Hunting down the hotspots

Whilst some simply view investment properties as a way to supplement their monthly income, others are making it their full-time profession and boast impressive portfolios. However in such a competitive market, many investors are relying on the phenomenon of hotspots to net them their next bargain.

Industry opinions on the matter are split. Some experts denounce the existence of these magical niches of affordable investment property, whilst others believe buy-to-let hotspots are just as common as those associated with owner-occupiers and very much a key aspect of current landlord activity.

Hotspots are more than just an area with rising rental yields though, as explains Gavin Davidson, property director at ThePropertyInvestmentMarket.com. “As a general rule,” says Davidson, “the more valuable the property and the better the location then the lower the yield, therefore when talking about finding an good investment property, a smaller one in a less desirable location may produce better yields but often a more valuable property can give better capital growth.

“The success of a buy-to-let investment will also depend to a great extent upon the supply of accommodation already available in an area. An abundance of rented properties will have a negative impact on rental prices and in the long run capital growth. We can see this happening in areas like Manchester and Cardiff Bay, where there has been a large supply of newly built flats, which have suppressed both rental and capital values.”

Look below the surface

Getting a bargain is all fine and well, but if you’re not going to see the returns you’re looking for or if finding tenants starts to become an uphill struggle then it’s a completely different story.

The best advice for any landlord is to buy close to home as it makes liaising with tenants much less problematic, however many professional landlords will be looking for properties further afield in order to make the most of their capital. Currently the East Midlands is seeing the best average yields of 6.60 per cent, whilst the average Welsh property comes in a close second with that of 6.41 per cent.

John Heron, director of mortgages at Paragon Mortgages agrees: “With relatively low property values at 15.4 per cent and 21.7 per cent below the national average, the East Midlands and Wales are attractive regions for investors. Good demand for rented accommodation in the towns and cities of these regions keeps the market underpinned.”

Wales is definitely one to watch

According to Heron the only way is up for Wales, and today’s canny investment could see a very lucrative return: “While the national picture remains strong, residential property investment looks particularly attractive in Wales. Trends in the local economy are very positive, creating new jobs and causing an influx of workers into the area, which in turn fuels tenant demand.

“Rents are rising strongly but so are property values, although to a slightly lesser extent. Investors have been enjoying steady rises in yields over the past few months, up from 6.3 per cent to 7.1 per cent in one quarter. With this positive economic backdrop underpinning growth in tenant demand, it is not surprising that Wales is the country’s top performer in terms of yield, and the only region to generate those in excess of 7 per cent.”

It’s all definitely relative though as whilst the surrounding area is a large factor, you don’t want to go attempting to let a student size property to an area teeming with young professionals. Couples account for 45 per cent of the UK’s tenants, followed by singles and sharers at 36 per cent and 12 per cent made up of students, with target market something investors should never lose sight of.

Telltale signs

New business and residential developments in an area are certainly something to watch out for as they will push house prices while giving rental yields a boost.

In this type of scenario though, Lee Grandin, managing director of Landlord Mortgages advises investors to exercise a bit of caution: “In instances where high proportions of developments are being sold to investors rather than owner-occupiers, the only thing that differentiates one property from the neighbouring one is the price.

“In this case landlords may be forced to drop their rental level to keep up with the competition. This drop could be dangerous for amateur landlords who would be hit hard without a portfolio of properties to cushion them against periods without rent or interest rate fluctuations.”

Market saturation is a property investor’s number one enemy. Once investment activity peaks and the supply catches up to the demand, landlords run the risk of longer void periods plus a struggle to retain competitive rental values. However where demand outstrips supply there are always good yields to be had.

“Look for University and hospital towns, also cities with international businesses which import staff on contracts,” advises Davidson. “Aspirational standards of living can also boost demand, particularly seaside towns – a good example being Brighton due to its location and the lifestyle it offers.”

Pay attention to the postcode

Certainly Brighton is still dominating the South Eastern lettings market. However as far as hotspot potential goes, it’s cooling off. Today, owning a property with a BN postcode does not automatically ensure that it will command an exceptional amount of rent each month – in most cases it is just as important to pick the right street as it is to pick the right town.

Alongside Brighton, Oxford, Edinburgh, London, and Bath all boast huge student populations and with every new term comes a fresh new set of tenants looking for suitable accommodation. If you opt for a large property, add yourself to the university housing lists and make sure it is kept in a good condition, you’ll never be short of offers.

Many more parents are now buying investment properties for their children attending University and renting the spare rooms out to their friends, or what Grandin calls a “captive audience”. Edinburgh currently offers the best prospects for parents looking to take the plunge at a three-year rental return of £32,527. London, St Andrews and Bath aren’t far behind though and healthy profits of over £19,000 in just three years can be expected.

“Buying for your child’s higher education has three fold benefits,” according to Grandin. “Potentially making a handsome profit, security in the knowledge your child is living in good accommodation and choice over your child’s flatmates.”

Don’t throw caution to the wind just yet

This might make for an attractive proposition but buying property to let should never be seen as a short-term way to cash in on an upcoming area. “The success of buy-to-let as a business is based not on short term speculative considerations but rather a long-term investment horizon of perhaps five or ten years,” continued Heron. “In my experience, successful buy-to-let investors have a clear, focused investment strategy, concentrating on a specific market segment and a geographic area with which they are very familiar.”

“The majority of areas follow a cyclical pattern,” added Grandin, “so that over time, both rental yields and capital growth tend to drop as a local market cools. The notion of ‘hotspots’ is a fluid one and without having tenant demand and high rental yields, landlords are left vulnerable as they become heavily reliant either on capital appreciation or a strong rental market in the area.”

Irrespective of area, terraced properties are by far the most popular, with 57 per cent of all landlords boasting at least one in their portfolio. In addition they generate the highest rental yields at 6.5 per cent, followed by semi-detached properties at 6.3 per cent and detached properties which see yields of 6.0 per cent.

What is a hotspot
not?

Hotspots are not the be all and end all when it comes to property investment though and, as most believe, gradually heat up and gradually cool off.

Grandin believes they should definitely be approached with extreme caution. “Despite what a lot of people think, you can’t just buy any old property in a so-called hotspot and hope to gain. However, investors should be careful not to rule out the surrounding areas of ‘up-and-coming’ hotspots. Here properties may be less costly and tenant demand may be transferred as those looking to rent are priced out of the localised market.”

Ultimately house prices are still climbing, quashing many first-time buyers’ hopes of getting a foot onto the property ladder and in turn leading to increased rental demand. This all means that even if your area isn’t touted as ‘the next big thing’, if you’ve done your homework as an investor and made a fully informed purchase then you can’t go far wrong.