When the 2002 figures from ARLA (Association of Rental Letting Agents) showed a decline in average rental returns in London, the South West and Northern Ireland, speculation about the demise of the buy-to-let sector gained momentum. Scare stories warned of the housing market becoming flooded with ex-rental properties that landlords were unable to rent or sell and many were predicting the demise of buy to let, but now, over half way through 2003, is this still the case? And even if some areas show a decline in rental returns, does this mean there are fewer profitable ‘hot spots’ left for willing buy-to-let clients?
According to ARLA the much predicted dramatic decline has not yet taken hold. Figures reported in its index for the first quarter of 2003 show geared rental yields climbing in the majority of regions. And while they fell in the second quarter, on average from 99.4 to 97.3, this was claimed to highlight the stability of the market as investments are still more volatile.
It is clear that, seven months into the year, the buy-to-let bubble has not yet burst and there are no obvious signs that it will do so in the immediate future. Indeed, according to some industry commentators the uncertainty of the housing market, expected to affect the sector so badly, could instead serve to boost it. They agree that if house prices continue to rise buying a property will remain out of reach for many (particularly first-time buyers) causing a further increase in the demand for rental properties.By the same token they argue that even if prices begin to dip, many potential buyers may delay until it is clear how low prices are heading, which could also fuel the rental market. These factors combined with the continued shortage of new-build and a rising number of single person households, means that demand for rental property is still strong and boasts huge potential for the prudent investor.
Ask any successful landlord what makes a buy-to-let investment work and the answer they give is bound to include a reference to location. Some may simply choose an area that is familiar to them, however a carefully researched location choice could spell the difference between a highly lucrative investment and a mediocre one. If a client is serious about their investment, their choice of location should reflect at least one, or preferably both, of the following factors: rental return and potential increase in capital value.
Although rental return will largely be dependent on the property type a client chooses, if it is situated in a location where demand is low a client is likely to experience rental voids or be forced to accept a lower rent than intended. Additionally the increase in capital value a client enjoys when they eventually sell may not be an immediate priority, but it is very important and any investor should consider the effect an area’s popularity can have on the value of their property. While none of us can predict the future, careful research and choosing an area with good transport links, high employment, and perhaps a university or large hospital will stand any buy-to-let investor in good stead. And if an area is earmarked for regeneration and the client can purchase a property in the area while prices are still low, all the better.
So where are the new buy-to-let ‘hot spots’? There are many areas which are suited to buy-to-let investment but have not received much coverage in the press and consequently there is the potential to maximise profits. Although they may not currently offer the best rental returns, each of the following areas has a good chance of seeing an increase in chargeable rents in the near future and significant potential for capital value growth in the long-term. Allerton and Woolton
Liverpool’s image may have suffered over the years but today it is becoming increasingly popular, especially among students and young professionals. An extensive regeneration programme is currently underway to transform it into a ‘world class city for the 21st century’ and it has recently been named the European City of Culture 2008. With the resulting upsurge in commercial investment, the city centre population is set to dramatically increase in the next three years, and because demand for rental property in Liverpool is in excess of supply it is an ideal area for a buy-to-let investment.
Smithdown Road and Wavertree are the main student areas in Liverpool but, although house prices there are relatively low, these areas are not the most attractive and investing there could be restricted by low rental yields. Allerton and Woolton are both superb alternatives. Both areas are still reasonably priced, close enough to the university to attract students but will not alienate other potential tenants. Online research indicates that a two-bedroom apartment in the Woolton area would cost around £80,000 and could currently be expected to fetch around £600 in monthly rental income. A three-bedroom house in Allerton could be purchased for about £120,000 and would fetch around £725 per month.
With the population of Milton Keynes expected to rise by an average of eleven extra people every day between now and 2011, the Government has identified the need for sufficient expansion to accommodate its rapidly increasing population. Investment in the area is planned to develop its transport links with London and Birmingham further, and also its schooling and leisure facilities. Along with its ongoing development Milton Keynes currently boasts extremely reasonable house prices and as such has huge potential for buy-to-let investors.
A two-bedroom apartment or maisonette in the area can cost as little as £85,000 and could command around £525 in monthly rental income. The average price of a three-bedroom house is approximately £130,000 and would fetch around £700 rent per month. Although rental demand in the area is not currently outstripping supply the area’s development has also led to a significant number of residential new-builds.
With residents in this area likely to be young families and couples looking for more modern accommodation any investor would do well to consider purchasing a new-build for rental purposes. There are currently new developments planned at Emerson Valley, Shenley Brook End, and the Westcroft area. Prices for a new three-bedroom house start from around £170,000 and could currently expect to command a rental income of about £900 per month.
In recent years the buy-to-let market in the South Manchester area has flourished, with landlords reaping the benefits of rising property prices and a good rental market. While past performance is no guarantee of future events, historically, properties in the South Manchester area have generally maintained and increased their values and the rental market seems to be growing year on year.
Although some areas of Manchester are now expensive, Withington is a reasonably priced, desirable location. Only five minutes from the vibrant and more expensive Didsbury, Withington appeals to those who want to be in easy reach of the city centre but also require some peace and quiet. The area is also popular among university students. A two-bedroom flat in the area would cost around £95,000 and be expected to fetch around £550 in monthly rental income. A three-bedroom house costs as little as £120,000 and would fetch around £700 in rental income.
It is widely believed that London is languishing at the bottom of the buy-to-let investor’s wish list and for many people central London is so expensive and the return on investment so low that the location is not a consideration. That said, the popularity of city living continues to grow apace and there will never be a shortage of people wishing to live and work in and around the capital. Naturally, this demand for city living pushes up property prices and the gap between London and other UK cities has widened over the last 10 years. However there is still potential outside the city for those who are looking for a significant return for a more moderate investment ‘ Chessington is a good example of a location that provides access to the excitement of the city without bank-breaking house prices.
Although only a twenty-minute train journey from Waterloo, and a ten-minute bus ride from Kingston University, a two-bedroom flat or maisonette in Chessington can be purchased for around £140,000 and a three bed house for approximately £180,000. Superb transport links to London the great nightlife and shopping in Kingston make the spot hugely attractive to young people many of whom are still unable to afford the more moderate prices of Chessington, but are unwilling to pay the extortionate rents expected in Kingston and Surbiton.
Furthermore, being so close to a university town Chessington provides the ideal student solution and a two-bedroom apartment or maisonette can fetch rent in the region of £725 per month. Good local schools and transport links also make the area attractive to young families and the average rental for a three-bedroom house in the area is around £1000.
In conclusion, no one can say for sure which areas will guarantee the success of a buy-to-let investment. However careful consideration and research into a chosen location can go a long way to not only minimising the risks involved, but also increasing the chances of a significant financial return.
Liverpool city centre is a good option ‘ the city is being regenerated in time for 2008 when it becomes the European City of Culture.
Property in South Manchester has historically increased in value, and the rental market is growing.
Chessington is a good option outside central London as it is a 20 minute commute and close to a university.