Particularly in overseas investor markets, the UK’s property sector has historically been dominated by London, with the capital enjoying an overwhelmingly disproportionate level of marketing from developers and property agents; and, in turn, demand from buyers drawn by their familiarity to the city, and their view of the UK as a monocentric market.
To an extent, we continue to see this trend play out. According to Benham and Reeves, there are 280,021 homes in the UK registered to foreign owners, accounting for almost 3% of the total UK housing supply. Of these, 103,425 are located in London – 36.9% of the total supply.
However, that figure represents a downward shift in London’s representation over the last few years. Of the 10 local authorities that have seen the greatest percentage increase in foreign ownership over the last year, for example, none are in London, with the North-West and West Midlands in particular seeing their market shares grow.
What we are actually seeing then, is a move away from the typical monocentric pattern of investment in the UK, towards a more regionally dispersed pattern of property ownership. In this article, we examine in more detail and factors and dynamics at play that are giving rise to this trend.
Diversification in Search of Yield
London represents the archetypal reliable long-term market, where properties have exceptionally strong occupancy rates. It is also true that, over the past 12 months, rental prices in London have encountered unprecedented growth, rising by 6.8% year-on-year to October according to Zoopla. Nevertheless, London rental yields in percentage terms still trail behind the UK, with an average of 4.7% versus 5.04% for the country as a whole. Indeed, breaking this down further by regions, London actual trails behind every other region in this regard:
This is because rental yields cannot keep up with price rises, given there is only so much tenants can afford to pay. As a result, higher priced properties tend to have lower rental yields and, given London is home to the highest average prices in the UK, the inverse is true for its yield.
This has become more pertinent in today’s high-interest environment. Paying lower interest rates, investors can absorb a lower yield as there is a greater chance running costs and monthly repayments will still be covered by the rent. However, when that interest rate rises, the likelihood of facing a shortfall on running costs grows.
As a result, investors are increasingly sensitive to rent and turning towards alternative locations to capitalise on higher yields. Given the widespread shortage of rental properties currently, they are able to do so without sacrificing strong levels of occupancy. This is particularly true of core regional cities, with prospective renters returning increasingly to their offices as opposed to working from home, and therefore seeking more central places to live. Indeed, we are also seeing owner-occupiers who bought homes on city fringes during the covid pandemic opt to sell and rent again in city centres, overstretched given the rise in interest rates and less inclined to work from home. This means that in cities such as Manchester, Birmingham, and Liverpool, it is easy to find yields nowadays averaging 6%, whilst also being rented from the first month of occupancy. Not only that, but rents are growing faster than in the capital – according to JLL, rents in Manchester have grown by 19.6% year-on-year – the largest increase of any UK city in the past twelve months.
Political Support for Regional Development
The market dynamics were are seeing are also being boosted by a political policy encouraging the redistribution of investment and development in the UK. The current conservative government succeeded in the last general election, largely as a result of gaining support in traditional labour strongholds, particularly in the Midlands and the North of England. This in turn has led to a refocus on these areas, and has given birth to the Levelling Up campaign. Part of a much wider policy to improve jobs, health, and the economies of regional areas in the UK, housing – and in particular incentivising the building of good quality homes – has played a highly prominent role.
Thus far, the North-West and Midlands have been the core benefactors through multiple rounds of funding:
Indeed, this prominence of the North-West has been seen over a much longer term, with the region being at the core of the earlier Northern Powerhouse movement. With a much clearer focus on core regional cities, this in particular incentivised significant levels of investment in Manchester and Liverpool in particular, and in the case of Manchester, saw companies such as the BBC and ITV relocate their headquarters to Media City in Salford. With the need to house the influx of professionals that result, Manchester in particular has seen a proliferation of new development from globally recognised developers.
Another political driver for regional growth has been the creation of Investment Zones, with 10 areas designated as recipients of substantial government funding, supporting by partnerships with the private sector, to grow around industries that would be core to the future of the UK economy. Again, the North-West has benefitted massively from this, with Liverpool and surroundings nominated as an area for life sciences, hoping to directly create 4000 new jobs in the area. Greater Manchester and the West Midlands are also earmarked for future designation. The knock-effect again is to increase the need for good-quality housing in the area, as well as create tax incentives, such as stamp duty subsidies, that directly benefit investors in the region’s real estate markets.
Transport Changes Driving Growth
Closely intertwined with top-down initiatives with the explicit aim of redistributing investment, the government has also committed significant funding to a series of transport initiatives that has a significant knock-on impact on regional housing markets. There has been much made of last month’s announcement to scrap phase two of the new high-speed rail network (HS2), initial intended to improve connection times between London and Manchester. However, the progress seen in phase one of HS2, connecting London and Birmingham, should not be ignored. Indeed, just this month, it was announced that the number of people employed by HS2 now surpasses 30,000, many of them in Birmingham – this in addition to a significant apprenticeship scheme set up in the city as a result of the project. In Birmingham, the effect of HS2 has been telling for a number of years, playing a seismic role in encouraging the relocation of many major businesses into the city, including HSBC and, more recently, Goldman Sachs. In turn, it has been predicted by JLL that Birmingham requires 7500 homes per year to be build to meet demand – of which less than half are currently being delivered on an annual basis.
Further, it is important to note that investment set aside for HS2 phase 2 will now be reutilised towards a northern rail network, improving adding new stations and routes to increase connectivity across core cities. As part of this, £12 billion along has been set aside for a Liverpool-to-Manchester Northern Powerhouse Rail line, reducing travel times between the two to create a much more joined up North-West economic zone.
The Result: Present and Future Growth
Alongside high yields, the market data really speaks for itself when it comes to growth prospects for regional cities. JLL’s most recent Big Six report, for example, illustrates that all six cities have enjoyed growth over the last year – this in spite of Nationwide reporting a 3.3% drop in year-on-year prices across the UK as a whole. Of these cities, Edinburgh has led the way with 8.7% annual growth, resulting from a particularly tight supply of new build housing, followed by Manchester with a 4.9% rise in the average property value.
Given ongoing support for investment, combined with investor appetite and an undersupply of adequate housing, this pattern of growth is forecast to continue. Again examining six key regional cities, JLL predict that Manchester will achieve the greatest amount of growth with a 19.6% increase in prices between 2023 and 2027. This will be closely followed by Birmingham with 19.2% growth over the time span. This compares to their forecast for the UK as a whole of 8.5% growth to the end of 2027, and 13% within central London.
Whilst London, then, continues to represent a long-term stable market, the immediate market dynamics clearly paint a strong case for regional cities, which as they mature and continue to developer, are also growing with longer-term consistency.
At Tailor My Property, we help clients to identify property investment opportunities across a range of markets and property types, including in core UK regional cities. If you would like to speak with a member of the team about the right investment for you, please don’t hesitate to reach out.