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| A residential street in Notting Hill. Central London’s relatively lower rental yield has been attributed to its high property prices, which have squeezed landlords’ returns. |
YOU may be one of many investors considering an investment in central London residential property, having visited the numerous British property roadshows touring Southeast Asia in recent years. And no doubt you are attracted by the prospect of good rental returns as well as potential capital growth over time.
This is not an unreasonable expectation. Given the intense investor interest in the British capital city’s property in recent years and its sky-high rentals due to a continued shortage of homes, it would be all too easy to assume that London is the UK’s most profitable rental city.
Not so though. Recent research reveals that central London has been outperformed by British regional cities in terms of residential property rental yield. Figures published over a week ago by BM Solutions show that London’s yield of 5.5% is among the country’s lowest, compared with the national average of 6.2%. The UK’s most profitable regions for landlords are the North West, North East, West Midlands and Wales with an average yield of 6.4%, reports BM Solutions, a provider of buy-to-let mortgages.
London’s underperformance vis-a-vis regional UK cities in terms of rental yield has also been noted in property consultant Knight Frank’s latest Private Rented Sector (PRS) Index. According to the quarterly index, the best-performing city in 2Q2014 was Leeds with an 8.2% average gross yield. This, coupled with Manchester’s yield of 7.9%, makes the North West the best-performing region in the quarter.
The second best-performing city was Birmingham in the West Midlands with a gross yield of 8.1%, nearly double that of central London’s 4.3% yield. Even in London itself, what’s clear is that the further away from central London (Zone 1), the better the returns; the city’s Zones 2 to 3 and Zones 3 to 6 registered relatively better yields of 5% and 6.6% respectively, Knight Frank’s research shows.
Interestingly, central London’s relatively lower rental yield has been attributed to its high property prices, which have squeezed landlords’ returns. Higher house prices also mean higher property-related costs such as mortgage and insurance, which in turn result in lower yields. The latest Land Registry figures show that London’s house prices had grown by 16.4% y-o-y as at June compared with the national average of 6.4%.
This is despite the fact that London has some of the highest rents in the country, thanks to the city’s continued housing shortage. According to the latest HomeLet Rental Index, the UK’s largest monthly survey of private tenants, rents in Greater London have gone up by 11.2% during the year to June 2014, compared with the national average of 6.3%. Average rents in the city are now £1,412 per month, more than double the £694 recorded for the rest of the country.
High tenant demand is ensuring that the UK rental market remains strong. Landlords are reporting that their average void period — the duration that a rental property is not let out — continued to fall to a 12-month low of 2.7 weeks in 2Q2014. This, coupled with just a week’s difference between the highest and lowest void periods, is an encouraging sign that properties are being let quicker, says John Heron, managing director of Paragon Mortgages whose quarterly PRS Trends Survey produced these findings.
With the best rental yields coming from outside London, however, market observers and property consultants are encouraging investors to look further afield. Exorbitant rents in London means that affordability is increasingly becoming an issue for tenants, and towns within commuting distance to the capital city stand to benefit as more young professionals move out in search of better value for their money.
Research conducted by HSBC earlier this year listed several Southern cities to watch. They included Southampton which, with its 8.73% yield, is the UK’s buy-to-let hotspot, and Reading and Brighton for their fastest growing yields last year. The bank also had Manchester, Nottingham, Blackpool and Hull among the top five locations in terms of rental yield.
However, will these research findings be enough to tempt investors, particularly those from abroad, to look beyond London? Not likely, if capital appreciation is what investors are really after, as the capital city still can’t be beat in that respect.
Knight Frank’s PRS Index shows that average capital growth in London still trumps the regional cities, with the highest growth recorded by London’s Zones 3 to 6 (13.5%), followed by Zones 2 to 3 (12.9%) and Zones 1 to 2 (7.6%). In comparison, capital growth for property in Leeds, which topped the rental yields for 2Q2014, was a mere 3.6%.
Even with relatively lower rental yields, the market for tenanted residential investment blocks in the British capital has been very strong in the past year, with demand from both international buyers as well as domestic institutional investors. Knight Frank reports sales of varied-sized blocks — from three units to 45 units worth more than £350 million (RM1.88 billion) — to 14 different nationalities in the past 12 months.
This demonstrates the enduring appeal of stable returns — coupled with the upside of strong capital growth — in a proven market.
Lim Yin Foong was founding editor of Personal Money, a personal finance magazine published by The Edge Communications. She is currently based in the UK.
This article first appeared in The Edge Financial Daily, on August 7, 2014.
