The start of a new year is traditionally a time for lists and so far, 2017 hasn’t let us down.
There was one list, however, which particularly caught our attention and raised a few eyebrows – the Daily Telegraph’s Top 10 buy-to-let hotspots.
The first thing that surprised us were the locations – 4 in London, 3 in southern counties, Cambridge, Oxford and the north’s sole representative, York. They struck us as being rather safe, predictable, cosy – and expensive.
Undoubtedly all these places fulfil the traditional up and coming buy-to-let location criteria, including
- Thriving town
- Well known retail brands starting to appear on the High Street
- Good/improving transport links and infrastructure
- Recent or planned town centre regeneration programmes
- New build developments
- Increase in estate agents
- Full skips and scaffolding springing up everywhere
- New schools and health centres etc.
But what really surprised us were the yields
As a nationwide Top 10, the best yields they could muster between them went from 5.1% – 7.6% gross.
Well, we thought, unless you already live in the immediate area, a good chunk of that frankly underwhelming income is going to get eaten up just by the costs of physically getting there and making yourself available to manage the property.
Unless you’re planning to shell out for a management company to run it for you, of course – but this is rarely a money-making strategy for a landlord.
The next thing to bother us were the average purchase prices. The list is based on two-bedroom properties and, according to the Telegraph’s information, prices in these 10 locations range from £149,000 to a fairly eye-watering £400,000.
We thought this was pretty steep for an individual landlord, particularly for one who’s perhaps just thinking about dipping a toe in the murky waters of buy-to-let ownership for the first time.
It’s a lot of money to put down and tie up; for that kind of outlay, you’ve got to be looking for a better return than 7.6% gross.
After all, you’ll be earning it
Being a landlord isn’t like letting a friend have the spare room for a couple of weeks; it’s a legally binding contract between you and your tenant – where most of the responsibilities are yours.
Assuming the tenant isn’t a friend, you’ll have to advertise your property and make yourself available for viewings. Presumably you’ll be looking for someone in full employment or a few students, so this means viewings will tend to be in the evenings and at weekends.
Then you’ll need to check references and creditworthiness, and ensure standing orders are put in place – because the rent is your income, you have to be certain it will be paid on time, every time (especially if you’ve taken out a mortgage on the property).
Needless to say, this process needs to be repeated every time a tenant moves on – and quickly, because an empty room costs you money.
Of course, before you reach the tenancy agreement stage, you’ll need to have had the necessary gas and electricity safety inspections. You’ll need energy performance certificates too.
And you can’t just plonk a favourite old sofa down in the property – all furnishings, including beds, chairs and everything else, have to comply with current fire and health & safety regulations.
Routine maintenance and decoration has to be planned around your tenants’ movements, not around yours – so whenever’s convenient for them may not be so convenient for you.
Urgent repairs and replacements are clearly events that aren’t planned around anybody’s movements. Not only do they demand your 24/7 availability, they also demand a realistic degree of liquidity – new boilers don’t come cheap, and nor do their plumbers.
Talking of which, standard home insurance probably won’t provide you with sufficient cover, so you may well need to take out landlord insurance to take care of specialist issues, such as lost rent or tenant injury compensation etc.
But hang on – we’ve already got way ahead of ourselves
All the above depends entirely on whether you’ve been able to negotiate all the obstacles that central and local government have put between you and your second property.
The UK’s housing crisis is genuine; latest estimates from RICS forecast a shortage of 1.8 million homes by 2025.
Understandably, the authorities are keen to discourage multiple home ownership and have put a range of measures in place to do so.
For a start, there’s a surcharge on Stamp Duty Land Tax; on top of the standard rate, buyers of second homes pay an additional 3% up to £125,000, an additional 5% up to £250,000 and a punishing 8% extra between £250,000 and £925,000.
Assuming you’re prepared to bite that bullet and pay up, you’ll still need to know the local authority’s policy on buy-to-let properties.
They can be against it for various reasons, the main ones being:
- They want to free up property for local residents (and voters), and:
- Students (primary consumers of buy-to-let properties) don’t pay Council Tax.
So, to make it more complicated and expensive for prospective buy-to-let landlords, they are empowered to invoke Article 4. This introduces the requirement for planning permission on any conversion to a Home in Multiple Occupation (HMO) – permission which is by no means certain to be granted.
If it is, you will have to apply and pay for a renewable HMO license.
There probably are better yields out there than the Telegraph suggests – but it will take a lot of research to find them. There will be a lot of wasted journeys and a lot of internet-induced eyestrain before you find your ideal buy-to-let property.
But you know what? The truth is, despite the British fascination with property, the residential sector isn’t a particularly lucrative one.
Factor in the costs, both financial and emotional, of being a landlord, and look at the volatility of the property market – it’s no surprise that buy-to-let landlords are growing increasingly disenchanted with their portfolios and their prospects.
And when they come to us, we advise them not to focus on location.
Rather, they should first focus on sector
Given the unpredictability of the residential property market, look around not for the next boom town for buy-to-let, but for a type of property that will not be subject to the ebbs and flows of everyday economic fluctuations.
Take Purpose Built Student Accommodation (PBSA), for example.
It still comes as something of a surprise to many that those large blocks of student en-suites and studios that are springing up everywhere, aren’t actually owned by the universities, but that the individual units within them are available for purchase as an income stream for ordinary investors.
As a property sector, these student apartments have consistently been providing the highest yields since 2011, according to the Financial Times.
The UK has a student population of around 2.3 million – but only 26% of them on average are able to access this hugely popular form of accommodation.
Hence the Catch 22 of students having to resort to buy-to-let accommodation, while the authorities do their utmost to funnel them away from it and into PBSA.
Of course, this undersupply is the investor’s friend, as it ensures immediate and long-term demand – with student numbers on the increase for decades and record-breaking intakes for the last 4 years, it’s hard to envisage when supply will ever even begin to catch up with the shortfall.
We also handpick our locations following exhaustive research and due diligence. Part of our filtration process includes avoiding the capital and other prohibitively expensive university cities, such as Oxford, Cambridge, Bristol and Birmingham.
We also discard places where PBSA development has been widespread, such as Liverpool, Manchester and Newcastle.
The CBRE’s rule of thumb defines saturation in the sector as 40% supply – so we prefer to keep well below that figure.
And further to undersupply
Of course, there’s a delicate balance to be struck when shortlisting our candidate towns; it’s not enough for them just to have a university, they have to have an ambitious university that students actively seek a place at. Consistent progress up the various university rankings is a useful pointer in this regard.
By the same token, students demand more from their university experience than just an academic qualification. They want to be close to a vibrant, lively city centre which offers a cosmopolitan mix of social, cultural and entertainment options. And if there’s easy access to the great outdoors, well, all the better.
So, we want our university towns to have regeneration programmes to ensure a fresh start for their more tired areas to match bustling, 21st century town centres – along with a suitable regard for their traditional heritage and natural charms.
Overseas students make up a significant proportion of the UK student population and, unlike in many other countries, our own native students tend to leave home to go and study.
Not only does this mean they all need accommodation, it also means that transport links are important. These also play a big part in our deliberations.
And, after our lengthy research process is complete, we sit down with our developer partner – the only NHBC-accredited student property developer in Britain – and, pooling our years of experience accumulated since the Student Property sector was in its infancy, we choose what we consider with some authority and every confidence to be the best places in the UK to invest.
And the result
This confidence allows us to provide sector-high 8% – 10% NET yields.
Yes, these are NET yields, not gross – and they are predetermined, contracted and fixed for 10 years.
Because most of our developments consist of 100+ units (usually more), we can spread the initial site purchase cost remarkably thinly; this is why we can offer properties from as little as £45,950.
And there are none of the nasty Stamp Duty surprises we mentioned earlier – because the government is keen to encourage PBSA, it has classified it as commercial property and is therefore exempt below a threshold of £150,000.
The other thing that investors find appealing is that all our properties are professionally managed onsite 24/7. This means that every single aspect of traditional buy-to-let landlordship is taken out of your hands; letting, vetting, maintenance, repair, rent collection – the lot.
Once you’ve signed the contracts, you needn’t lift a finger.
This management service is included in the purchase price, so you won’t have a further penny to pay during the 10-year fixed income period.
Which of our 17 student property locations are hotspots this year?
Alphabetically, first is Bradford
Bradford’s booming economy means its growth is outpacing the likes of larger regional cities, such as Liverpool and Manchester.
In 2014 alone, £525 million was invested in the city centre, with a further £1.5 billion set aside for infrastructure improvements over the next few years.
Air, road and rail transport links are excellent, with easy access to two of Britain’s favourite National Parks.
Bradford University’s reputation is soaring, with its 2014 ranking of 82nd leaping each year – up to 43rd in 2017 (Complete University Guide).
It’s a Top 10 UK university in four subject areas and its School of Management has achieved a Triple Crown of accreditations.
The university is aiming for a 30% increase in the student population by 2024, but the current shortfall of PBSA supply is an astounding 82.4% – that’s nearly 19,500 students having to look for alternative accommodation.
Find out more about Scholar’s Village, one of our Bradford properties, and download our comprehensive Investor’s Report.
Stoke-on-Trent is our next tip for 2017
Home to the UK’s 2nd fastest-growing economy outside London over the last five years, Stoke is a Financial Times Top 10 European Micro-City of the Future.
This means it has excellent prospects for inward investment, economic growth and business expansion.
Over £1.5bn has been invested in city regeneration since 2008, with a further £473.5m to be injected from 2016 to 2021.
Within an hour of four international airports, an hour and a half from London by train and minutes from the motorway network, Stoke is also just half an hour from the popular Peak District National Park.
The city has just opened a £282 million educational hub, UniQ – the UK’s largest collaborative project of its kind.
Its two universities, Staffordshire and Keele, have 22,700 students chasing just 4,779 PBSA units.
Our new development, Q Studios, is being built in phases and the quality of Stoke’s first all studio property will be the envy of a student population currently largely resigned to shared kitchens and bathrooms.
We don’t want to give the impression that we’re rubbishing the Telegraph’s list; quite the reverse, we’re grateful to it for provoking a debate.
But in the interests of fairness, we thought we’d look at another list – this time, the 5 buy-to-let hotspots for 2017 as rated by a popular lifestyle website.
All 5 from the North, including one in Scotland…