Why do investors turn to regional cities outside London?

As the real estate market and the UK economy as a whole performed exceptionally well as we recover from the economic shock of Covid-19, UK real estate remains the most stable and reliable asset class.

In fact, recent growth projections from the International Monetary Fund (IMF) show good signs that the UK economy is bouncing back even faster than forecast, with the common highest growth rate in the G7. Paired with the fact that house prices rose by 8% in the year to July 2021, now is an ideal time to invest in UK property for strong and consistent returns.

But which regions see the majority of this growth?

Although London has a population of 9 million and accounts for almost a quarter of the UK’s total economic activity, many buyers have turned to other regional cities to achieve the highest possible growth from UK real estate investment.

Although the capital has historically been the most popular place for international investors, these other major cities are gaining global recognition for their high demand and strong development potential.

The northern cities of Manchester and Leeds are increasingly popular investment choices for both domestic and international investors, not to mention Britain’s second city by size and population in the heart of the Midlands, Birmingham, which is the start of an exciting growth curve.

JLL senior director Will McKintosh told Arabian Business that “historically stagnant or declining primary property prices in central London have triggered a trend towards a ‘two-tier’ market where Arab investors would buy owner-occupied homes in London and seek higher capital. and rental dividends in Manchester’s thriving post-industrial second city. ”

This is a buying trend that we see globally, as the capital remains an attractive place to own a residential property, but the more lucrative investment opportunities turn out to be in regional cities outside London, mainly due to lower property prices and higher yields. .

What are the three main reasons why people invest outside of London?

1. Lower capital inflows

Due to London’s affordable ceiling, buyers are investing elsewhere to maximize their returns. With average property prices in London more than double the price in most other regions of the UK, interest rates and capital growth are often significantly lower in the capital.

To get some perspective, let’s take a look at the average property prices in some of the UK’s most important cities:

London – GBP 488,500
Manchester – GBP 188,900
Birmingham – GBP 179,200
Leeds – GBP 181,600

2. Higher yield

Average yields in each region:

London – 2.83%
West Midlands (Birmingham region) – 3.85%
North West (Manchester region) – 4.69%
Yorkshire & The Humber (Leeds’ region) – 4.56%

We compared the rental yield of one of our custom-built premium properties, Affinity Living Riverside in Manchester, with a similar property in Mayfair, London:

Render showing an example kitchen at Affinity Living Riverview, including a floor-to-ceiling window and open kitchen with dining table Similar developments in London, Mayfair (zone 1)
Affinity Living, Manchester

  • 2-bedroom apartment 342,000 GBP
  • Average rent 1,705 GBP
  • Average annual gross dividend 6%
Similar developments in Mayfair, London (zone 1)

  • 2-Bedroom Apartment £ 1,150,000
  • Average rent 2,817 pm GBP
  • Average annual gross loan return 2.9%

With a 3.1% difference between the average rental returns in each city for a similar rental property, it is not surprising that domestic and international investors are reconsidering investments in the capital.

3. High demand

Tenants’ demand for city centers is growing in Manchester, Birmingham and Leeds, as all three have a growing population, strong career opportunities and high graduate retention rates. All three cities will be positively impacted by the government’s new Crossrail train, High-Speed ​​2 (HS2), which will bring around 1.5 million people within 45 minutes of London in phases from 2021. Not only will this further establishing these cities on the international radar, HS2 is expected to increase the trend of Londoners emigrating to the capital, as they can achieve a higher standard of living at a lower rental price while maintaining a commuting distance to work.

But how high is the demand in cities outside London?

Zoopla said there had been a ‘sharp rise’ in demand for city life, although its data showed rents were still down in London on an annual basis in the wake of many tenants leaving the capital.

Manchester

Recently voted 3rd on Time Out’s best city list, while London lagged behind in 13th place, Manchester came out on top in categories including friendliness, resilience and nightlife.

The city’s popularity is also reflected in recent Rightmove research, which revealed that inquiries about rental housing in Manchester city center have increased by 69% on an annual basis. With a population growing at twice the national rate, demand is at an all-time high in the capital of the North, and the number of properties available for rent is at a very low level — down 76% at the same time last year.

Manchester is home to 80 of the 100 FTSE Top 100 UK companies, bringing a demographic group of young professionals and a growing talent pool to the city-target market for rental developers. This widespread trend of young professionals moving out of the capital and into cities like Manchester has been a common story among tenants in our Manchester development at Select Property Group.

Scott Christian, a resident of our Victoria Residence development in Manchester, moved from London in January this year: “I lived in Canary Wharf in London, which, as you might imagine, was very expensive. Then with the pandemic, my partner and I both lived in a single bed, so it made complete financial sense to move up to Manchester, where we could afford a nicer two-bedroom apartment so we could both work from home. ”

Birmingham

At the start of an exciting new growth curve, Birmingham’s population is increasing by 10,000 people a year, but still has a relatively low supply of custom-built residential properties. 75% of this growing population consists of ‘the city’s core residents under the age of 35’, making Birmingham the youngest metropolis in Europe. Together with an underserved real estate market, this young demographic makes Birmingham a first-class investment opportunity as young professionals are the primary market for rental housing. With over a third of the millennia now to rent their entire lives, people are willing to pay a premium for their desired living experience.

Home to the largest economy outside London, there is a growing trend for blue-chip employers such as HSBC Bank and Goldman Sachs to establish headquarters outside the capital and in Birmingham. Employment growth in the second city is expected to increase by 10% over the next decade compared to an increase of 6% over the last 10 years. By attracting more people to its growing economy, Birmingham saw a 25.2% increase in rental demand from Q4 2020 to Q1 2021.

By increasing Birmingham’s presence on the international stage, the city will host the Commonwealth Games in 2022 and will be a key hub for HS2, connecting London with the Northern Powerhouse.

Leeds

Although Leeds may be less developed than Manchester and Birmingham, Leeds is being recognized for its strong development potential and should be on the radar for real estate investors looking to diversify their portfolios.

Leeds is the UK’s fastest growing city and is the main driver of an urban region with an economy of GBP 64.6 billion, a total population of 3 million and a workforce of 1.37 million. Over 32,000 VAT-registered businesses are based in Leeds and more than 6,000 small and medium-sized businesses account for more than half of the employment.

To attract tenants to the city, the distance between supply and demand is the largest since 2013 in Leeds, identifying a lucrative opportunity in an undersupplied market. This demand is reflected in recent research that showed that 32% of real estate professionals registered an increase in buyer demand in the city this year.

Although London will always remain one of the world’s most visited cities, praised for its history, architecture and nightlife, the growing trend for investors seeking other UK cities to maximize their returns is here to stay. For owner-occupants who want to live in London or perhaps buy for a mix of rent and residential purposes, we agree that there really is no such thing as the capital.

At Select Property Group, we have a range of investment opportunities in the UK’s best investment cities, including Manchester and Birmingham to deliver a strong and consistent return. Contact our real estate investment consultants today for a conversation about your real estate preferences, goals and any questions you may have about the market.

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