Mortgage data suggests that recent changes to the tax regime around investment properties is leading to waning enthusiasm among buy-to-let landlords. However, with the UK property market’s performance becoming increasingly fragmented on a regional level over the last year or two, certain areas are still a hotbed for buy-to-let.
Liverpool is one of them. A recent Financial Times analysis looks at the development trend that is seeing developers in the city building properties designed to specifically cater to the buy-to-let market and examine the question around the sustainability of that approach.
Buy-to-let landlords have been enticed to Liverpool in significant numbers over the past few on a combination of factors. Capital growth, while significantly lower than that seen in London and the South East, has been strong. Average prices in Liverpool have grown by just under 20% in the five years to March 2018. Property market consultants Jones Lang LaSalle estimate further growth of 17.5% over the three years between now and 2021. That is much more than in London and the South East, where average growth over the same period is forecast to be sluggish to non-existent.
Gross rental returns are also much higher in Liverpool and other cities in the Midlands and North West, such as Manchester, Birmingham and Leeds than in the London area. 8 of the 25 and 3 of the top 8 yielding buy-to-let postcodes, based on Totally Money data, are in Liverpool. High rental yields are strongly correlated to the fact that Liverpool property is also still much more affordable than in other parts of the UK. Hometrack data puts the average price of a property in Liverpool at £117,000. That’s almost £100,000 less than the UK average of £215,000.
Small one bedroom apartments in new upmarket developments in the city can still be bought off-plan for under £100,000. The combination of strong rental returns, good prospects for capital growth and a low barrier to entry is appealing for investment properties. The result of this is that as much as 85% of the residential developments currently being built or with planning permission in Liverpool are being sold off-plan to investors on a “fractional investment basis”. This means that developers are funding construction with the deposits of early buyers who commit either before construction has started or at an early stage.
Buying investment properties off-plan usually means getting a better price than would be the case for a finished property. This improves long term return on investment. However, it also involves significant risk as if the developer does not sell enough units off-plan due to a market downturn or over-saturation, construction can be delayed or even abandoned. One notable example of the risks around off-plan investment is a city centre near to the city’s Giles Gilbert Scott cathedral. Developer North Point Global intended to build 800 properties and a Chinese bazaar on the site. However, the developer has pulled out, the site remains empty and investors, many of whom were from East Asia, are out of pocket.
Despite that there is currently a huge amount of development taking place around the city’s university, and in the regeneration of the waterfront and docklands. The largest endeavour is Peel Group’s 60-hectare and £5 billion regeneration of a swathe of the docklands. It’s planned to be completed in stages over 30 years and as will as residential and commercial real estate will include a new £55 million cruise ship terminal. Everton Football Club’s new stadium is also likely to be located on the site with talks advanced.
Huge regeneration projects of the kind currently taking place in Liverpool are a delicate balancing act. They can result in very strong long term profits for investors. However, there can also be shorter term sticky patches when large volumes of property come onto the market in a short space of time, flooding the market. This can impact rental yields, tenancy and prices. And of course, if things don’t go to plan there can be longer term risk. Only time will tell how sustainable the current buy-to-let development boom in Liverpool proves to be.