ARTICLE ORIGINALLY PUBLISHED 21ST AUGUST 2017

As I touched upon in my last article, long term out-performance is the principal aim for a residential investor in our era of lower returns.

Residential investment is a completely different mindset from choosing your own home to live in. It is discretionary by its nature and so should be your judgement. An investor should therefore be choosing a property that not only appeals to future tenants but also delivers a superior capital return over the decades to come.

Here I will focus on some of the key macro-economic factors to think through when picking your investment:

Location, location, location

An old property adage, and a very successful TV series, but unerringly correct.

Unless you are specifically looking to let and manage properties yourself, it is important to remember your money can be invested anywhere in the UK. Natutrally the sheer cost of property within the M25 is a barrier to many, but most investors regularly make the mistake of simply focusing on their local area. I would urge investors to look at the broader UK market and, using the analogy of the stock market, you need to pick the right stock in the right sector.

A major worry for most investors is how their property is managed if they are not based nearby and able to ‘keep an eye on it’. Letting/managing agents do vary in standards enormously, but you can find plenty of good companies across the country if you are prepared to do your homework. It is a very competitive market and a good agent will keep your expenditure and void periods between tenancies down to an absolute minimum. I would always ensure any agent is regulated by both the RICS or ARLA (ideally both). Do remember they don’t get their commission if your property isn’t let, so your interests are aligned.

I will use an example of a friend of mine who bought a property as an investment in a village in the north-east of England in 2004. It is a beautiful, scenic area and a delightful place a couple of miles from where he lives and works. He has used a local agent to manage the two bedroom cottage and it has attracted reasonable demand over the last 13 years. However it is worth 7% less today (in nominal terms) than when he bought it. With the same money in 2004, he could have bought a one bedroom flat in Brixton, South London – it would have rented extremely well, but much more importantly, it would have trebled in value over the same period. The only bright side I can see is that he won’t be subject to capital gains tax!

As an investor you need to broaden your outlook and do detailed research, targeting areas which have vibrant local economies and offer the potential for superior returns going forward. There is so much information online these days and I would encourage anyone to travel to select areas, asking the important questions: Where do tenants want to live? Is there a shortage of available property in the area? Where are people looking to live and work? What type of property is in demand?

Infrastructure-led gentrification

This is something that is a little more lasting and fundamental than simply a neighbourhood benefitting from a spruce-up and a new coffee shop.

If you focus on piggy-backing your investment with a major infrastructure change, you will enjoy the long-term property rewards. I am talking here about new, faster rail connections, airport expansions, new motorway links etc – these are definite game changers as they fundamentally and positively transform local economies. In London, for example, Crossrail will soon be underway along with proposed tubeline extensions. In Kent, the High Speed 1 (HS1) railway line is in full operation and improving many towns. In the North/Midlands there are new HS2 stations and rail hubs being created, with vastly improved connectivity.

Population increases and social changes

It’s a very simple concept – if an area’s population is increasing and attracting more professional people, both house price and rental increases will follow.

London over the last 20 years has added over two million more residents and its population is projected to increase further at similar rates. Many satellite or commuter towns to London have in turn increasingly buoyant economies, especially those with infrastructure changes. HS1 has dramatically cut times to London for many Kent towns that were previously out of commuters’ reach. These towns are now attracting much higher earners who are in turn boosting the local economies with their London salaries. Then there are local economies that are centres of expertise e.g. Cambridge and its dynamic scienctific/bio-technological industries boosting south-east Cambridgeshire.

In regional Britain however some cities and towns are suffering from static or falling populations. The professional population is decreasing and there is an increasing percentage of people on lower incomes or receiving benefits. These are areas I would strongly advise individual landlords to avoid investing in. Don’t get trapped under the ‘higher yield’ headlights. Properties here will not deliver capital growth over the long term and, as an area stagnates or declines economically, so too will the net rent received. Rent collection will become significantly harder as the tenants decline in quality, along with increased voids and wear and tear.

Much like London, there is an ongoing trend regionally towards urbanisation, so areas of Manchester, Birmingham and Leeds will continue to attract tenants and offer superior returns. Equally vibrant towns such as Harrogate and nearby market towns, where the local economies are thriving, are attracting increasing numbers of young professionals. These are the areas that outperform over the medium/long term.

In my next article I will focus on more local, specific trends to look out for but I hope the above gives a feel for some of the crucial ‘bigger picture’ influences to consider when investing in residential property.