In our last blog post, we looked at what appears to be a shifting pattern of investment across the UK. London – traditionally a property market that has delivered rapid appreciation but increasingly modest yields – seems to be falling out of favour and, keen to find more promising markets, many investors are now directing their attention to cities such as Manchester and Liverpool.
In this article, we consider some of the key criteria that professional investors apply when choosing a location, and how those criteria might now be responsible for the apparent investment exodus from London.
Fundamentally, it comes down to a question of reasonableness and expectations. For example, is it reasonable to expect that prices in the capital could continue to grow so far ahead of the pace of average wage growth? In the long term, the answer to that must surely be ‘no’ but, thus far at least, many property owners have clung on. For them, the big challenge has always been about gauging when the tipping point might occur. If enough people remain confident that price rises can continue – even if only for a little while – then that can be enough to keep values high. In other words, sufficient market confidence can make continuing appreciation a self-fulfilling prophecy.
However, the problems occur when that confidence falters. In London, it is doing so for a number of reasons. Increased taxation on higher value properties has been one factor. Another has been the recent introduction of an extra 3% Stamp Duty on second properties. In London, where average values are already very high, these extra costs can really mount up – often adding tens of thousands to asking prices.
On top of that, the government is now planning anti-corruption measures to curb the practice of investing ‘dirty money’ in London. It has long been suspected that London properties have been a haven for money launderers and that the influx of so much questionable cash has been at least partly responsible for inflating prices. As a recent article in The Observer noted: “It is estimated that some £120bn-worth of UK property is owned by offshore entities. Much of this has been paid for with “dirty money” laundered on behalf of Russian oligarchs and corrupt African officials who have plundered their home countries of cash and assets.” Now, however, amidst increasing calls for greater transparency about property ownership, some of that foreign demand might begin to dry up.
The combined effects of these factors could easily erode longer term confidence in the London market and could even raise the spectre of price deflation – at least in some of the most extravagantly priced boroughs. However, these are not the least of London’s woes. On the 25th April, an article in The Economist pointed to growing instability in the London property market, noting that “the motor of the British economy is becoming less productive and more unequal. “ It reported that between 1993 and 2008, land prices rose by over 300% in real terms, and that this has increasingly tended to drive out less productive industries, as well as professionals involved in essential but not particularly high-earning sectors.
“Economists might welcome a shift from low- to high-value industries, but high property prices threaten its continuance,” notes the report. “Academics complain that they have been forced to move out of town. The share of employed people in inner London working in professional scientific, research, engineering and technology jobs has fallen from 6.6% to 5.4% since 2011.”
With vast numbers of young people, teachers and public sector workers all being priced out of the city, demand must inevitably shift elsewhere. Moreover, those who stay face a steady reduction in disposable income as housing costs eat into their earnings. According to The Economist, “Londoners’ disposable income (after housing costs) fell by 4%, a steeper decline than in any other part of the country” and those who rent in the private sector suffered an even more pronounced reduction – amounting to a full 28%.
If this trend were to continue, then the capital would see increasing concentrations of the very wealthy – people who typically save much more than they spend – so another long term effect could be a slow reduction in local consumer spending. Hence, the city’s economy would suffer.
These are all serious warning signs for investors and many are not waiting around to see if their worst fears are likely to be realised. Prices in some London boroughs are becoming more erratic and, as far back as 2014, the market started to see a shift in interest – away from the centre and towards an extended commuter belt in the South East.
Now, in 2016, investors are looking even further afield – particularly towards cities such as Manchester – and the criteria they are applying should come as a surprise to no one.
Potential for capital growth remains high on people’s lists, of course, and there is a general sense that the North West can deliver. Manchester’s economy is growing much faster than the UK average, its population is rising and yet, because more than half of all North West properties are still below their 2007 peaks, there is confidence that prices can grow safely and steadily without creating volatility.
Yields are another key concern and, in this respect, the North West property market leads the country. Comparatively low prices combined with healthy rental incomes mean that investors’ money works harder here than in any other region.
Security of demand is another key concern. As a region, the North West exhibits considerable diversity; patterns of rental demand vary considerably between its many towns and cities. However, investors are focusing on the areas of clear economic growth, where business expansion and inward investment are driving demand for jobs and associated rentals. Both Manchester and Liverpool are benefiting from such effects and, here, demand is so strong that landlords with good quality properties can be confident of secure and profitable tenancies.
Returning to the ideas of reasonableness and expectations, the North West property market has much to commend it. Healthy demand, growing economic strength, outstanding yields and rising populations are all positive signs for investors. What’s more, with new construction and refurbishment projects taking place across major cities such as Manchester and Liverpool, there are some very attractive deals to be found.