In stark contrast to the rest of the country, investment in buy to let property in the North West has seen a significant shift in the location of investors over the past couple of years. However, forthcoming changes in legislation could potentially see rents in the North West soar.
In 2015, 40% of investors in the North West buy to let market, lived outside the area.
By the end of the third Quarter of 2018, the number of investors in North West rental property, who do not live in the region, had reached 62%.
Andrew Turner, chief executive at Commercial Trust, commented: “What is interesting about the North West purchases in 2018, is that the new data shows greater diversity in terms of investor location.
In 2015, North West buy to let purchases were dominated by people from four areas. 60% of all purchases were from people within the North West, with 23% living in London and the rest made up of people from the East of England and West Midlands.
Investors living in and investing in the North West have dropped down to 38%, while London has increased to 24%. The East of England represents 11% of investors in the North West and has been joined by the South East, where 11% of these investors are located. In 2015, South Eastern investors simply were not purchasing properties in the North West.
Whilst the West Midlands (5% in 2015) has retained a similar level of investment in the North West, in 2018, investors have also started to appear from the South West, Wales, the East Midland and Yorkshire and Humber.”
Reasons for investment
The growth in investment in the North West from other areas, can be attributed to a number of reasons.
In April 2016, the Government introduced a 3% stamp duty levy on second homes – and since then, the percentage of individuals who live outside the area, but invest in the North West, has risen sharply.
Turner says: “The introduction of stamp duty has affected investors more acutely, in areas where property prices are higher. In the North West, the impact of stamp duty has been less exacerbated, due to lower house prices.”
At the same time, cities like Liverpool and Manchester have in recent years, benefitted from significant investment in infrastructure.
House prices in these areas started from a relatively low base, compared to other parts of the country, but are starting to climb.
Regeneration is resulting in population growth and increased demand for rental homes. This is partly down to the number of educational facilities, attracting more students to the areas – and prospective tenants. However, a number of big companies are also relocating to the North West and creating new job opportunities which are in turn, the catalyst for migration.
All of this, along with improved quality of life, is helping to push house prices up, offering investors potential capital growth.
At the same time, due to the lower price of housing and rising rents (a consequence of sustained and growing tenant demand), rental yields can be far more competitive than in other areas of the UK, offering a potent proposition for buy to let landlords.
The 2017 Autumn Budget saw the Government pledge further investment in the Northern Powerhouse, which can only attract further business opportunities to the region.
Despite the increase in house prices, buying a property remains more affordable in parts of the North West than elsewhere. According to Hometrack, in Liverpool, properties typically cost about 4.8 times the annual salary, resulting in one of the lower earnings to house price ratios in the country.
The average home costs £118,000, meaning property investors can potentially get a lot more for their money, than elsewhere in the UK. Compare that to the average cost of a property in London, standing at £491,200, according to Hometrack.
During 2018, average house prices in Liverpool increased by 5.9% to May. This growth is partially stimulated by an ongoing £14 billion city council programme of redevelopment and regeneration.
Among the ambitious plans are the development of 10,000 new homes, a new stadium for Everton Football Club, an additional cruise terminal, £250 million of road infrastructure and two million square feet of commercial office space.
Liverpool Local Plan has ambitions to create 38,000 new jobs and 35,000 new homes up to 2033, with the population forecast to rise above half a million.
Manchester continues to prove popular for buy to let investors with the area becoming a focal point for new tech firms and MediaCityUK, in Salford, proving a magnet for talent. Established names like Google, Amazon, Freshfields, LLP and Microsoft have all opened offices in Manchester recently.
A recent £33 million investment in Manchester Business School can only further embellish that talent pool.
But it is not only available talent that is drawing businesses to the region. Lower commercial rent costs are undoubtedly another factor.
According to UK Investment Transactions, the first quarter of 2018 saw £865 million of investment in North West.
There were two deals in particular that stood out; L&G’s purchase of the India Buildings in Liverpool for £125 million and Aviva’s acquisition of 2 New Bailey in Salford for £113 million.
Ben Roberts, director of capital markets at property consultant Lambert Smith Hampton, in the north-west, commented: “The north-west has performed very strongly, particularly when compared with the national data, and we’re continuing to see a broad range of investors keen to invest into the region.”
Earlier this year, a report from a Chinese property investment website Juwai.com, indicated that Chinese investors were also keen to invest in buy to let, in Liverpool and Manchester. One of the by-products of Brexit negotiations has been a weaker pound sterling and Chinese investors have consequently had more spending power in the UK.
Whilst much of this traditionally focused on southern cities like London and Cambridge, enquiries in Manchester increased by 255.6% year on year, in January 2018. Liverpool saw a 160% increase in the same period, while enquiries in London were down 48.5%.
Juwai claims that the average Chinese investor has £223,000 to spend – and the maths stacks up in the North West, where Rightmove indicates the average property price in Manchester is £190,000.
The threat of legislative change
Whilst the allure of the North West buy to let market might seem obvious, a landlord’s obligations are changing, in an evolving regulatory environment.
For example, October 2018 saw the introduction of new rules which redefine a House of Multiple Occupation (HMO) and who must apply for a licence.
This has not only added licencing costs for many landlords, but required investment to ensure their HMOs meet local authority and minimum bedroom size standards.
For those who own buy to let property a considerable distance from their own home, in the past it might have made sense to outsource much of the upkeep through a letting agency.
So one of the big issues looming large on the horizon is how the Tenant Fees Bill, banning letting agent fees, will impact on the North West?
Will landlords suddenly find themselves paying more money for other agency services and will these additional costs be passed on to tenants through rental increases? Given Commercial Trust’s data, it would appear that the North West might be more susceptible to rental pressures than other areas, if “outside” investors are using agencies to manage rental properties.
Will some landlords simply change their investment strategy and decide to invest closer to home, where they can self-manage their rental portfolios?
Turner says: “There are a number of factors at play. Ultimately many landlord investors will look at margins and whether the cost of using an agent is still more cost-effective than the cost of stamp duty on a purchase.
There could be a shift in geographical investment strategy from some and it will be interesting to see what impact the ban has on rising rents in the North West.
Ultimately landlords want to see a return on their investment and if the last two years have demonstrated one thing, it is that investors will adapt to change in order to continue providing what is becoming an increasingly essential element of the UK’s housing provision.”
