The North West of England is currently one of the leading UK regions for buy-to-let purchases, second only to the historically strong South East. Richard Rowntree at Paragon looks at the rise of the Northern new kid on the block
Over seven million plus people call the North West home and I imagine a good proportion of them would tell you that it’s a great place to live.
A combination of civic and independent investment has resulted in regeneration and forward-facing cosmopolitan hubs that are home to thriving arts, culture and entertainment scenes. This helps to draw in tourists and students, particularly to Liverpool and Manchester, the region’s two main economic strongholds and home to well-respected universities.
After decades of underachievement – according to a 2010 report by the Regional Economic Forecasting Panel, wealth per head in the North West was 14% below the UK equivalent – the region is finally fulfilling its potential.
The North West’s economy, once weakened by over-reliance on a fading manufacturing industry, is now driven by modern high technology sectors including ICT, pharmaceuticals and telecommunications in addition to financial services.
The result is a regional economy that is outperformed only by London and the South East after growing 31.4% between 2010 and 2018.
As well as the bright lights of the towns and cities, the North West boasts natural beauty. The Peak District and Lake District are stand out spots but are joined by plenty of other places offering impressive views over quaint villages, unspoiled countryside or wild coastline.
So, with a broad overview of the North West and what it can offer tenants, let’s look at some of the factors driving the growth that saw more landlords buy new properties in the region than they did in London last year.
Strong rental yields
When considering how lucrative a buy-to-let investment is, a measure that is almost always taken into account is the potential rental yield and this is an area where the North West performs particularly well.
Of all the landlords taking part in BVA BDRC’s latest survey, those in the North West achieved the highest yields. At 6.5% this was above the England average of 5.8% for Q2 of 2020.
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Although analysis of Paragon data suggests that the North and Wales top the North West in terms of rental yields achieved, it also shows that landlords in the region can potentially see even better figures than those reported by BVA BDRC with average yields of 7.11%. Whichever measure you use, it’s clear that the North West is a place where the ratio of rental income to property purchase price is attractive to investors.
I think that central to the North West’s strong yield return is demand for rented accommodation in the area – something supported by data on the growing number of households as I cover below – and this is driven by some of the groups of tenants who gravitate to the region.
Across the UK, the highest yields are achieved by landlords who let to migrant workers at an average of 6.8%. Mirroring the size of regional economies, the North West has the highest migrant population in the country after London and the South East.
According to the Office of National Statistics’ latest quarterly migration report, in the year ending March 2020 around 313,000 more people moved to the UK than left. Of this number 257,000 arrived for formal study.
When we look at the UK cities with the most universities, Liverpool and Manchester are both in the top ten and are joined by others across the region such as Lancaster. Add to this the fact that student lets offer strong rents and we can see that the region’s offering for those choosing the UK for work or study supports its position as a leading area for yields.
The student market is one we feared would be negatively impacted by the Covid-19 pandemic and while we’re yet to see how this will develop there is potential for the numbers of overseas students studying in UK to dramatically fall in the short term. It’s worth noting that if this scenario does materialise it would also result in a reduction in UK students studying abroad, as well as those enjoying gap year adventures, so there would be a degree of one cancelling out the other.
Attractive property prices
Of course, to achieve good yields it helps if the price you pay for property is comparatively low and this is another key element of the North West’s emergence as an appealing area for buy-to-let landlords.
The average price of a property in the UK is £234,612 according to the latest Land Registry UK House Price Index. Those purchasing in the North West will pay much less as the average property price is just £167,809. Only those in neighbouring regions will pay less for property with averages in the North East at £125,938 and Yorkshire and the Humber at £165,561.
As you would expect, many of the UK’s most expensive postcodes are in London and the South East. Paragon figures show that advances in these regions have decreased over the past few years and increased in the North West amongst other areas. This suggests that there is a trend towards investing in areas where buyers feel they are getting more for their money.
At first glance, the North West’s low levels of rental inflation over the past five years would appear to be a chink in its armour. Even though it hasn’t exceeded 1.5% over this period, it has been generally stable and that is something that shouldn’t be overlooked.
Stable markets don’t always deliver the best returns when the going is good but, as the events of 2020 should prove, it’s not always possible to see what’s around the corner. It’s sometimes wise to look at the longer term, opting for markets that deliver reliable, if modest, returns due to being less susceptible to external influence.
It’s too early to gauge the long-term impact that coronavirus will have on the region but looking back to midway through the last decade we can see that the North West has a proven track record of being less volatile than other regions.
Changes to tax relief on finance costs and Stamp Duty Land Tax (SDLT) as well as Prudential Regulation Authority (PRA) underwriting standards for buy-to-let mortgages resulted in a decline in lending for buy-to-let purchases in most regions after being introduced by the Government. Lending for house purchases in the North West remained relatively stable, however and early indicators point to a similar resilient response to the market’s latest challenge.
With rents only creeping up slowly in comparison to other regions, people in the North West pay a smaller proportion of their average salary – 26%, which equates to £610 per calendar month -compared to the England average where renters typically pay 29% of their salary.
I feel that this balance of offering tenants a great place to live while remaining affordable is crucial to the area’s success. It also means that any rental increases can be absorbed without a significant negative impact.
Strong levels of tenant demand
The North West’s affordability also has an impact on demand and may be one reason why it has the highest levels of any UK region according to landlords surveyed by BVA BDRC.
Another factor may be the growing number of households. The Office of National Statistics’ 2018-based household projections for the region forecast a change from 3,120644 households in 2018 to 3,296981 households in 2028, an increase of 5.6%.
This can be attributed to a range of factors; one being rising numbers of one person households which, after increasing by 300,000 on the year prior, surpassed eight million across the UK in 2018.
With 31% of North West households being listed as lived in by one person, the area sits at the higher end of the scale for single occupancy households in England. Comparing this to London, the lowest in England at 23.9%, suggests that this trend is playing a part in stronger demand in the North West compared to the capital.
Considering again that the North West is home to a large number of well-respected educational institutions, demand in the region may also be boosted by increasing numbers of those in higher education. The latest figures reported 2.4 million people in post-secondary study, a significant number of whom rely on the PRS for their accommodation.
Landlords show desire for continued North West investment
The idea that landlords are responding to this demand is supported by industry data. The North West recorded the third highest number of new buy-to-let purchases over the past five years, with the South East accounting for the highest, followed by Greater London. Last year, the region leapfrogged London in terms of new buy-to-let homes purchased.
Again, judging by landlords responding to BVA BDRC’s Q2 2020 survey the region is set to continue to attract investment. Those in the North West are more likely than any other region to buy property in the next 12 months, with 26% of landlords in these locations indicating that they intend to increase their portfolios.
Source: Mortgage Finance Gazette