In the world of buy-to-let property investment there are some cities which have become consistent hotspots, drawing investors due to their strong economic performances, high yields, and unfailing supply/demand imbalances. These traditional investment hotspots, such as London, have ranked as top cities for global investors for years. However, political change brings uncertainty and Brexit has investors and companies looking at new and less traditional markets for their future potential.
Throughout my career working in international property investment, the UK market has always made a lot of sense for buy-to-let investments. While the market is still strong and can offer investors high yields, especially in the north, Brexit has been casting uncertainty on the industry. With negotiations being extended, it’s expected that companies with UK offices will discuss contingency plans and investors will be more open to exploring new markets.
These uncertainties and their effect on the UK property market were discussed in-depth at the annual MIPIM conference in Cannes this March. Both CBRE and London First spoke at the popular ‘Brexit: a new face for Europe’ seminar which touched on the topic of contingency plans and the fact that companies need the ability to attract and retain employees - something that can prove difficult in times of ambiguity. In order to do this both start-ups and established companies are looking at shifting their centers of operation to new markets in cities in mainland Europe and beyond where they can enjoy lower overheads, can be assured of the political climate, and can offer their employees all the advantages of living in a global city.
One new market that could benefit from these contingency plans in Lisbon, Portugal which has a vibrant economy and has been voted one of the safest countries in the world. There is a huge demand for housing for the middle class, both domestic and foreign, which was highlighted by Hugo Santos Ferreira (APPII) during MIPIM. This is a good problem to have from an investor perspective as it indicates a lack of supply of housing. In any market the study of the supply and demand imbalance is key. As an investor, I also find it very important to ensure that there’s demand from the domestic market in the long term as these are the people that a buy-to-let property will eventually be let to, especially when engaged in a long-term tenancy agreement.
Some of the other factors that we always consider before entering a new market are accessible to transportation and infrastructure. According to Brookfield Property Group, the commute between work and home shouldn’t be more than 20-30 minutes, which corresponds with our own advocacy of the concept of live-work-play. A buy-to-let investment property should offer tenants the ease of having short commutes to reach workplaces or services.
The availability and affordability of buy-to-let financing is also an extremely important component that we need to take into consideration before we enter a new market. Our database of investors is global and it’s often the case that our investors are purchasing a property that they will never visit, buying solely for investment purposes, either on the hunt for rental yields or a capital growth play. Unfortunately, when buy-to-let financing is unavailable for foreign investors or when financing is so expensive that it eats up all your rental income without offering high enough capital growth to make up for potential negatives in monthly cash flow, we can’t justify the market as a good investment location even if other variables are on point.
Another factor that needs careful consideration pertains to interest rates and potential rate rises as these will negatively impact investors' net monthly returns. We offset the risk of rate rises by identifying those markets that exhibit very strong yield returns, leaving our purchasers with an immediate positive net monthly cash flow and a buffer to weather changes in the economic market. In seeking these cities that offer very strong yield returns, we have focused our search on US markets, where several factors have led to the evolution of the property sector.
While at MIPIM, Cushman Wakefield participated in a panel discussion entitled ‘How shifting trends and new technologies are impacting the US property sector’ where job growth was presented as a key indicator of the potential of a property market. Brookfield Property Group also pointed to three trends which are signs of this potential: population growth, the rise of millennials, and growth of innovation and technology.
As IP Global is currently looking for a strong return in the US, we have been looking at these trends closely, in order to find locations that can offer growth potential for investors. We are also following advice given by Hines at MIPIM on ‘The rise of the rest’. This concept focuses on the expansion of cities and redefining core cities where we expect to see a growing population of millennials. With this in mind, IP Global is targeting US cities with young populations and industries, such as Minneapolis and Atlanta, the latter of which has been voted the most likely location for Amazon’s HQ2.
Any time that there are uncertainties in traditional property markets investors will look to new markets in order to find areas of opportunity. Due to the nature of Brexit and the questions that it has created, contingency plans are being made and new markets are being looked at for their investment potential. As a company, IP Global is keenly aware of this change in the directive and has continued to broaden our investment perspective accordingly.
By looking to new markets we can offer investors new opportunities, as they broaden their horizons past traditional hot-spots to cities that can offer them great future potential. After all, isn’t that the best possible outcome of any contingency plan?
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