Tue 06 Jul 2021
There is lots of talk in popular property investment forums, podcasts, and training academies about “goldmine” areas, meaning areas that are good for investing. The people using this term rarely define what they mean and exactly what constitutes a good area for investing. Let us fix that.
The first thing to say is that different investment strategies have different requirements for successful investing. Buy-to-let (BTL) is very different to Serviced Accommodation (SA) or Houses in Multiple Occupation (HMO).
Typically, SA and HMO require higher rental demand, a very different tenant type, and higher yield than BTL. Understanding what factors contribute to a successful investment is essential for making your investments successful.
If you look at BTL, for example, there are three key factors that make an area good for investing: purchase price, rental yield, and potential capital appreciation. How do we define and identify these key factors? Each of these three factors boils down to certain economic conditions in an area that make it viable for investment.
Purchase price is determined by the historic wealth in an area.
Somewhere like London or Bristol has high purchase prices due to their past industry producing great, generational wealth. It is the generational wealth that causes purchase prices to outstrip incomes, even in these cities that have large, well-paid service sectors.
This why average house price in the North East of England is around 6 times the average salary, whereas in London the average house price is 21 times the average salary. The lower the historical wealth, the lower the purchase price.
Rental yield is decided by wage and is linked with tenant type.
Wages are paid at a level necessary for workers to have an acceptable standard of living, not so much that they do not need to work, and not too little that they cannot work.
People can only spend a percentage of what they earn on housing and people who earn more can spend more. In a country with a relatively high minimum wage, compared to global standards, wages are given a hard minimum that cannot be undercut. This gives an artificial minimum rental income that is higher than the market would set without intervention.
This means that areas in which there is low historical wealth and high, growing wages produce the highest yields and in areas with low historical wealth the minimum wage ensures a relatively high yield return.
Capital appreciation or price growth is caused by new wealth coming into an area from somewhere else, usually through new industries or state spending.
Looking at Savill’s recent prediction of 28.1% growth in Yorkshire and the Humber, it is clear that this growth is predicated on the development of new industries in the area, induced by government subsidy and already manifesting in the form of large companies moving staff and headquarters to the region.
So when people are looking for capital appreciation, they are really looking for areas in which the economy will grow in the future.
Shaw and Co Estate Agents believe the combination of these three factors makes up the substance of your investment decision when looking for a BTL investment area. If you have little capital available and are looking for a high yield then look for areas with low historic wealth. If you want good capital appreciation then look for areas with the potential for the biggest economic growth.
How to balance these factors and ensure an optimal investment is entirely down to your circumstances and goals. By being clear on your strategy and what factors determine the success of your investment you reduce risk as much as possible and encourage your own success.