Best places to invest in property in UK uncovered

This week we take a look at the best places to invest in property in the UK right now.

Investing in bricks and mortar tends to beat the most popular alternatives, chief amongst them being shares.

But, and it’s a big but, to do it right requires three elements:

1. a mortgage
2. some tenants
3. work (from you)

And item three starts with choosing a property.

There are a lot out there to sift through so it always pays to drill down on a particular location before you begin.

Sure, experts will probably be able to make decent returns anywhere, but for the rest of us location matters. A lot.

Pick the right location and you’ll have a tailwind behind you in your investment journey.

We start our search by segregating the UK into regions and then further narrow it down to focus on individual cities.

The findings are based on four factors:

• Rental Yield
• Capital Gains
• Future Growth
• International Standing

OK, without further ado. Let’s get into it.

Rental yield hot spots

While house price is usually the key talking point for the UK property market in general, rental yield is often the big one for would be property investors.

And that makes sense. Landlords find it useful for carrying out initial property comparisons. But I think it helps that it is simple to calculate too.

You divide annual rental income by property price and multiply by 100.

(annual rental income/rental property price) x 100

So if your property cost £100,000 and you get £5K per year rent, your rental yield would be 5% ({5/100}x100).

Here’s the best places for rental yield according to Zoopla:

Top UK regions for rental yield

Region	Average gross rental yield	Average gross rental yield (rounded)
North East	7.34%	7%
Scotland	7.32%	7%
North West	6.52%	7%
Northern Ireland	6.24%	6%
Wales	6.23%	6%
Yorkshire and the Humber	6.23%	6%
West Midlands	5.78%	6%
East Midlands	5.70%	6%
South West	5.23%	5%
East of England	5.17%	5%
South East	5.17%	5%
London	4.92%	5%

The North seems to be the place to be for rental yield. Other areas that aren’t the South come a close second, which leaves the South (including London) trailing.

But before you run off and start searching for properties in the North. Wait just a minute!

Would you believe it if I said it wasn’t quite as easy as that. There are a few things that you need to account for.

First, rental yield doesn’t tell the whole story. It has a major weakness called fees.

You see it is calculated before fees.

This means, it is possible that your fees could end up eating away much of that yield if you aren’t careful.

In fact, a property with a high rental yield could actually cost you money.

Net Yield & ROI

It’s no surprise then, that canny property investors tend to look for net yield, which removes fees. Now, this is a big improvement but even that has its limitations.

You see it doesn’t account for house price increases. And as we’ll see a bit later on this is where the big gains are made for most people.

This is why the best metric to assess a property’s investment potential is ROI (Return on Investment). This one takes account of fees and house price increases too.

Unfortunately, there aren’t good sources ROI out there. You usually have to calculate this yourself.

(You can use this calculator to crunch ROI numbers).

Another point to bear in mind is this. High rental yields can be synonymous with trouble.

There may be trouble ahead

I’m talking about vacancy rates and maintenance fees in particular. (Take it from one who knows!)

Here’s a conundrum for you. When is an 8% yielding property not yielding 8%?

Answer? When it’s vacant half the time.

You see a property with an 8% yield is only really yielding 4% if it is vacant half the time.

Vacancies don’t just mean you are missing out of rental income either. They usually come with fees for finding new tenants, further reducing your yield.

And by the way, if those passing tenants trash the place you may find your yield goes negative. Ouch! Not to mention all the stress and hassle it may cause.

That’s not to say you can’t find a decent high yielding property if you know what you are doing. Just that it isn’t easy, otherwise everyone would be doing it.

And there’s more. High yielding properties tend to have lower capital gains. Not always, but, as a general rule, I’d expect a higher yielding property’s price to increase at a much slower rate vs a low yielding equivalent.

And finally, there’s a little thing called tax to consider.

Property tax 101

Was it Karl Marx who said “the proletariat pay tax on income whilst the bourgeoisie don’t pay capital gains?” Or words to that effect.

And whether he said it or not there’s something to it. Let me explain.

Rent is subject to income tax and making money from an increase in house value is subject to capital gains tax.

But here’s the thing. Capital gains is usually less than income tax. Not only that but you only pay it when you realize the gain. And here’s the clincher, you don’t have to realize that gain to enjoy the benefits with capital gains.

In fact, this is one of the most powerful tools in property investment. You may have heard of it, through its more common name – the remortgage.

Say you bought a house for £100K on a 75% LTV mortgage (meaning you put down £25K of your own money) and then say, that house doubles in value to £200K. As long as your credit standing remains in tact you should then be able to remortgage at 75% of £200K ie £150K. Suddenly you’ve magicked thousands of pounds out of nowhere and not had to pay any tax on the gain.

I think that’s a rather long winded way of saying, whilst yield is important, its not the key to property investment returns.

Capital gains aka house price increases

In practice the biggest driver of property investment returns for most people most of the time is going to be capital gains.

That doesn’t mean rental income isn’t important. It absolutely is. You need it to cover your monthly expenses. Non more so than your mortgage repayments.

But providing your rent after fees can cover your monthly outgoings, you can then sit back and let compound interest work its magic via house price growth.

So then the question becomes, where are the best places in the UK for upwardly mobile house prices?

Savills tend to be the goto for property market predictions and they split the UK down into regions like this.

Top regions for capital gains

Region	5 year growth  (%)
North East	21
Wales	21
North West	20
Scotland	20
Yorkshire and Humber	20
East Midlands	20
West Midlands	20
South West	18
South East	17
East	17
London	14

There seems to be a clear North/South divide there. You are looking at around 20% in the North but 18 or less in the South.

Outside London there’s no showstopper, but anywhere Northern is probably a safe enough bet for capital gains over the next few years.

So at this midpoint the North is looking like the place to be but there are also a couple of other things to consider.

Future growth

So far we’ve looked at regions, but those are pretty big areas to cover. So you might be thinking can we focus in a little?

And the answer is, yes we can.

Luckily for us, leading global commercial real estate services provider CBRE examined the prospects for a range of real estate sectors in the 50 largest towns / cities in the UK.

They analysed a variety of economic and demographic factors that support growth through twelve economic sectors. It’s well worth a read if you have some time on your hands (You can find it here).

Here’s a summary of their data (You can find a more detailed explanation of how we crunched their numbers below).

UK cities by future growth expectations

Future growth	Score
Manchester	30
Bristol	35
Birmingham	47
Brighton	56
Edinburgh	62
Bournemouth	65
Southampton	65
Nottingham	66
Glasgow	67
Belfast	67
Oxford	67
Cambridge	67
Sheffield	68
Reading	69
Leeds	70
Aberdeen	71

Based on that, I think it’s pretty clear that Manchester and Bristol have the best future prospects.

Either one would probably be a pretty safe bet for your money.

But as Manchester is in the North where yields and house price growth is expected to be better it’s looking like game set and match for the Mancunians.

Although, there’s one other aspect worth your consideration and that’s a cities international appeal.

So called international cities usually enjoy stronger and more diverse economies than other places. This makes them more resilient and robust over the long term.

An international standpoint

Whilst I’ve never met anybody who hasn’t heard of London, name another UK city and I’m pretty confident I can think of a time when I met somebody who hadn’t heard of it.

And it matters, because foreigners want to invest in places they’ve heard of.

And foreign money helps to drive prices up. Perhaps, not so good, if you haven’t yet bought a house, but good with bells on if you are looking for capital gains and any serious property investor should be.

So is it only London or are there some other internationally recognised cities out there?

Perhaps, the best source we have is Knight Frank, the largest privately-owned property consultancy in the world.

Their Global Residential Cities Index is the goto guide for global property. It looks at 150 cities internationally.

The latest edition includes five in the UK and these are:

• Birmingham
• Manchester
• Glasgow
• Edinburgh
• London

And it’s not so much of a surprise really, when you consider which UK cities attract the most tourism. Here’s the top five cities ranked by international visits according to Statista

• London
• Edinburgh
• Manchester
• Birmingham
• Liverpool

Liverpool replaces Glasgow, but other than that, they are the same.

And this theme is continued when we consider the view from international professionals. Here’s their top five (according to the British Council).

• London
• Edinburgh
• Manchester
• Bristol
• Birmingham

If we ignore those cities that only appear on one list (Bristol, Liverpool and Glasgow) we are left with these four.

• London
• Edinburgh
• Manchester
• Birmingham

The Winner

So in summary. If you are looking for the best places to buy property in the UK, it couldn’t be simpler.

Go North if you want yield. And go North if you want capital gains.

And if you want to narrow it down to a city, Manchester looks like the most promising and perhaps Edinburgh is an outsider.

How we analysed the data from CBRE

Here’s an optional section if you are interested where we explain how we analysed the CBRE data.

We looked at the top 5 cities in each sector. Scored them for their rank and then totalled up the numbers at the end. The lower the score the better the future prospects for that particular city.

If a city that ranks in one sector didn’t appear in the top 5 of another it automatically ranks 6. If a city didn’t appear in the top 5 in any sector it doesn’t feature at all.

As an example, Manchester ranked first in six categories. Second in another. Third twice. Fifth twice and didn’t appear in the ranking for hotels so got a six there.

That score was calculated as follows:

6 x 1 = 6
1 x 2 = 2
2 x 3 = 6
2 x 5 = 10
1 x 6 = 6
Total = 30

Future demand / Sector	Office	Retail	Leisure Food & Bev	Urban Logistics	Self Storage	Life Sciences	Student Housing	Multi-Family Housing	Single Family Housing	Affordable Housing	Senior Living	Hotels	Total Score
Manchester	1	3	5	1	1	3	1	1	1	5	2	6	30
Bristol	2	2	2	2	2	6	4	2	3	1	3	6	35
Birmingham	3	1	6	5	3	5	6	4	2	4	6	2	47
Brighton	6	6	3	6	6	6	6	3	4	3	1	6	56
Edinburgh	4	5	6	6	6	4	3	6	6	6	4	6	62
Bournemouth	6	6	4	6	6	6	6	6	6	6	6	1	65
Southampton	6	6	6	6	6	6	6	6	6	2	6	3	65
Nottingham	6	6	6	6	4	6	2	6	6	6	6	6	66
Glasgow	5	6	6	6	5	6	5	6	6	6	6	4	67
Belfast	6	6	1	6	6	6	6	6	6	6	6	6	67
Oxford	6	6	6	6	6	1	6	6	6	6	6	6	67
Cambridge	6	6	6	6	6	2	6	6	6	6	5	6	67
Sheffield	6	6	6	3	6	6	6	6	5	6	6	6	68
Reading	6	6	6	4	6	6	6	5	6	6	6	6	69
Leeds	6	4	6	6	6	6	6	6	6	6	6	6	70
Aberdean	6	6	6	6	6	6	6	6	6	6	6	5	71