Factors that have led to healthy returns outside the capital remain compelling
As someone who was born in London but now lives in the Midlands, I am only too familiar with the tendency of the national media to focus on the capital as though nowhere else exists.
Thankfully, that tendency does not extend to landlords. Indeed, over the past couple of years, we have seen a huge amount of money leave the capital and flow out to Britain’s other major conurbations.
Buy-to-let indices will often tell you that Liverpool, Manchester, Nottingham, Leeds, Birmingham and Glasgow are increasingly popular places for investors to purchase in.
Student populations in need of flexible, affordable and quality accommodation are driving this, according to TotallyMoney research, but there is also strong tenant demand from young professionals choosing not to tie themselves to one place for too long by buying. The need for many years of saving to build a sufficient deposit to purchase is also a factor supporting tenant demand.
Capital values are lower and rents are good in these places, meaning yields are far more attractive to landlords than in London. The TotallyMoney research claims that yields in some parts of Nottingham hit 12 per cent in December last year, while postcodes in Liverpool, Bradford and Sheffield exceeded 8 per cent.
Latest syndicated research, conducted by BDRC, shows that landlords operating in the East Midlands and the East of England continue to report the strongest demand from tenants while landlords in the South West, the East of England and Yorkshire and the Humber have the most positive outlook on rental yields over the next three months.
Although our sense is that yields are not quite that spectacular on average, BDRC puts the average yield nationally at 5.6 per cent – still a healthy rate of return for most investors.
Despite this trend being two to three years in, there is still a lot of value to be found in the big regional hubs, particularly as the government has committed billions to supporting infrastructure development around the UK in a bid to bring economic growth, housing and jobs to regional cities. This investment will support local BTL markets for years to come.
The shift in focus away from London has also been accelerated by taxation changes, with landlords increasingly needing to find stronger yields that stand up to the heavier cost burden. This has not only prompted a bump in regional investment, where the purchase market is stronger, it has also affected the approach landlords are taking in those cities.
To really maximise yield, buying property where they can add capital value with refurbishment up front makes a lot of sense. We have seen a real uptick in landlords using this strategy, particularly where they have chosen to rebalance their portfolios by selling off properties – typically in London and the South East – which are lower yielding or no longer profitable, and purchasing in other regions.
This has had a knock-on effect on financing, with a growing need to fund both refurb costs and the longer-term BTL. The hassle factor has been high for landlords looking to do this, though, with funding often needing to come from two lenders, necessitating two application processes within months of each other. Thankfully, lenders have responded to this problem.
There has also been a rise in the number of landlords looking to purchase HMOs and multi-lets as a way to maximise rental income and insulate portfolios from tighter cost margins as a result of lower reliefs. This part of the market has seen considerable growth over the past 12 months, and the regional play fits well with this. Student accommodation lends itself to the HMO model.
Landlords are a savvy bunch. Despite the challenges of losing tax relief, having to pay more stamp duty and having to pass tougher affordability tests, they are coping. It makes sense for their finances to adopt some or all of these approaches and lenders should want to support borrowers engaging with their portfolios to make them more profitable.
Alan Cleary is managing director of Precise Mortgages