07/09/2018 by Robin Gregson & Jason Guest
Big Cities and 'Bandwagon Investment'
Listen in on a seminar room full of property investors and you're likely to hear certain cities mentioned time and time again. Few conversations pass without at least a fleeting reference to Birmingham, Liverpool or Manchester, but this celebrity sometimes comes at a cost. Big university cities have been delivering some of the UK's top yields for a good number of years, but as their reputations have grown, so local prices have tended to rise.
This raises an important question: is their long term potential to investors now hampered by their own well-publicised success?
To answer that, we spoke with one of our in-house investment advisers, Jason Guest.
Q. Manchester, Liverpool and others are delivering some great results, Is this sustainable & is there a problem?
No, there's no problem as such. Properties in parts of these cities are doing really well, and we're still recommending many of them to our clients. But it's about being careful about your choices. For years now, journalists, advisers and pundits have been touting the potential of places like Manchester city centre, and investors have been quick to seize on some great opportunities. Many of them have done well, and that's fuelled a continuing spiral of awareness and investment. That's all fine, but the issue to be aware of is the maturity of the market. Rising demand from investors tends to raise prices generally, and that's clearly been happening for some time, particularly in key parts of these 'hotspot' cities. Continuing capital appreciation is good news for early investors, but it creates a challenge for newcomers to the market. Rising prices make it increasingly difficult for them to achieve the sorts of yields that attracted to them to the market in the first place. To enter these 'honeypot' markets now requires more money up front, which means average yields will tend to be lower; it may also demand a readiness to compete with some much better established landlords.
Q. So you feel the big cities may have reached their peak?
No, I wouldn't want to make such a broad statement. I think it's fairer to say that it will be a lot harder now to achieve great yields in some of the country's best-publicised city centres. Prices - and therefore the costs for new investors - have risen sharply in the last couple of years, and that will tend to dampen down average yields for new investors. But that concern only really applies to destinations that have been on people's radar for a considerable time. Parts of central Birmingham and Manchester probably fall into that category. I'd have fewer concerns about newer developments, of the kind we're seeing in Liverpool's docklands, for example. But even there, there's a lot of publicity being generated and that could eventually have the same effect. The big winners will be the early investors, while those coming later to the market
will have to pay more.
Q. So there's life in the cities yet?
Absolutely. I certainly don't want to suggest that aspiring landlords should turn away from cities altogether. Many of them have a great reputation and all the ingredients are still there for some very rewarding investments. For all its fame and continued growth, Manchester's property market is still characterised by strong demand and healthy average rentals. It never became overheated in the way that London did, so many parts of the city still look like very safe bets. The same is true of many districts of other big towns and cities - in the Midlands, Yorkshire and Scotland, too. What I do think it's important to acknowledge is that patterns of supply and demand are always changing, so just because a market looks popular, it's no guarantee that it's completely safe or that it holds the greatest potential for profit.
Q. So don't just jump on the bandwagon...
Exactly. Up until the last couple of years or so, there will have been many wealthy investors who regarded central London as a fairly safe bet, and really just because lots of other investors had gone there before. So relying on the herd instinct isn't always a guarantee of safety. London's property market made a lot of people very rich for a time, but it all depended on the timing of the investment.
Q. So where do you think investors should now be looking if they want better returns?
That depends on all sorts of different circumstances, including whether you're happy to take a longer term view. For those who are, it could be worth investigating markets that are close to areas of strong, widely recognised growth but where average values haven't yet been much affected. Many areas of robust growth tend to produce a sort of 'ripple effect' - a slower, steadier growth in average values that expands outward from the centre. It's good to catch those waves while average prices are still low. In Manchester, for example, we've recently been looking at properties south of the centre, where prices are just starting to climb. In districts such as Chorlton, absolute values are still relatively low, but the prospects for steady growth are certainly encouraging. Areas like this could be a really attractive option for investors who may not have huge budgets to work with but who want to achieve really strong yields. The same could also be said of certain parts of the East Midlands and Yorkshire. Currently, we're seeing growing interest in places like Lincoln and Halifax, both of which are benefiting from economic growth within their respective regions.
But there's no one-size-fits-all solution. As I say, the right choice of property depends on all sorts of things. If an investor with a large, well established portfolio came to me with a budget of £300,000, we might prioritise capital growth and look at options for a single investment in one of the more prestigious, well known locations. But if a first-time investor came with the same budget, it might make more sense to prioritise rental yield and use the money to invest in a number of more affordable properties. This all comes back to my original point: it's about being careful about your choices. Part of that is about knowing what you want to achieve. If you want to make your money work hard, then it makes sense to prioritise yield - and that typically means choosing affordable, carefully researched properties in areas of high rental demand. Those won't necessarily be found in chic urban centres and the best-advertised destinations; often, they'll be on the periphery.
Q. So in summary, what tips would you offer to potential investors and what would you tell them to take into account?
Decide your level of comfort. What level of risk are you happy with, are you risk averse or happy to see benefits only if the security is set in place, and what are you trying to achieve from the outset.
Procrastination, over analysing and waiting for the “next better investment” are the proverbial devils on the shoulder of many of the clients/investors I speak to.
If you are a safe investor and want well located property that is ready to go, provide natural steady growth and secure rentals then that is perfect for you, you will remain cash positive each month after deductions and in time your property will grow in value accordingly. However if you want to explore the options that can generate a greater yield and much more dynamic appreciation then you have to have an open mind set, for example buying off plan or under construction rather than already built. We all know of people who bought before the market boomed in certain locations (particularly London and the boroughs) and its so easy with hindsight to say they were lucky, or question how they made their wealth, BUT I can guarantee those investors took a risk when others would not, when they could see what others did not believe in, when they bought off plan in an area that was marketed as up and coming, and saw the minimal deposit they used maximise their returns.
If it's a set amount of cash you want to invest and just want it to work for you, then it is simple, go for the highest yield on offer, but again, the offers get better dependent which stage you buy. This question also relates to strategy as well, in general, long term exponents of buying property always reap the benefits, but short term is possible, particularly if you are the more open minded type.
Spot the signs and the right buying signals of areas, and get to know your towns and cities. Most people reading this will be on multiple databases and will be inundated with emails and in all likelihood they will be touting the same places, Liverpool, Manchester etc, but that does not mean that other locations offer as good, if not better opportunities. The fact is, that getting into a City or location before it is on all the obvious portals is key, so look for hints of future growth, the University towns that are genuinely short of accommodation, look for new investment, new commercial ventures, watch the news, read blogs etc
It is far better to get into a market early, rather than buy 3 years after it has been plastered over all the portals – for example, the actual City Centre of Manchester is quite a mature market now, but I have no doubt that if someone could buy a property at prices from 3 years ago, now, then it would be an easy decision, so it is become that person.
Not all cities can grow like London or Manchester, it has to be a major City, for example Birmingham now has all the signs that Manchester had 3-4 years ago, so that opportunity is there. If you look at a property price heatmap of London 15 years ago, with red being the high prices that have plateaued and will grow naturally, and green being the area that has that room to move, you probably would have seen the Centre of London and the SW as red, if you go on the same heatmap in London now, you will see every borough from Ealing to Stratford, Catford to Cricklewood and beyond are red – meaning there is little room for movement. The “red” will grow from the centre outwards so it is finding those cities that have the inner areas primed for regeneration that have major movement in terms of infrastructure and development.
Do your homework and ask questions? There is never a silly questions, and more often that not, clients struggle to pick up the phone and ask something that would have been a very straightforward answer, send an email, if the question is relevant then your consultant will be able to answer it. Unless I'm asleep I'll always respond to a question, be it a phone call or whatsApp message or email, dont be afraid to ask.
This really applies to the BTL residential market and not so much the simpler student market – but be wary of rental guarantees on residential properties, these are where you need to do your homework, look at rents in the area on property portals and see how they equate to what is being offered, if it does not add up then do not consider it. If a £150k property is being marketed with a 8% Net rental guarantee (£12,000 per annum after costs) and rents in the area are just £750 pcm for a like for like property then you can see there is an issue, it takes two minutes to check this but could save you a lifetime of headaches down the line.
Again we all know someone who is receiving 10% net returns in London, but ask the question of when they bought that property, it will be many years ago and rentals have increased as their property purchase price remains the same as it was when they bought 20 years ago. The numerous TV programmes always show successes and in most cases they are, but all investments have risks, so if it a set amount you want clear into your bank, if it is a 10 year plan, then don’t deviate from that and expect something that is not realistic. Residential properties do not come on the market offering 10% net returns, these are achieved through maturing, ask yourself, why would anyone sell something so lucrative.
Know your difference between return on investment and return on cash invested as they are two different things, have a plan, set out to achieve it and keep your feet on the ground, the clients who do this
invariably succeed and the ones who run before they can walk, often, encounter problems.
Have a budget and stick to it.
If you have questions about property investment options, please call Jason or one of our advisory team on 01244 343 355 or complete this ENQUIRY FORM to be contacted directly by a consultant.