For decades the number one adage of UK property investment trends has been ‘location, location, location’ – they even named a TV show all about investing in property after it.
But in 2019 there’s been a subtle shift, making it more a case of location, location… and function.
While the old rules of property investing still apply in the main, there’s a growing focus on functional properties, and keeping that in mind could help you to optimise your portfolio as we move past the end of the decade.
Look north for prime locations
It’s easy to think the north-south divide means there’s less money to be made north of the Midlands, but a report by Property Hub in April revealed that this is not necessarily the case.
For example, the former property podcast turned online community noted that during its recovery from recession, growth in central London rippled out into the surrounding areas.
With Manchester now showing signs of the same trend, the report recommends locations like Bolton, Stockport and Wythenshawe – and especially along the Metrolink tram routes – as possible places where significant value will be added in the near future.
It even goes so far as to suggest that the Manchester ripple effect could reach as far as Liverpool, adding further value to the city’s own regeneration efforts.
“Yields for investors are strong too,” Property Hub said. “They vary by area of course, but on the whole yields are higher than in Manchester or Leeds.”
High yields in Yorkshire?
Over in Yorkshire, both Leeds and Sheffield are tipped as good opportunities. Leeds has had a confusing recent history for the investment property market, as rapid development in 2006-07 led to oversupply when the economy crashed in 2008.
In the decade or more since, developers have largely avoided the city because of this perception of oversupply.
Yet with a booming local population, this has actually led to an undersupply coupled with significant regeneration and new development including a station on the HS2 rail line, if it is ever completed.
Sheffield, according to Property Hub, is lagging furthest behind the other northern cities with astonishingly low property prices even in the city centre.
Low prices mean high potential gains – and with new luxury hotels and HSBC offices in development along with nearly £500 million to be spent on The Moor shopping centre, the chance of a healthy return is pretty clear to see.
Fashion or function?
Property Hub’s report warns against simply buying the cheapest property available in the hope of achieving the highest yield – again because of location, but this time on a more micro rather than macro level.
Low property prices are typically associated with less desirable areas, making it important to seek out the best returns on investment by finding bargains in desirable boroughs, districts and suburbs and adding value to them.
However, an alternative could be to focus on function rather than fashion, as research from Cushman & Wakefield this summer showed a surge in property investment in ‘alternative commercial’ classes like care homes, hotels, student accommodation, self-storage facilities and car parks.
These niche functional premises accounted for 28% of investment in commercial real estate in the UK for the whole of 2018 and over 40% in Q1 2019 – up from just 5% a decade ago.
David Haynes, international partner for capital markets at the commercial real estate services provider, said: “Investors are seeking better yields and are increasingly prepared to consider a wider range of property types, different financing options and adjusted risk returns to achieve their goals.”
But he warned that ‘alternative real estate’ should not be considered as a catch-all term, due to the diverse nature of the different commercial premises covered by the phrase.
“Investors should look at alternative property types as distinct specialist sectors that have varied demand drivers and investment traits,” he suggested.
Alternative property investment at scale
Finally, the Cushman & Wakefield report noted the use of large portfolio deals as a way to rapidly gain access to the strongest covenants and best commercial property assets.
As commercial leases have shortened in recent times, the firm has seen long-term income investment transfer over into alternative commercial real estate with 57% of transactions in the form of portfolios, at an average value of £276 million.
“We are seeing investors acquiring, or partnering with, dominant operators to quickly gain specialist knowledge and economies of scale,” Mr Haynes said.
The rapid rise in alternative commercial property investment in the UK seems set to continue at least for the remainder of 2019, ranking function alongside location when considering the next best opportunity for investment.
For those investors who are able to find competitive deals on alternative commercial premises in desirable locations – or in places that are only just coming into their own through regeneration and new development – the potential for substantial yields could be particularly strong in the medium term.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.