Find the next growth zones for rental yields and capital growth
When investing in buy-to-let, capital growth and rental yields are key issues but what makes one area more likely to become a hotspot for growth or yields than another? Research by Savills predicts rental yields in prime London could rise by 17.1% in the next five years, however, with more stock coming onto the market, regional cities such as Cambridge, Winchester and Manchester are also looking tempting for international investors.
In the past year prime rents rose by 1.5% in London, and 2.4% in the prime commuter zone. Rental growth has been prompted by restricted levels of new stock coming on to the market, and a growth in demand as the London economy continues to strengthen and more people seek to work, live, and invest in the capital.
While rental growth in London has been good over the past five years, at 7.7% for prime and 10.5% for prime commuter zone, the consumer price index for the same period rose 12.1%, meaning rental yields did not keep pace with inflation.
Analysis by Savills shows gross yields average 3.25% across prime London housing, while just 23% of housing stock yields over 4% gross.
According to the Experimental Index of Private Housing Rental Prices by the ONS, rents in London have grown at twice the rate of those outside London in the past 10 years – showing a 33% increase compared with 17% for the rest of England.
The Valuation Office Agency puts the median rent of a two-bedroom property in London at £16,800 - 2.35 times higher than that for England as a whole.
When it comes to capital growth, commuter zones look set to outperform prime London over the next five years as people seek better value. Prime London prices are 36.8% up on 2007 prices compared to a 6.6% increase in commuter areas over the same timeframe.
Research by Savills indicates between now and 2020, house prices could rise by 24.5% in prime London suburbs, by 24% in inner commuter zones, and by 23.4% in areas up to 30 minutes by train from London.
With house price growth picking up, there has been speculation interest rates might rise, however, the Bank of England seems to be steering clear of this.
A report by the University of Lancaster warns housing in London is out of sync with the rest of the UK and that as house prices continue to outpace wage rises there is a risk that by 2017 the market will turn, leading to a crash.
Research by UBS suggests that after Hong Kong, London is the most overpriced housing market in the world, implying if the market conforms to its expectations, there could be a 95% chance of a ‘correction’ in prices of at least 30% in the next five years.
Out of London
Beyond London, the biggest levels of annual growth from 2014-15 have been with three-bedroom properties. These saw a rise of 4.7% compared with an average of 2.4% across all properties.
Cities such as Cambridge and Winchester saw rises in demand for rental properties, although demand for larger properties (those with five bedrooms or more) is low, at -2.8% below their 2008 peak.
Research by CBRE identifies York, Edinburgh, Oxford, Milton Keynes, and Coventry as the top five cities in the UK with the highest growth in rents.
Rental prices in York increased by 26% thanks to demand from students and young professionals. Average rent in York is £901 a month, while the average house price is £228,907, 10% the national average.
Milton Keynes is the fastest growing urban area in Europe. Commutable from London, rents in Milton Keynes have risen 15% in the past year to £949 a month. The average house price is £237,399, a 3% increase since 2014, while the local population is expected to increase by 8% by 2020.
City and town locations, and strengthening regional economies in places like Manchester, Leeds, Bristol, and Edinburgh, are expected to be key drivers for growth outside London. Savills expects price growth to return from 2018 once the market gets used to new tax and regulatory changes.
According to the UK Cities House Price Index from Hometrack, 12 UK cities saw prices rise faster this year than central London. These included Glasgow with 7.6% growth, Manchester 6.8% and Leeds 6.6%, while Kensington and Chelsea, and Hammersmith and Fulham saw declines of 3.4% and 5.1%.
The Good Growth for Cities Index by PwC and Demos, cited Reading and Bracknell, Oxford, Edinburgh, Cambridge, and Aberdeen as the top five cities to live in the UK. Wakefield and Castleford, Middlesbrough and Stockton, London, Sunderland, and Liverpool made the bottom five.
Figures from Land Registry show a 5% annual rise in prices from September 2014-2015, taking the average house price in the UK to £187,000, the highest it has been since 2008.
Stamp duty reforms have hampered sales of homes above £2 million and failed to boost the lower end of the market, and Countrywide expects 2015 sales to be 5% below 2014 levels due to lower levels of transactions.
However, with the population of the UK expected to reach 70 million by the end of the decade, house prices may continue to rise – just more slowly. Forecasts from the Centre for Economics and Business Research (CERB) suggest house prices will rise by 5.6% this year, taking the price of an average house up to £322,000 by 2020.
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