240,000 in 2021, representing 28% above buyer demand for rental property on a five-year average.
Key investment opportunities in Manchester’s property market include buy-to-let apartments, student accommodation, and commercial properties. Manchester is a student city, so there is a high demand for purpose-built student accommodation. The city centre also offers many commercial property investment opportunities, with areas such as Spinningfields and NOMA experiencing significant developments in recent years.
#1 Leeds
- Population: 455,123
- Rental Yield: 6.5%
- Average Property Price: £205,600
Leeds is one of the largest cities in the U.K. and has a diverse economy with a mix of traditional and modern industries. The city has a solid financial services sector and is home to several major banks and insurance companies. The healthcare, retail, and manufacturing industries also play a significant role in the city’s economy.
Leeds is a popular destination for foreign investment and has a reputation as a hub for innovation and entrepreneurship. The property market in Leeds is thriving, with a high demand for rental and purchase properties. The city centre is particularly popular with young professionals, who are attracted by the city’s excellent transport links and vibrant social scene.
The city’s affordable housing shortage allows developers to build new properties to meet this demand. There is also a high demand for commercial properties, particularly in the city centre, which could offer good returns for investors. Additionally, the city is home to several major regeneration projects, such as the South Bank project, which will see the redevelopment of a large city area.
The Bottom Line
The rental yield of the UK property market increased annually and quarterly, rising from 5.9% in the previous year and 5.4% in Q3 2022 to 6.2% in 2023. However, the UK housing market experienced a slowdown since Q4 2022, with house prices falling four consecutive times in 2022. This trend is expected to continue, with analysts forecasting an 8% decline in house prices in 2023.Property type and size, location and proximity, and condition and quality of the property, among others, are the main factors that impact rental yields. In addition, cities like Leeds, Manchester, Birmingham, Liverpool, and Sheffield rank among the top cities for the best rental yields. Property investors looking to maximise their returns should consider investing in areas with high demand, good transport links, and access to amenities.
