Home Property Nottingham hits the top slot as UK's best buy-to-let investment city

Nottingham hits the top slot as UK's best buy-to-let investment city

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When it comes to the best place to invest in property, Nottingham comes top. The city has taken on joint first position rivals Liverpool as the UK’s best performing property investment location.

The two cities came joint with average rental yields of 6.2 percent once mortgage costs are taken into account.

The latest edition of Private Finance’s buy-to-let (BTL) hotspots analysis reveals that while Liverpool has retained its position since May 2017 – despite lower rental yields due to falling rental prices in this area – Nottingham has moved up from second position following a £121 increase in average monthly rents.

However, while this may be great news for investors it’s not so welcome news to those renting.

Adam Kingswood, director at lettings firm Kingswood Residential in Nottingham, said: “Because of the shortage of property and more tenants moving to the area – those being drawn to our two excellent universities, hospitals and big employers like Boots, E.ON and Experian – rents are being driven up. There are not enough houses compared to tenants.

Adam Kingswood, director at Kingswood Residential
Adam Kingswood, director at Kingswood Residential

“It is bad news for tenants as the market is very competitive but it is good news for landlords as rents are being pushed up. We need more landlords coming to the market. For investors the positives of investing in property do still outweigh the negatives. Increasing rents, minimal void periods and good yields compare well with other investment strategies, even when factoring in recent tax rises for landlords and the potential upcoming Council selective licensing. “

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Across the top 10 hotspots, rental yields have risen by an average of 0.9 percentage points (pp) since May 2017, with Southampton experiencing the biggest increase (2.2 pp). This increase is due to rents rising faster than house prices (20% increase in rents vs. 6% increase in house prices since May 2017 across the top 10 hotspots).

Top 10 buy-to-let hotspots by average net rental yield

Just scroll across to see all the figures

Ranking in Jan 2018 Location Average house price* Average mortgage costs* (annual) Average rent 2018 (monthly) Average rent 2018 (annual) Net rental yield 2018 (excl. tax) Net rental yield 2017 (excl. tax) Ranking in May 2017
=#1 Liverpool £131,707 £2,440 £886 £10,632 6.2% 8.0% #1
=#1 Nottingham £138,937 £2,574 £929 £11,148 6.2% 5.6% #2
#3 Cardiff £198,649 £3,680 £1,301 £15,612 6.0% 3.9% #7
=#4 Southampton £210,291 £3,896 £1,356 £16,272 5.9% 3.7% #11
=#4 Greater Manchester £163,800 £3,034 £1,052 £12,624 5.9% 4.3% #5
#6 Coventry £178,768 £3,312 £1,082 £12,984 5.4% 5.4% #3
#7 Edinburgh £246,508 £4,567 £1,454 £17,448 5.2% 4.4% #4
#8 Leicester £162,937 £3,018 £900 £10,800 4.8% 3.7% #14
#9 Brighton and Hove £360,673 £6,681 £1,969 £23,628 4.7% 3.3% #17
#10 Bournemouth £237,113 £4,393 £1,282 £15,384 4.6% 3.8% #10

*Average house price is based on December 2017 data. Average mortgage costs are based on a two-year fixed, 75% LTV, BTL interest-only loan at an average rate of 2.47%

There was a slight increase in average mortgage rates towards the end of 2017 as November brought the first interest rate rise in 10 years (to 0.5%). However, Bank of England data shows the average two year (75% loan-to-value) BTL fixed rate is at its lowest point (2.47%) since tracking began in January 2012 and has fallen by 15 basis points (bp) since May 2017 (2.62%).

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As a result, many landlords across the UK will have seen their annual mortgage costs fall. Brighton and Hove, for instance, has seen the biggest reduction in mortgage costs. Despite a 2.1% increase in house prices in the area in the past eight months (meaning the size of a 75% loan has increased), as a result of falling mortgage rates a landlord would now pay £6,681 in interest annually compared to £6,993 last May: a saving of £312.

But it is now more important than ever for landlords to choose and manage their investments carefully to ensure they remain profitable. In some areas house prices have risen too quickly for landlords to benefit from falling rates. Nottingham has seen the greatest increase in house prices since the analysis was last carried out (from £127,302 to £138,937 – an increase of 9%). The value of a 75% loan has therefore risen from £95,477 to £104,203, and despite falling rates, annual mortgage interest costs would be higher for a landlord taking out a 75% LTV mortgage today (up from £2,521 to £2,574).

Shaun Church, director of Private Finance, said: “Finding the right buy-to-let location is a careful balancing act. Too large an initial investment makes it difficult to achieve a healthy yield, but landlords must also be confident that property values will appreciate at a higher rate than mortgage borrowing to achieve a long-term profit. Strong rental demand is also key to prevent lengthy void periods that can damage affordability. While there has been some movement in the top 10 buy-to-let hotspots, larger cities and university towns tend to offer the greatest opportunity for investors as they offer the highest rental demand.

Concept of growing housing market. Financial data on background.
Prices on the up (Image: Getty Images)

“Though the buy-to-let sector is facing many challenges, one area where landlords have benefited is falling mortgage rates. However, seeking independent advice is becoming increasingly important for landlords to find and be accepted for the best deals. With house prices on the rise, too large a loan can negate any savings made from low rates, so landlords need to consider all aspects of their mortgage.

“There are particular challenges for portfolio landlords, classed by the Prudential Regulation Authority (PRA) as those with four or more buy-to-let properties. These landlords now face much more stringent affordability tests and must demonstrate the profitability of their entire portfolio to be accepted for a loan. ”

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