There was a time that London and the South East of England were the obvious choices for property investors; capital values rose more quickly, rental demand was dependably high and rental values always looked impressive. The region's prices led the UK property market by such a margin that many indices featured data for "UK markets excluding London" in order to avoid skewing the nationwide averages.
Today, things have changed. Fuelled by waves of overseas investment, London saw a rapid recovery from the global financial crisis and, for a long time, property prices remained buoyant. However, that same, seemingly inexorable rise in capital values led, inevitably, to a problem of affordability. While the super-rich and big institutional fund-holders could still afford to invest in London with the expectation of solid capital gains, ordinary people could not. Prices had simply run too high, and something had to give.
The resulting slide has been apparent in recent market data. For example, the most recent house price index from Rightmove found that average prices in Greater London had fallen by 3.2% in the 12 months from September 2016. By contrast, Yorkshire & Humber rose by 3.1% over the same period, and the North West property market saw an annual rise of 3.4%. With respect to capital appreciation, that represents a straight reversal of the long-standing North-South divide.
A similar pattern is evident when we look at rental values. Rightmove's Rental Price Tracker, published in September 2017, found that average UK rents outside Greater London had risen by 1.2% in the 12 months from the third quarter of 2016. Over the same period, values in the capital actually fell by 3.3%.
The affordability question
For investors, affordability has become a big issue. In order to maintain anything approaching a worthwhile yield, landlords in the South East have had to demand excessively high rents. Rightmove puts the current average asking rent in Greater London at £1,920, compared to the UK average of just £789 elsewhere. At a time when the real value of wages is falling - due to a mix of austerity, business uncertainty and rising inflation - such rental payments must look increasingly daunting in the eyes of ordinary families.
This would certainly explain what appears to be the beginning of a northward migration. More university students are staying in northern towns and cities after graduation, and more southern-based residents are moving outwards in search of more affordable housing. Faced with a shifting pattern of regional demand, many London-based landlords have been faced with a difficult choice: if they keep rental prices high, they could become uncompetitive, risking longer void periods and late payments by tenants. On the other hand, if they drop prices, they will inevitably see a further reduction in yields that are already sometimes tenuous.
To judge by recent data, increasing numbers of landlords across Greater London are now taking the latter option: setting lower prices and effectively sacrificing yields for steady occupancy.
The appeal of the North
Elsewhere, the picture is rosier, and affordability is a key reason for that. Some of the best yields in Britain are to be found in the regions that recovered most slowly from the global financial crisis. In some parts of the North West and the North East, for example, average values are still below their peak 2008 values. Consequently, investors can acquire highly marketable properties for considerably less than they might have to pay in the South East, and yet they can count on robust rental demand and healthy profits. Absolute rental values might be considerably less than they are in London, but as a proportion of the total investment cost, they are much higher, hence the better yields.
According to LendInvest's Buy-to-Let Index Quarterly Report for September 2017, Manchester now delivers the highest yields in the country. Its 6.04% returns are comfortably ahead of its nearest competitors and these are coupled with rental price growth of 6.25% - a figure which was beaten only by Luton (6.81% this year, with yields of 4.51%.)
Commenting on the figures, LendInvest observes "Manchester was considered one of the markets to watch in the last Index, leading the charge for Northern markets in the UK. Manchesters market continues to make great headway ... The citys residential property market boasts the most lucrative average yields thanks in no small part to a thriving rental market. "
Capital gains have been strong in Manchester - averaging around 7.39% according to LendInvest's figures. However, Manchester is not the only success story in the North. Hull has fared very well - producing capital returns of over 11% and yields of 4.65% - but other northern regions are also seeing a surge in their fortunes.
Sheffield City Region is one such market, which is being buoyed by substantial inward investment. Last year, planners launched a £28 billion economic development strategy which aims to create 70,000 new jobs and 6,000 new businesses over the course of the next ten years. Doncaster Sheffield Airport has already undergone a major overhaul and new road connections, while the £500 million iPort project is establishing one of the UK's foremost warehouse and logistics centres. Major improvements in infrastructure, together with rising commercial investment should see a marked rise in both rental demand and living standards across the area. Such outcomes would naturally be welcomed by local landlords.
The Northern Powerhouse
Sheffield is one of the regions expected to benefit from the Northern Powerhouse initiative and the multi-billion pound HS2 rail link. In January 2017, it secured £38 million from Northern Powerhouse Fund. The city region will also have a station on the new high speed rail network.
Other northern cities will also benefit from the Northern Powerhouse scheme, which includes a reported £13 billion for regional transport improvements, over £3 billion for local enterprise partnerships and £60 million for Northern Powerhouse Rail. £400 million will also be earmarked for small business support and investment schemes.
Another big beneficiary will be Liverpool, although in the light of recent private sector announcements, it might be argued that the city is looking after itself very well already. The Liverpool City Region currently accounts for a full 17% of the North West's economic output, but this contribution is likely to grow very dramatically in the next few years. The city plans to deliver some of the country's largest and most ambitious infrastructure schemes, which began with Liverpool2, a £400 million deep-water container terminal at the Port of Liverpool.
More significant still will be a proposed 30-year waterfront redevelopment scheme called Liverpool Waters, for which planning consent has now been granted. This £5.5 billion scheme aims to create up to 20,000 new jobs, and to secure inward investment amounting to £30 billion. If successful, it will represent one of the largest urban redevelopment projects in the whole history of Britain. This should utterly transform the city's economy and, with it, the local employment and property markets.
Another important feature of many northern markets is a high student population. Liverpool, for example, is home to four universities and 90,000 students, and it produces upwards of 30,000 graduates every year. Increasingly, as the city establishes itself as a centre of excellence for growth industries such as IT, finance and renewable energy, those graduates are choosing to stay in Merseyside. The same is true of other major cities such as Sheffield and Manchester. Around 100,000 students live in Greater Manchester and the area accommodates more 25 to 29 year olds than anywhere else in Britain.
For a whole host of reasons - affordability, yield, rental demand, strengthening economies and more - northern property markets are looking increasingly attractive to investors. Prices remain comparatively low and yet, having not experienced the ballooning effects of some southern cities, they still afford plenty of room for growth.
If you're considering an investment and you'd like more information about opportunities in the North, please call our advisory team on 01244 343 355.