Large-scale investors typically improve upon average income yields by acquiring bulk portfolios at a discount to vacant possession rates.

A 25% discount would lift the average gross income yield from 5.8% to 7.7% across the UK as a whole and take gross income returns
in the top 10% yielding postcode districts to over 10% for two-bedroom properties.

Total returns

Both investors and renters undoubtedly need to be mindful of the extent to which income yields vary across different segments of the market and the relationship this has with capital growth prospects.

This enables investors to look at total prospective investment returns. It enables would-be buyers to understand how much delaying the decision to buy will cost them both in terms of rent versus the cost of funding a mortgage and potential lost capital growth opportunity.

At a national level, house price growth has historically significantly enhanced total returns in the residential investment sector. Average house price growth equates to 6.7% per annum over the past 30 years, exceeding inflation by 2.8%.

Based on the Savills house price forecasts and assuming that landlords’ costs account for 30% of gross rental income, we believe that the average annual total return for residential property across the UK will be around 6.9% over the next 10 years. This rises to 8.2% in London and 7.7% in the South East. Large-scale investors should be able to achieve higher double-digit returns in these locations.

Identifying markets that offer the best investment prospects is complex. It is not as simple as comparing gross average income yields of, say, less than 5.5% in Bristol and Brighton to yields of over 6.5% in Liverpool and Nottingham.

As we have seen, each area will provide opportunities to deliver yields some way over the average. Equally there will be a trade off between income yields and capital growth prospects that will vary significantly between locations and, to a degree, property types.

Investors with a significant borrowing requirement are going to be attracted to higher income yielding markets to allow them to service debt. This may mean investors concentrate on one and two-bedroom housing where yields are highest and the growth in demand for renting will be the most concentrated.

However there will be a place for larger housing within balanced portfolio not least to accommodate forecast rising demand for
family accommodation.

As people delay entry into the housing market, so there will be an increase in demand for rented family accommodation of three beds or more, that is expected to offer better capital growth prospects to offset lower income yields.

Taken from
Special Report: Rental Britain