Buy-to-let yields 2021: where are the best postcodes in London?

2 June 2021 | Investment

In the below guide, it provides a rundown of the best-performing postcodes for property investors looking to expand their portfolio, as well as exploring what the data tells us about the current residential lettings market and its prospects in the near future.

What are the top postcodes?        

Home Made argues, that 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.

Nevertheless, 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,” the Home Made report said.

“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.”

According to Home Made, the top 10 postcodes in London offering investors the best rental yields for one, two and three-bedroom properties are as follows:

1-bedroom properties

  1. IG11 (Barking, Upney) – 6.12%

  2. N9 (Lower Edmonton) – 5.89%

  3. TW13 (Feltham, Twickenham) – 5.65%

  4. EN8 (Cheshunt, Waltham Cross) – 5.57%

  5. IG1 (Ilford) – 5.56%

  6. EN3 (Enfield) – 5.50%

  7. RM6 (Chadwell Heath, Goodmayes, Marks Gate, Little Heath) – 5.46%

  8. RM1 (Romford) – 5.43%

  9. RM7 (Romford, Dagenham, Hornchurch) – 5.39%

  10. IG2 (Gants Hill, Newbury Park, Aldborough Hatch) – 5.35%

2-bedroom properties

  1. UB1 (Southall) – 5.93%

  2. IG11 (Barking, Upney) – 5.64%

  3. EN3 (Enfield) – 5.52%

  4. RM6 (Chadwell Heath, Goodmayes, Marks Gate, Little Heath) – 5.48%

  5. N9 (Lower Edmonton) – 5.42%

  6. TW5 (Hounslow) – 5.39%

  7. N18 (Upper Edmonton) – 5.39%

  8. IG1 (Ilford) – 5.37%

  9. IG3 (Ilford, Cransbrook, Loxford) – 5.35%

  10. RM1 (Romford) – 5.33%

3-bedroom properties

  1. RM8 (Dagenham, Beacontree) – 5.13%

  2. RM9 (Dagenham, Beacontree) – 5.01%

  3. RM10 (Dagenham, Beacontree) – 4.90%

  4. IG11 (Barking, Upney) – 4.80%

  5. EN3 (Enfield) – 4.76%

  6. RM3 (Harold Wood, Harold Hill) – 4.64%

  7. N9 (Lower Edmonton) – 4.61%

  8. CR0 (Croydon) – 4.56%

  9. N18 (Upper Edmonton) – 4.54%

  10. CR7 (Thornton Heath) – 4.54%

Overall

  1. IG11 (Barking, Upney) – 5.13%

  2. RM10 (Dagenham, Becontree) – 4.97%

  3. RM9 (Dagenham, Becontree, Castle Green) – 4.94%

  4. RM8 (Dagenham, Becontree, Becontree Heath, Chadwell Heath) – 4.91%

  5. SE28 (Thamesmead, Greenwich, Bexley) – 4.88%

  6. E13 (Plaistow, West Ham) – 4.59%

  7. RM3 (Harold Wood, Harold Hill, Noak Hill, Harold Park) – 4.54%

  8. N9 (Lower Edmonton) – 4.44%

  9. E6 (East Ham, Beckton, Barking) – 4.40%

  10. RM6 (Chadwell Heath, Marks Gate, Little Heath, Goodmayes) – 4.35%

What does the data reveal and why?

The most attractive investment prospects right now are mainly clustered in London’s outermost eastern boroughs: Barking and Dagenham, Redbridge, and Havering. Home Made’s review of its 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.

Despite this, they have lost considerable ground to towns such as Barking, Ilford and Romford, located further out in travel zones 4, 5 and 6.

Transport infrastructure boost

As was the case in its original 2019 analysis, Home Made found that 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 (the much-talked-about and much-delayed project where services are scheduled to begin in 2022) is set to 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,” Home Made added.

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, Home Made argues.

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.

Home Made claims 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 (for example, Stratford and Royal Docks).

However, ambitious redevelopment plans underway in the east, particularly in Havering, are set to have a similar impact.

“Investors should expect to see consistent growth in rental yields along with significant appreciation in the sales value of any property,” the Home Made team says.

Using the data to inform investment strategy

While the above is a useful guide to help investors seek out the most promising opportunities, Home Made says there are a few things to bear in mind when applying the findings to your own investment strategy.

Supply, demand and seasonality

The firm argues 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,” Home Made explained.

“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 – a property let in December won’t perform as well as one let in June.”

In summary…

Overall, the report says, 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.

“The lettings sector demonstrated its resilience during the Covid-19 lockdowns and the related financial recession,” Asaf Navot, Home Made’s chief executive, said.

“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.”

He added: “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.”

Navot concluded: “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.”

You can read the full Home Made report here

This post has originally been featured in Property Investor Today.