[HSBC RESEARCH ARTICLE, SOURCES AND LINKS INCLUDED BELOW]

AN ECONOMIC SHIFT FROM THE CAPITAL

London remains at the centre of much of the UK's economic activity, which is reflected in the capital's still buoyant property market.

But the high cost of London property, combined with efforts to boost the UK's regional economies, could mean other cities beyond the capital have the potential to offer attractive returns for buy-to-let (BTL) landlords.

Growing demand
In August 2015, the average UK house price was £284,000 - a 5.2% increase on the previous year, whereas the average rent paid by tenants across England has risen 2.5% in the year to June 2015. For areas where the growth in house prices has been more muted, this national trend has boosted rental yields - a measure of rental income versus house prices.1

And, with property becoming less affordable, there's a growing demand for rented accommodation, which now accounts for 37% of all UK households. Estate agent Savills forecasts this percentage will continue to rise over the next few years.2

Gráinne Gilmore, Head of UK Residential Research at estate agent Knight Frank agrees: "The need for rental accommodation is strong, and we expect this trend to continue, especially in city centres around the UK."  

Investment impact
Introduced in June 2014, the ‘Northern Powerhouse' project is a government initiative designed to distribute economic power more evenly around the UK. As part of these plans, certain northern cities will be given greater control over their own economic policy, while there will also be significant public investment in transport infrastructure.3 It is hoped that this will attract corporate investment - either through new start-ups or the relocation of all or part of existing businesses.

For the property market, this may mean a boost to rental demand as economic opportunity attracts new potential tenants. Improvements to the public transport network and roads could increase the appeal of already-popular areas or open up overlooked locations.

Manchester leads the way
Graham Davidson, managing director of Manchester-based Sequre Property Investment, believes the city is already benefitting from the Northern Powerhouse project. "We have seen a sharp rise in enquiries for property in Manchester and other top-performing northern districts."

After the BBC's move of its headquarters to Salford, other businesses are planning to follow their lead to other parts of Greater Manchester, including leading international law firm Freshfields.

For BTL landlords, such relocations can have a direct impact on local demand for places to rent. "There are high levels of demand, both from students and working professionals, in areas such as Salford Quays. This contributes to a buoyant rental market with a low risk of void periods," says Mr Davidson.

HSBC's own research on regional buy-to-let hotspots, published in spring 2015, placed Manchester at the top of its chart for strong rental yield performance.4 The city had a modest increase in average house prices (up 4% year-on-year). At the same time, average monthly rent also rose by 4% year-on-year.

Not taking into account the costs of acquiring or managing a property, this research gives Manchester an indicative rental yield of 7.93%. Nottingham and Liverpool also make the top 10 with 7.04% and 6.38% respectively. Yields across 10 of the top locations in London only ranged between 5.20% and 4.02%.

Significantly for landlords, favourable conditions in Manchester mean average yields are heading in the right direction. They have risen from 7.60% in 2013 to 7.93% today. Conversely, yields in the inner London suburb of Southwark have decreased from 6.15% to 5.18% over the same period.

Rise of the regions
While London's economic position is unlikely to be rivalled in the short term, and it may remain the go-to location for many BTL landlords, market dynamics and economic rebalancing are shifting attention away from the capital.

For potential landlords researching their options, lower house prices and the expectation of increasing rental demand could make the buy-to-let markets in the north of England worth considering. However, each local market may vary from regional averages so it's important to do your own research and get financial advice before committing to buying a property.

Regional rental yields
(Simple gross yield, based on average property price and average rental income)

Any opinions expressed are given in good faith but no liability is accepted for any direct or consequential loss arising from the use of this information.

You should always think carefully before purchasing a buy-to-let property. The value of a property is a matter of opinion and not a matter of fact, not all properties will grow in value or provide sufficient income to cover all your associated costs. You will be responsible for your costs even if you do not have a tenant. Property can also be difficult to sell and you may not be able to sell quickly if you need to do so.

Sources 
Table data: HSBC Press Office, 2013, 2014, 2015 
1. House Price Index – ons.gov (August 2015 
2. Savills Residential Property Q4 2014 - euro.savills.co.uk (November 2014) 
3. Government boost for northern powerhouse - gov.uk (August 2015) 
4. HSBC Buy-to-let Hotspots news release - hsbc.com (May 2015)

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