As an Asian investor eyeing opportunities in the UK property market, understanding rental yields in the UK property market is crucial for making informed decisions. In 2023/2024, the landscape of real estate investments in major UK cities like London, Manchester, and Birmingham presents a compelling picture of potential returns. Here, we break down the average gross rental yields and contrast them with net rental yields, helping you navigate the intricacies of property investment in these regions. These gross yields are based on a rolling 12-month basis calculated on average sale prices and rental prices on price per Sq. Ft Basis.
Average Gross Rental Yields in Key UK Cities
London:
As the capital city and a major global financial hub, London’s property market remains robust despite fluctuations. In 2023, the average gross rental yield in London stands at approximately 5.8%. While this might seem lower compared to other UK cities, the strength of London’s rental market lies in its long-term capital appreciation, projected population increase over next 10-20 years and ability to bounce back quickly in the event of any economic downturn.
Manchester:
Known for its vibrant economy and younger demographic, Manchester offers a higher average gross rental yield of around 7.2%. The city’s ongoing development projects and increasing population make it an attractive market for rental investments.
Birmingham:
With extensive regeneration initiatives increasing property demand, Birmingham shows an average gross rental yield of 6.8%. The city’s strategic location as UK’s second city, ongoing infrastructure improvements, student population, commute to London with HS2 and economic growth potential make it a favorable option for property investors.
Gross vs. Net Rental Yields UK Property Market
Understanding the difference between gross and net rental yields is vital for any UK property investor.
Gross rental yield is calculated by dividing the annual rental income by the property purchase price, then multiplying by 100 to get a percentage. This figure provides a basic insight into the return on your investment before accounting for any expenses.
Net rental yield, on the other hand, subtracts all operational expenses from the gross rental income before making the calculation. This yield provides a more accurate representation of your real financial return, considering the costs associated with maintaining the property.
Expenses Impacting Net Rental Yield
Several expenses can affect the net rental yield in the UK property market: An example of those expenses are
Property management fees: Typically ranging from 8% to 12% of the rental income, these are paid to property management companies for overseeing your property. Are you currently on a competitive Letting and Management fee? Are the extra administration charges e.g. inventory checks, tenancy agreement preparation, renewal fees prohibitive to you maximizing on your net yield?
Maintenance costs: Regular maintenance is essential to keep the property in good condition and retain its rental and capital appreciation. Use the services of a reputable Letting and Management agency that take care of your investment and advise accordingly on best practices to maintain your property in excellent condition.
Mortgage Payments: Changes in interest rates can affect mortgage payments, especially if the mortgage is on a variable rate. Higher interest rates mean higher mortgage payments, reducing the net yield. Investors might opt for interest-only mortgages where only the interest is paid during the mortgage term which keeps monthly outgoings lower. Another option is refinancing from your current rate to a more favorable rate?
Ground rent and service charges: These are particularly relevant if you own a leasehold property. Investment properties with numerous facilities on site have their advantages but be aware that they also come with higher service charges.
Void periods: Times when the property is unoccupied with no rental income being generated. Effective and proactive marketing and property management can help minimize these periods.
Tax implications: Considerations like income tax on rental earnings and potential deductions can impact your net yield. Speak with our tax partner to ensure you are tax efficient on your UK property investments.
By subtracting these expenses from your gross rental income, you obtain the net rental yield, which is generally lower but reflects the actual earnings from your investment.
Conclusion: Understanding rental yields UK Property Market
For Asian investors, understanding these aspects of rental yields in UK cities like London, Manchester, and Birmingham is crucial. By considering both gross and net yields and factoring in the associated expenses, you can better strategize your investments to maximize returns and mitigate risks in the dynamic UK property market. Speak to us today about your UK property investments. For a free 30-minute consultation contact [email protected] or follow us here for market updates.
