One of the main concerns for any landlords is capital growth. The windfall property owners receive through rising house prices is the bedrock of property investment, and the savvy investor will only purchase properties which are likely to rise in value.
The current state of the UK property market illustrates the profit that is on offer. The latest figures from Zoopla show that the average property price grew by 6.1% in August to an all-time high of £235,000. This growth is also twice as fast as that seen at the same time last year.
Furthermore, the Office for National Statistics has stated that annual house price growth is running at 8%, despite the ongoing tapering of Stamp Duty relief, and new data from Hampton’s suggests that we can expect more growth of 3.5% a year up to at least 2024. As always, it is likely that many parts of the country, such as the North West, will see much higher growth than this.
With all of the above in mind, this is clearly a good time to invest in UK property – but what is the best type of property for capital growth?
The most basic advice for any investor is to put your money where people are going. Increasingly, that means you should be looking at city centre apartments for a number of reasons.
The first and most important is that big city centres are where businesses and the best employment opportunities are. High quality jobs are a big draw, and so people are moving to city centres more than ever before.
City centres are also the beneficiaries of a huge amount of neighbourhood and infrastructure investments which make the areas a more pleasant, more convenient place to live. New trains and trams, improved cycle routes, new green spaces, new innovation districts and much more give city centres a lifestyle that nowhere else can match – and one which is especially attractive to the type of young professional renters who are willing and able to rent out the luxury apartments which are so profitable for investors.
Because of their location, and the consequent popularity, the demand for city centre apartments grows every year, and a growing demand means more competition. In turn, this means that house prices go up, leading to increased capital gains. Combined with that is the fact that no city centre in the UK has enough homes to satisfy the aforementioned demand.
As a country we are not building anywhere near enough homes, and that state of affairs is magnified in city centre markets. There is no sign of this situation being resolved, meaning that the capital gains on offer with this property type will continue to increase in the coming years.
Benefits of buying off-plan property
Buying property off-plan – before construction is complete – is one of the best ways to secure high capital gains. This type of property can be purchased at a below-market rate and its value will begin increasing immediately, and will continue to do so over the whole construction process if you have chosen the right location.
For this reason, buying off-plan is a good option for investors who are focussed on capital gains. By the time the building is finished, it is quite possible that you will have already accrued tends of thousands of pounds in additional value which you can cash in on immediately through a sale.
Additionally, the lower entry prices associated with buying property off-plan mean that you may be able to enter a market which might normally be out of your price bracket. For instance, the aforementioned city centre markets are the most in demand, and so entry prices tend to be higher – but by investing off-plan you can buy here and get an edge over investors who are only interested in completed property.
Finally, purchasing off-plan often means that you can pay in instalments over the course of the build rather than being liable for the entire lump sum in one go. This has the benefit of protecting you from a certain level of risk by spreading your liability out over a longer period in a way that does not affect your purchase.
Capital gains tax and selling your property
One thing to bear in mind if you are planning to invest and make the most of growing house prices is that you will be liable for Capital Gains Tax (CGT) when you sell your property.
This is a tax that is payable when you sell an asset that has increased in value since you originally bought it. The tax varies depending on a few factors including the size of the profit and your income, and it will be levied on the size of the gain rather than the total sale price.
You will have to pay this tax when selling any property that is not your main home, so it is worth bearing in mind when building your portfolio. For more information on Capital gains Tax, please see the UK government website by clicking here, and if you are unsure then make sure to speak to an independent financial advisor before investing.
…but don’t forget rental growth
However, even though you will pay an extra tax on the profits of any sales you make, investing in property does not just have one income stream. The second, rental income, is just as important and complements capital growth perfectly.
Your rental yield is your annual rental income described as a percentage of the purchase price of the property. It is a reliable, steady stream of income that provides a passive return that you will receive regularly as opposed to capital gains which you can only access when you sell your property.
How do you work out your rental yield? Try using our property yield calculator >>
In many cases, it is often the case that properties with a high rental yield are not the same ones as those which also have high potential for capital appreciation. Many of the most in-demand rental properties are in established areas where house prices are stable, or not rising as quickly as the fastest-growing areas.
However, it is possible to have the best of both worlds. By investing in regional property hotspots such as Manchester or Preston, you can tap into booming rental markets which are also seeing above average house price growth. If you can find the right city centre, off-plan apartment in a place like that, you will be able to secure a great rental yield on top of impressive capital growth in the future.
As research noted recently by Alliance City Living, demand across Manchester for rental properties was higher in Q2 2021 than ever before following the initial easing of pandemic restrictions. With a supply crisis on the horizon, competition and rents are likely to continue increasing – further establishing Manchester as a city where you can get the best of rental income and capital appreciation.
For more information about investing in the North West, contact our team today and learn more about our outstanding opportunities >>
