What is a Good Gross Rental Yield in the UK?

“I couldn't believe it,” James said, staring at his calculator. “A 12% gross rental yield. That's unheard of!” The phone call earlier that week had come as a shock. His property in Manchester had just seen an enormous return, far above the average. Yet, not everyone is as lucky as James. In the UK, the average gross rental yield can vary significantly depending on location, property type, and current market trends. But what exactly is considered a ‘good’ gross rental yield in the UK?

To find out, we need to break down the details. Gross rental yield is the return on investment (ROI) expressed as a percentage, calculated before any operating costs such as repairs, insurance, and taxes are deducted. It’s the most basic indicator of how well a property is performing in terms of rental income, but it can be misleading if not contextualized with other factors like net yield and capital growth.

Understanding the Average Gross Rental Yield

In the UK, the national average gross rental yield hovers around 3-5% for most properties. However, this figure can increase or decrease based on where you're looking. Properties in London, for example, typically have lower yields—often around 2-4%—because of the high cost of buying property relative to the rental income they can generate. But if you head north to cities like Liverpool, Manchester, or Nottingham, yields can reach up to 7-12%, making them much more attractive for investors.

So, what makes a yield ‘good’? While a 3-4% yield might be acceptable in areas with strong capital growth prospects (like London), most property investors aim for a yield of 5% or more to ensure a healthy return. In more speculative areas, investors often target 7-8% or higher to compensate for potential risks such as slower capital appreciation or volatile local markets.

Breaking Down the Key Factors

1. Location, Location, Location The old adage couldn’t be more relevant. Prime locations like central London are highly sought after but come with lower yields due to their sky-high property prices. On the other hand, regional cities, commuter towns, and university areas often provide higher rental yields because of their affordability and consistent rental demand. According to the most recent data:

   City	Average Gross Yield (%)
   Liverpool	10-12%
   Manchester	8-10%
   Nottingham	7-9%
   Birmingham	6-8%
   London	2-4%

   The above cities provide fertile ground for investors seeking high yields. But as with any investment, high yields come with higher risks—properties in these areas might not appreciate as fast as those in wealthier regions.

2. Property Type The type of property you invest in will significantly impact the gross rental yield. For example, HMOs (Houses in Multiple Occupation), where rooms are rented out individually, often offer some of the highest yields. While traditional buy-to-let properties might provide stable yields, HMOs can reach upwards of 10-15%. However, these types of investments require more management and stricter compliance with legal regulations. Meanwhile, city-centre apartments and student accommodations often perform well due to constant demand but may come with higher maintenance costs.

3. Rental Demand and Occupancy Rates High yields don’t mean much if your property is sitting empty. Occupancy rates in a specific location are just as crucial as the yield itself. For example, university towns often see excellent yields because of the steady demand for student accommodation. Still, these properties can have downtime during summer holidays or between academic terms, potentially impacting annual yields. That’s why cities with high year-round rental demand like Birmingham and Manchester are often seen as safer bets.

4. Potential for Capital Growth A good gross rental yield shouldn’t just be viewed in isolation. Properties in areas with strong capital growth potential can deliver exceptional long-term returns. For example, even though yields in London are typically low, property prices have historically risen faster than most other regions. This means investors might accept lower yields in exchange for significant appreciation over time. However, the recent market slowdowns in areas like London have led many investors to seek better-yielding regions.

The Impact of Current Market Trends

The UK property market has experienced some significant shifts in recent years due to external factors like Brexit, the COVID-19 pandemic, and rising interest rates. These changes have led to shifts in both rental demand and house prices, influencing yields across the country.

• Brexit: Initially, there was concern that Brexit would lead to a housing market crash. However, many regional cities have seen their markets flourish as people move away from London in search of more affordable housing.
• COVID-19 Pandemic: The pandemic accelerated demand for properties outside major city centres, where space for home offices and access to outdoor areas became a priority. This trend has benefited the rental yields in suburban and rural areas.
• Rising Interest Rates: As of 2024, rising interest rates are starting to impact the affordability of mortgages, which could limit demand for property purchases, thus increasing demand in the rental market. This shift could further boost gross rental yields, especially in areas with strong rental demand.

Net vs. Gross Rental Yield

While gross rental yield is an essential measure, it doesn’t account for the various expenses that come with being a landlord. The net rental yield is what you earn after deducting costs like maintenance, insurance, taxes, and mortgage payments. Net yields often range between 2-6%, depending on the property type and location.

For example, a landlord with a property in Liverpool generating a gross yield of 10% might see this figure drop to around 6-7% once expenses are deducted. That’s why focusing solely on the gross figure can sometimes be misleading.

Case Study: The Manchester Success Story

James, our investor from earlier, found his way to a 12% gross yield by doing his homework and taking a calculated risk. He purchased a three-bedroom terrace house in the outskirts of Manchester for £150,000, far below the city average. The property needed some renovations, which cost him an additional £20,000, but once it was ready, he was able to rent it out for £1,700 per month, giving him a solid gross yield of 12.8%.

His success was due to several factors: he chose a location just outside a booming city, where rental demand was high but prices were still relatively low. He also opted for a property type (terrace) popular with families and young professionals. And while Manchester is known for its high yields, James still took a gamble on a property that required substantial upfront work. His story is a reminder that high yields are possible, but they don’t come without risks.

Final Thoughts

In summary, a good gross rental yield in the UK is generally considered to be anything above 5%, with yields of 7% or higher being excellent in most regions. However, investors need to weigh this against other factors like property type, rental demand, occupancy rates, and the potential for capital growth.

Location is king when it comes to property investment, but understanding how yield fits into the bigger picture of your investment strategy is equally essential. It’s not just about chasing the highest number; it’s about making smart decisions that align with both short-term cash flow needs and long-term financial goals.