Whilst London has always been regarded as the UK’s ‘premier’ location for property investment, and continues to attract significant interest and lively demand, investors are now starting to recognise the added value investment opportunities outside of the London marketplace.
With 85% (56.7 million) of the UK population living outside of the capital, there is clearly a vast market to be explored across the whole of the UK. Recognition of the size of the market (19% of all property now falls within the private rented sector), and the opportunity to achieve greater rental yields is now attracting investors to alternative locations, especially other major City conurbations and University towns.
Prime Central London v Greater London
As a whole, London continues to be regarded as a stable location and continues to attract property investment buyers, however, we are seeing some fluctuations in activity across Prime Central London and the Greater London markets.
Prime Central London, which has historically been driven by investment in single unit, luxury properties by Ultra High Net Worth foreign investors, is currently undergoing a ‘cooling’ period, as investors feel the effects of oil price plunges in global markets. The resulting slowdown in activity has resulted in limited growth being achieved in property prices (0.8% in March 2016), according to research published by Knight Frank; their lowest rate in more than six years. In addition, the number of residential property transactions completed in Prime Central London has also dropped by 13% over a 12 month period, when compared to last year.
As a consequence, these factors have contributed to a position where rental yields have become compressed to 2.91% and potential returns are no longer as high as enjoyed in previous years.
In the Greater London market place however, we see a different picture.
Outside of the Prime Central London space, the residential market continues to experience a period of much stronger growth. In fact, throughout 2015, the average house price in Central South East London increased by 8%.
In addition, whilst available rental yields on investment property in Greater London do not reach the same levels as other areas of the UK, they are by no means as compressed as in the Prime Central London space, with current yields at approximately 3.28%. .
Whilst the available return on investment is still limited, the risk faced in the Greater London marketplace is greatly reduced compared to that of the Prime market, as investors have the flexibility to diversify their portfolio across a number of properties and types of properties. The benefits to this approach are two fold as not only is risk reduced, but also the availability of finance options increase as investors work with less compressed yields and potentially lower LTVs.
Investment growth outside of London
As investors seek greater returns on their property investments, they are now looking to regional locations, with JLL reporting that in 2016, ‘37% of investors were looking to invest outside of London and the South East’.
Major cities, such as Manchester and Birmingham have become more prominent locations for investment as a direct result of stronger rental yields, affordable property prices and the desirability of the location. In fact, in Manchester alone, there has been £8.2 billion of property investment during the last 10 years. However, there is still a requirement for 10,000 new properties to be built each year to satisfy the current levels of demand in the city.
As regional locations such as Manchester become more attractive for residential investment and demand for property increases, this is influencing a positive impact or drag effect on the commercial property sector. With more people living and working in the city, this is also driving an increased demand for commercial property space. Savills have predicted that an additional 3 million sq ft of office space is required in Manchester over the next decade.
As a direct result, Manchester has seen an increase in both domestic and foreign investment in the residential and commercial property areas, and yields on both residential and commercial property are now strong at 7.98% and 5% respectively.
Not only do regional locations offer the potential to achieve greater returns on investment, but also provide the opportunity to achieve an increased spread of risk over a wider portfolio of property.
The average price of a residential property in London is £534,785. This price is almost three times the UK average price of £189,901. It is clear from these figures alone, that the opportunity for investors to achieve a greater spread of risk, through the acquisition of a larger portfolio is much more viable when operating outside of the London market.
In addition, portfolio investment outside of London can be spread across a number of geographical ‘buy to let’ hotspots, where investors can assess market conditions, in terms of employment statistics, investment in infrastructure and other socio-economic influencers. By adopting this approach, investors not only benefit from a diversified spread of risk, but also stand to gain greater levels of return on investment, where property benefits from capital appreciation in an ‘up and coming’ location.
Whilst London has established and will retain its leading status for property investment in the UK, there is a wider market to explore throughout the country. Property investors who seek to expand their portfolio, whether as a short term project or long term investment, should consider the costs, potential returns, benefits and risks of the whole of the UK property market.