The UK average gross yield for let residential property is 5.8%. After costs and voids we would expect a typical private landlord to see net yields in the order of 4.1%.

Income yield is not just important to investors it can also inform those making the decision as to whether to rent or buy. It gives an indication as to the relative costs of servicing a mortgage against the cost of paying rent. A low yield typically indicates that, subject to an individual’s precise mortgage requirement, renting will typically be the cheaper option.

The headline net yield has historically been a constraint on investment into the residential sector though against current bank deposit rates of 1.6%, even these yields look a relatively
attractive proposition.

There are clear opportunities to improve on this headline return. Our analysis shows that there is substantial variation in gross income yields between property types and between high and low value markets within individual locations.

Smaller units in the lower tiers of market, where tenant demand from singles and couples in earlier life stages is strongest, deliver much higher yields. The average gross yield for one-bedroom properties stand at 6.7%.

Higher income yields can also be achieved by buying in lower value markets. To demonstrate this we have divided the country’s postcode sectors into 10 equal sized groups by reference to the income yield delivered by a two bed property.

The highest yielding 10% postcode districts generate an average gross yield of 7.8%. In this group the average asking price of a two bed investment property is under £100,000.

By contrast, in the lowest yielding postcode districts, where the average value of a two-bedroom investment property is £326,000, the average gross yield is just 4.4%.

Yet, it is vital to understand local variations. A key finding of our research is that average income yields do not vary dramatically at a regional level or even local authority level, but are much more linked to localised differences between high and low value markets.

Across the UK as a whole, average gross income yields are
in the range between 4.8% and 6.2% in three quarters of all local authorities.

Whilst the regions of the north offer marginally higher income yields, within each region there is a wide variation in income yield around the average. The extremes are especially marked across inner London where the top 25% postcode districts provide an average yield of 7.0%, while the bottom 25% yield 3.9%. Here the distinction between high and low value markets is particularly marked.

In London, postcodes where the average price for a two-bedroom property is below £200,000 the average gross income yield is 6.2%.

In areas where prices average £300,000 to £500,000 that yield falls to 4.7%. In the super prime areas where the average two-bedroom property price exceeds £1.5 million that yield falls further to 3.3%.

In the North West, where the average gross income yield is higher
at 6.3% for a two-bedroom investment property, the top 25% postcode districts provide an average yield of 7.0%, whilst the bottom 25% yield 3.9%.

Taken from
Special Report: Rental Britain