New research has revealed the best type of housing in London for property investors, as rental demand in the capital remains strong and interest rates are set to fall in 2025.

Drawing on the latest house price and private rental data from August 2024, specialists at SBA Property Management have identified terraced houses as the highest-yielding type of housing for buy-to-let returns in the capital city.

With average property prices of £579,743 and monthly rental costs of £2,594, terraced houses in London offer buy-to-let investors yields of 5.37% – well above the average for all property types at 4.81%.

The second most lucrative property type to invest in is flats which offer an above-average rental yield of 5.08%. The average price of a flat in London is £443,073, with monthly rent payments of £1,876.

Semi-detached houses also present a good opportunity for investors, with average house prices of £686,952 and monthly rents of £2,695, yielding returns of 4.71%.

Detached houses offer the lowest rental yield for buy-to-let investors of 3.11%, with average house prices surpassing the million mark at £1,036,179.

Property investors remain in a strong position to buy, as the stage is set for mortgage costs to fall over the next year as interest rates decrease. In fact, interest rates are expected to fall as low as 2.75% by autumn 2025, according to economists at Goldman Sachs, making buying more affordable.

Paired with the predicted growth of the rental market as demand in the capital continues to skyrocket, now is a good time to make a purchase. 

Experts predict a moderate annual increase in London rental prices between 3% and 5% in 2025, above the UK-wide market average which is 2% to 4%.

Tim Darwall-Smith, director at SBA Property Management, saus: “As mortgage costs fall and demand for rented accommodation continues to increase, now is the perfect time for investors to look at the London property market.

“Our analysis of the latest data shows that terraced housing is the best investment opportunity in London, yielding high rental return rates of 5.37%. Investors must pay attention to which property types and locations will make them the best returns – as interest rates continue to decrease, new opportunities will present themselves.”

Going beyond the latest data, terraced houses and flats have proven to be the most reliable investment opportunity over the last five years, with their average rental yields from the period August 2019-July 2024 sitting at 4.88% and 4.47% respectively. This is closely followed by semi-detached properties, which yield an average return of 4.32% – just above the five-year average for all properties at 4.3%.

When comparing London with the rest of the country, rental yields are unsurprisingly lower in London due to high property prices, but the pattern of how well different property types perform in terms of rental yield remains the same. 

Across England, terraced housing was the highest-yielding property type at 5.80%, closely followed by flats at 5.58%.