- Postcodes in North East London take the top spots for highest rental yields in 2021.
- The boroughs of Barking & Dagenham, Redbridge, and Havering offer the most attractive opportunities for property investors as they undergo significant urban redevelopment.
- COVID-19 has changed renter behaviour, with tenants migrating further away from the centre and moving greater distances away from their current home.
We have analysed data from thousands of property listings across London to create an up-to-date guide on buy-to-let rental yields for investors in the capital. Having crunched the numbers for every postcode in Greater London, we have identified the areas that offer the best investment opportunities for buy-to-let landlords.
In the below guide, we provide a rundown of the best performing postcodes for property investors looking to expand their portfolio, while exploring what the data tells us about the current residential lettings market and its prospects in the near future.
Since the onset of COVID-19, investors have turned away from many of the asset classes whose presumed security and capacity for long-term value creation were once thought unimpeachable. With international lockdowns accelerating existing trends towards flexible working practices and e-commerce, investors have seen billions wiped off the value of commercial property assets.
However, while commercial property has suffered, the value of residential assets has fared well during the pandemic. Thanks to the extended stamp duty holiday, the sales market is buoyant and price growth has exceeded expectations, while a surprisingly robust lettings market benefited from permission to continue operating during later lockdowns and a flurry of activity as renters seek out housing that more closely aligns with their post-COVID priorities.
While the residential lettings market in London has fared reasonably well despite the pandemic, rental yields in some neighbourhoods have emerged in a far stronger position than others. In particular, postcodes located further away from the city centre (which continues to struggle amid ongoing restrictions) offer the best returns for investors.
Here are the top 10 postcodes in London offering investors the best rental yields for 1, 2, and 3-bedroom properties.
- IG11 (Barking, Upney) - 6.12%
- N9 (Lower Edmonton) - 5.89%
- TW13 (Feltham, Twickenham) - 5.65%
- EN8 (Cheshunt, Waltham Cross) - 5.57%
- IG1 (Ilford) - 5.56%
- EN3 (Enfield) - 5.50%
- RM6 (Chadwell Heath, Goodmayes, Marks Gate, Little Heath) - 5.46%
- RM1 (Romford) - 5.43%
- RM7 (Romford, Dagenham, Hornchurch) - 5.39%
- IG2 (Gants Hill, Newbury Park, Aldborough Hatch) - 5.35%
- UB1 (Southall) - 5.93%
- IG11 (Barking, Upney) - 5.64%
- EN3 (Enfield) - 5.52%
- RM6 (Chadwell Heath, Goodmayes, Marks Gate, Little Heath) - 5.48%
- N9 (Lower Edmonton) - 5.42%
- TW5 (Hounslow) - 5.39%
- N18 (Upper Edmonton) - 5.39%
- IG1 (Ilford) - 5.37%
- IG3 (Ilford, Cransbrook, Loxford) - 5.35%
- RM1 (Romford) - 5.33%
- RM8 (Dagenham, Beacontree) - 5.13%
- RM9 (Dagenham, Beacontree) - 5.01%
- RM10 (Dagenham, Beacontree) - 4.90%
- IG11 (Barking, Upney) - 4.80%
- EN3 (Enfield) - 4.76%
- RM3 (Harold Wood, Harold Hill) - 4.64%
- N9 (Lower Edmonton) - 4.61%
- CR0 (Croydon) - 4.56%
- N18 (Upper Edmonton) - 4.54%
- CR7 (Thornton Heath) - 4.54%
- IG11 (Barking, Upney) - 5.13%
- RM10 (Dagenham, Becontree) - 4.97%
- RM9 (Dagenham, Becontree, Castle Green) - 4.94%
- RM8 (Dagenham, Becontree, Becontree Heath, Chadwell Heath) - 4.91%
- SE28 (Thamesmead, Greenwich, Bexley) - 4.88%
- E13 (Plaistow, West Ham) - 4.59%
- RM3 (Harold Wood, Harold Hill, Noak Hill, Harold Park) - 4.54%
- N9 (Lower Edmonton) - 4.44%
- E6 (East Ham, Beckton, Barking) - 4.40%
- RM6 (Chadwell Heath, Marks Gate, Little Heath, Goodmayes) - 4.35%
What does the data show and why?
As the data indicates, the most attractive investment prospects right now are mainly clustered in London’s outermost Eastern boroughs: Barking and Dagenham, Redbridge, and Havering. A review of our previous yields analysis (published in late 2019) suggests that there has been a sustained eastwards shift in the location of postcodes offering the best potential ROI for buy-to-let landlords.
East London locations that performed well in 2019, such as East Ham, Plaistow, and Thamesmead, once again appear among top performers when looking at overall yields across each property category. However, they have lost considerable ground to towns such as Barking, Ilford, and Romford, located further out in travel zones 4, 5, and 6.
There are several likely reasons why this is the case, with trends established both before and during the pandemic responsible for the continuing eastwards shift.
Improvements to transport infrastructure
As was the case in our original 2019 analysis, improvements to London’s transport infrastructure mean that residents in high-yield areas can commute into the major economic hubs of the city centre with relative ease. The forthcoming Elizabeth line (services are scheduled to begin in 2022, though the project has already been beset by significant delays) will drastically improve transport connections between many of this year’s best performing locations to the rest of the TfL network, with stations opening in Ilford, Goodmayes, Chadwell Heath, and Romford. We know that rental prices react more quickly than sales values to infrastructural improvements, so investors should expect to see an even greater spike in rental yield value in these East London suburbs.
The impact of urban redevelopment
Urban redevelopment schemes that introduce thousands of units of high-specification housing and modern amenities tend to change the profile of tenants, making them more attractive to working professionals on higher incomes. This increases the value of nearby property, leading to a sustained rise in rental yields over the medium term as rental price growth outpaces the growth in sales prices.
East London’s outer boroughs are currently further behind in their redevelopment journey than many of the more central neighbourhoods that have already been transformed by various urban renewal projects (e.g Stratford, Royal Docks). Ambitious redevelopment plans underway in the East, particularly in Havering, are set to have a similar impact, and investors should expect to see consistent growth in rental yields along with significant appreciation in the sales value of any property.
Consumer and renter behaviour
Tenant migration patterns have been altered significantly by COVID-19. Since the onset of the pandemic, the widespread adoption of flexible working practices has meant that renters have had more freedom to move across the city without as much concern for the impact on their daily commute. When we analysed enquiry data for rental properties in TfL travel zones 4, 5, and 6, we found that 40% of the renters enquiring on properties in these areas were currently based in zones 1, 2, and 3, suggesting a significant spike in the number of tenants moving towards London’s suburbs. Similarly, 64% of the renters logged in our database in 2020 were moving to a completely new area of the city, with an average travel time of 44 minutes between their previous property and prospective new home.
As well as having the flexibility to stray further away from the workplace, tenant priorities have changed drastically following our collective experiences of successive lockdowns. The so-called ‘race for space’ is well documented, with many tenants moving to the suburbs or leaving the city altogether in search of larger properties with more access to green space and better suited to pet ownership - features which are now a higher priority for many than proximity to the workplace.
Many have also moved further away from the centre to reduce costs during a period of sustained economic upheaval. For many of London’s working professionals, it no longer makes financial sense to pay a premium for expensive central property when there is no need to maintain a daily physical presence in the workplace. Properties in high-yield areas are able to satisfy both the post-COVID lifestyle priorities and affordability criteria of London’s renters.
Using the data to inform investment strategy
While the above is a useful guide to help investors seek out the most promising opportunities, there are a few things to bear in mind when applying the findings to your own investment strategy.
Supply, demand, and seasonality
There are many factors that influence the likelihood of a property achieving its full potential yield anticipated on the basis of market data, chiefly the combined impact of local supply, demand, and seasonality. We explored the role of supply, demand, and seasonality at length in a piece aimed at institutional investors, but to summarise (very) briefly, we know that supply/demand varies significantly across the year and between different regions of the city at any given moment.
Though there is a general trend towards stronger demand across the board during the summer months, not every postcode experiences the same highs and lows at the same time. The time of year and current local market conditions will affect the likelihood of your asset achieving its full potential, e.g. a property let in December won’t perform as well as one let in June. Supply, demand, and seasonality thus need to be factored into a long-term plan for value creation.
Gross yield vs net yield
As our rankings are based mostly on property marketing data (particularly with regards to asking rents), they do not account for the impact of a landlord’s operating costs on their final yield, meaning they reflect a theoretical gross yield. The net yield, calculated once operating costs have been deducted from rental income, will be significantly lower than the gross yield if the cost of letting a property are high. Landlords need to find ways to reduce their property marketing and standing costs to narrow between net and gross yield.
For example, let’s compare what happens to the net yield when using a traditional lettings agent vs letting with Home Made:
The average asking price of a 3-bedroom property in RM8 is £363,667 and the asking rent is £1,555. This makes the gross yield 5.13%.
The average tenant-find fee with a national agency is 13%. The above property would generate £18,660 in annual rental income if the asking price were achieved, meaning the landlord would pay their letting agent £2,425.80 in fees (excluding additional administration fees). If we deduct the fees from the annual income, this leaves the landlord with £16,234.20. If we recalculate the yield using the net income rather than the gross income, this changes the yield from 5.13% to 4.46% (equivalent to £16,219.55).
Home Made would charge fees of £948 for tenant-find services on the same property, leaving a net income of £17,712. Once we recalculate the yield, it changes from 5.13% to 4.88% (equivalent to £17,746.94).
These values are calculated exclusive of VAT and prior to consideration of other costs and fees incurred in managing a rental property. As you can see, seemingly insignificant deviations in yield percentage can in fact represent significant sums in nominal value. It is essential to consider how your operating costs will impact the potential gross yields listed above and how this might limit the return on your investment.
Overall, the residential lettings market has proven remarkably adaptable when faced with challenging economic circumstances and various existing trends that disrupt the way people rent and let property. Remarking on the yields data, our CEO, Asaf Navot, had the following to say:
‘The lettings sector demonstrated its resilience during the Covid-19 lockdowns and the related financial recession. Rental yields in Central London were more significantly impacted by the addition of thousands of short-let properties back into the market, while less central locations benefited from the consumer behaviour shift towards remote-working alternatives.
As a result rental yields in outer zones have remained high, and even increased in the last 18 months, as renters expanded their search radius to include the new areas that they would now consider living in. In a sign of the market’s strength for those who can adapt, Home Made added tens of thousands of new properties to its portfolio in the last year, with landlords benefiting from our ability to offer properties all across London and minimise the disruption of COVID restrictions using our digital tenancy processes and tools.
We remain highly optimistic about the future of the UK’s rental space as more people than ever are looking to live in rental properties for longer periods of time, and as the ongoing supply shortage remains significant, with the government consistently well below its annual housing construction targets.'
If you would like to speak with us about your property needs, contact us via our website to find out how we can help. We charge just 3% plus VAT (with a minimum fee of £948 plus VAT) for tenant-find services and 4% plus VAT monthly for full property management. If you're ready to get started, book your free valuation here.
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