For many years, London was regarded by international property investors as one of the world’s most attractive destinations. It made a spectacular recovery from the last recession and, for several years, capital growth seemed to defy all conventional economic logic. Prices kept on rising and investors kept seeing their assets appreciate.
However, economic logic is not so easily dismissed. Market momentum and a sense of optimism can drive prices so far but, eventually, sanity must prevail. In this case, sanity means investing in a property because of its intrinsic value – i.e. its ability to deliver respectable yields – and not just because it promises runaway capital growth. In London, stratospherically high prices have made good yields ever harder to achieve and, increasingly, investors seem to be eyeing regional markets instead.
Long term forecasts suggest that average house prices, having made rapid advances in recent years, will now rise at a much more modest pace. Partly, these restrained predictions are based on the idea that the disparity between house prices and average earnings cannot keep widening forever. If that basic principle is to be believed, then rental yield must, for most investors, become an ever more important gauge of success. Prices are expected to continue to appreciate – and to do so at a far better rate than any savings account is likely to deliver – but with average national forecasts averaging around 4% to 5%, it will be yields that make the difference between an ordinary investment and a great one.
Over the last few years, one of the best UK markets for yield has been the North West of England. According to the LendInvest Buy-to-Let Index (March 2016), Manchester and Liverpool lead the country, delivering rental yields of 6.02% and 5.16% respectively.
Of course, total returns are about more than just yields. Capital appreciation is another vital factor. However, whilst London has fared well in recent years, faith in its property market now seems to be waning. Some commentators believe that property in the capital is now substantially overpriced and have predicted that prices here will see some of the UK’s slowest growth. For example, in April, the Royal Institution of Chartered Surveyors (RICS) noted that: “prices in London are expected to fall significantly over the next three months , while prices in the North West are expected to soar.” This is only opinion, of course, but it’s one that many high profile investors seem to regard as credible.
Manchester in particular is seeing great interest on the part of both domestic and foreign investors. There is a sense that, as one of the slower-recovering regions after the last recession, the North West has proportionately more scope for sustainable capital growth. Property prices in the South East soon escalated beyond their pre-recession peaks but in many parts of the North West, prices are still lower than they were in 2007.
In addition, there is all the talk of the Northern Powerhouse and the impact of the HS2 rail link. There is a demonstrable record of growth in areas like Salford, whose housing market was so signally invigorated by the relocation of BBC staff. All kinds of economic indicators are pointing to Manchester as Britain’s hottest investment location and the media have been quick to point out some notable investors who are now seeking to capitalise on it.
On 24th April, for example, the Manchester Evening News reported that: “The former Prime Minister’s wife Cherie Blair and son Euan have become private landlords, snapping up nearly 30 flats in south Manchester, Stockport and Trafford… Since October 2014 she and the Blairs’ eldest son have spent around £2.5m on homes in Stockport town centre , Whalley Range and Urmston, all of them apparently to rent out. ” The article goes on to estimate that the investments will net around £170,000 per annum but that further returns will come in the form of capital appreciation. It states: “Property prices in south Manchester’s suburbs are continuing to head northwards, meaning their investments are set to become increasingly lucrative. According to Rightmove, sale prices have risen 13% in Whalley Range in the last year.”
Chinese investors are also moving into Manchester in force. According to a BBC report on 22nd April: “Lured by George Osborne’s promotion of the ‘Northern Powerhouse’, Chinese investors are packing their bags and heading up the M6… In the process, the Chinese are helping to fuel the beginnings of a property boom and push up prices, particularly in Liverpool and Manchester.”
In the same article, the BBC noted that 500 Chinese investors attended a seminar run by an organisation that has already sold over 400 BTL properties in Manchester, Liverpool and Sheffield. It also described a recent development in Salford Quays, in which only half of the properties went to local buyers. A quarter of them were bought up by Chinese nationals, and the remaining share went to British investors living abroad. The influx of money from overseas – and especially China – is already having a measurable effect upon prices, and many investors expect the trend to continue.
A line from the BBC report neatly summarises a common sentiment about this important shift in investors’ focus: “As prices have risen in London, the rental yields – the percentage returns every year – are beginning to look more generous in the big northern cities. There’s a greater chance of capital appreciation, too.”