Secondary market offers good returns
Look beyond ‘Glasburgh’ for rental yield
It would seem that investment in a London portfolio is an end in itself, rather than a means to an end; as if there is a certain abstract cache about owning property in the ‘financial capital of the world’ even though superior overall returns, on a pro rata basis, could be achieved in Bristol, Manchester, Leeds and other major provincial cities.
Bemused Scots agents and brokers might call this phenomenon ‘reversed provincialism’ yet the irony is that Scottish residential investors can take a similarly myopic view of their own patch with minds concentrated on Glasgow and Edinburgh.
The attraction of the two main cities is understandable. Edinburgh’s traditional rental investment stock, in particular, has an enviable record of being almost immune to any of the price falls common in other parts of the kingdom. Glasgow, for its part, is underpinned by its position as an ‘alternative’ capital – e.g. as home to national broadcasting and most national newspapers, the two major football clubs, and the entertainment industry.
However, when it comes to rental yield (which with subdued capital growth is the greater for investing in residential property at present), buyers may find that the Scottish ‘secondary’ markets offer superior returns to the two main cities.
Take, for example, a one-bedroom flat at £155,000 in fashionable Stockbridge, Edinburgh, and a two-bedroom flat in equally fashionable Hyndland, in the West End of Glasgow, at £180,000. If occupied continuously, the annual rental yield from the two properties would be in the region 4.64% and 5.3% respectively – impressive when compared to current returns from bank and building society deposits but not as good as yields that could be achieved from less rated locations outside the two cities.
The Carrick Knowe district of Edinburgh is popular with semi-skilled working-class families and situated just three miles west of cosmopolitan Stockbridge. There, a two-bedroom ‘cottage flat’ (ie. one with its own garden ground) might be acquired for £125,000, leading to a probable annual rental income of £8,400 – a yield of 6.7%.
Move ten miles further west to Livingston (still relatively affluent despite the economic downturn) and a modern two-bedroom flat (not ex-local authority) can be acquired for under £100,000 and potentially produce an annual rental yield of 7.5%.
With a large local employment base (particularly in hi-tech industries) and wide-ranging shopping facilities (the town centre boasts one million square feet of modern retail space) a well maintained flat in a good area of Livingston should have no trouble attracting responsible tenants.
It is even worthwhile keeping an eye on the older established West Lothian towns lying close to Livingston, even though they have not been historically looked upon as ‘private tenant territory’. The restoration (and electrification) of the former Airdrie to Bathgate railway provides these communities with frequent commuter rail services to the centres of both Edinburgh and Glasgow.
With white collar households increasingly having one spouse who works in Edinburgh and the other in Glasgow, the financial savings (and lifestyle benefits) from living in a location that is comfortably commutable to both cities cannot be underestimated.
Hamilton, located just 11 miles south-east of Glasgow, is another ‘provincial’ town where high rental demand combines with relatively low prices to produce the prospect of substantial rental yields. As well as being within easy commuting distance of Glasgow city centre by both rail, bus and motorway, Hamilton itself boasts a number of business and technology parks on its doorstep, all of which contributes to demand for rented property.
A modern, two-bedroom flat in a pleasant part of town marketed at just below £90,000 would, if rented, probably produce an income of £8,400 per annum, a yield of almost 10%.
But caveat emptor, to use a well-used expression within the property sector. Having concentrated on the advantages offered by provincial letting investments it is only fair to highlight a potential disadvantage – the fact that when house prices do eventually start to rise again, Edinburgh and Glasgow properties will almost certainly prove to be the superior investments in terms of the rate of renewed capital growth.
However, while any major recovery in house prices still seems some way off, Scotland’s ‘secondary markets’ offer some interesting prospects for investors who prioritise current yield over projected capital values at an undetermined future date.
David Alexander is proprietor of the Edinburgh and Glasgow-based letting and estate agency D J Alexander