While real estate insiders predict a rosy long-term outlook for home prices in prime central London, in the short-term prices in the city have stalled and rental yields are low—factors that might lead would-be property investors to look elsewhere.
Second-tier cities to the north of Britain’s capital, including Birmingham, Manchester, Liverpool and Leeds in England, and Glasgow and Edinburgh farther north in Scotland, offer affordable buy-to-let inventory and a growing population of young professionals looking for housing.
These factors are likely to translate to strong rental values and rental growth as well as the capital appreciation that investors crave, experts say.
"Suddenly, the case for residential investment in these markets has become very compelling," said Mark Evans, the head of Knight Frank’s regional residential development business.
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Birmingham is benefitting from major infrastructure improvements
Birmingham, a city in the center of England of just over one million people and the second largest in the U.K., is currently showing strong capital price appreciation, spurred by infrastructure improvements and a growing business sector.
"Birmingham has become a bit of a hot spot for residential investment outside of London," Mr. Evans said, noting that he’s recently seen a mix of first-time buyers, seasoned purchasers, local investors and overseas investors, all looking to benefit from the city’s strong market dynamics.
One of the factors driving the city’s growth is the construction on England’s HS2, the high-speed railway that will travel 250 mph, and link London and Birmingham for the first time—bringing the typically one-hour-and-21-minute direct commute down to 49 minutes—and later fork off toward Manchester in the North West and Leeds in the North East.
Although the first services between London and Birmingham won’t be offered until 2026, the fact that construction has started, and that there will be two stations in central Birmingham and a third in nearby Solihull, has already spurred housing and commercial development in the area, and given companies, including HSBC and Deutsche Bank, a reason to relocate some of their business operations and employees.
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"The fact that people will be able to move between the capital and this regional city more easily and quickly is a major driver of development and growth," Mr. Evans said.
Knight Frank’s recently published Birmingham Report notes that the annual growth rate for average house prices in Birmingham has averaged between 5% and 10% since mid-2015, and has outperformed the wider U.K. market for more than a year. House prices are expected to continue rising about 5% per year through 2022, and Birmingham’s prime real estate is expected to hit £500 (US$694) per square foot by 2020.
If investors plan on letting units out to the young demographic of renters, Mr. Evans noted that they should look to pick up units that will likely cost between £170,000 and £250,000 (US$235,912 and US$346,930) for a one-bedroom, and above £225,000 (US$312,237) for a two-bedroom or larger unit, depending on the flat’s location and its features.
Manchester and Leeds to similarly benefit from HS2
Like Birmingham, the northern towns of Manchester and Leeds should similarly benefit from the construction of HS2, experts say. Although these sections of the track won’t open until 2032 or 2033, once the project is finished, it will significantly improve travel times between London and these regional cities, bringing the trip from Manchester down to 68 minutes (from 128 minutes) and the trip from Leeds down to 57 minutes (from 120 minutes), according to BBC.
In the next five years, housing prices are expected to increase in the North West, where Manchester is located, by 18.1%, and in the North East, where Leeds is located, by 17.6%, according to Savills’ Residential Property Forecast. This is because of the region’s affordability when compared to London and areas to the south of the capital.
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Savills research analyst Lawrence Bowles said that Manchester, like Birmingham, is similarly benefitting from businesses like the BBC moving some of their operations north from London.
"Access to high-quality employment will support demand for rental properties," he said, which is why, "as a buy-to-let investment, Manchester is looking very strong."
Although there are some luxury properties available—specifically in suburbs where Manchester United players reside—he said it’s likely a better idea for investors to purchase a few buy-to-let units, potentially even in the same building or on the same street, to mitigate their risks.
This strategy will also allow investors to take advantage of the increasing rents, and a market in which the current yields are hovering around 5.5% to 6%, according to Gary Hersham, principal at London-based Beauchamp Estates.
Liverpool offers an up-and-coming hot spot
But while Mr. Hersham said he likes Manchester, he thinks Liverpool—located about 35 miles east, on the Irish Sea that separates England from Ireland—is really the second-tier city to watch in the U.K.
"There’s a huge university student community, the yields are upwards of 8%, and it’s underdeveloped," Mr. Hersham said. "Liverpool is one of the most undervalued cities in the U.K."
He specifically mentioned a 700-unit warehouse conversion project called the Tobacco Warehouse Apartments at Stanley Dock, which he is pre-selling now for about £280 to £320 (US$389 to US$444) per square foot, or £260,000 to £500,000 (US$361,000 to US$694,000) total with presale incentives, as a development to consider. "You can’t buy a broom cupboard for that in London," he said.
"If I had a say," he continued, "I’d push all of my investors to buy in that block in Liverpool."
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Scotland: The next frontier
A final place that investors might consider are the Scottish cities of Glasgow and Edinburgh, Mr. Bowles said.
"Edinburgh has thriving economic services center," he said, which presents an opportunity for investors.
Like other U.K. cities to the north of London, Scotland will also get a boost from the construction of the HS2, with travel times from London to Edinburgh or Glasgow reduced by one hour, to 3 hours and 30 minutes, when the train line is complete.
According to the Savills Residential Property Forecast, prices in Scotland are expected to increase 17% over the next five years—like the other northern cities, much better than the 7.1% growth expected in London in the same period.
Mr. Bowles said, "£4 million (US$5.5 million) doesn’t buy you much in London anymore, but it gets you much more—and a much better value for your money—in the North West of England or in Scotland."
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