A guest post by Rob Dix on Property Hotspots
We talked about investment hotspots on a recent episode of The Property Podcast, and depending on which newspaper you read you might have seen areas as diverse as Bristol, Canary Wharf, Market Harborough and Montenegro being over the last few months.
A “hotspot” is really just marketing spin, but it’s supposed to imply a rapid, short-term increase in prices.
Which sounds great, right? I’ll turn later to why being blinded by hotspot hype is dangerous, but let’s put scepticism aside for a moment and explore what makes an area “hot”.
So how do you spot a hotspot?
Well, open up any newspaper on almost any day of the week. But when people start predicting rapid growth for an area, it’s often for one of these reasons:
If a significant amount of public or private money is being ploughed into an area, you might have a hotspot on your hands.
Marketing brochures sometimes talk about “regeneration” if there’s a new supermarket opening on the High Street, but for a hotspot we’re looking for real investment.
One example is the Liverpool Waters project, with its £5.5bn investment in regenerating 60 acres of derelict dockland.
A note of caution, though: by the time you’ve heard about the forthcoming investment, so has everyone else. That means any uplift in prices might have already been “priced in”.
New transport links
If new transport links make an area better connected or easier to commute from, it could become a hotspot as more people want to move in.
Two big planned transport projects, HS2 and Crossrail, will make it faster to get into central London from points along the route. Some of those areas could take on hotspot status.
Governments can make areas more “investable” at a national level if they change the taxes around property purchasing and ownership, such as stamp duty.
At a more local level, investment in a city by the EU or the national government could spur others to pile in and see prices rise.
“Tastemaker” companies moving in
Big companies spend millions deciding where to open new shops, so piggybacking on their research might not be a bad idea. Whole Foods, for example, is known for buying in early to areas that they think are on their way to gentrification. Waitrose is another indicator, according to Savills.
The shop in itself isn’t the reason for prices to increase, but their confidence is an indicator that good things might be about to happen.
Chase a hotspot, and you might get burned
It can be hard to disentangle genuine signs of growth from marketing spin – and in reality, by the time a hot new area is being touted by the media it’s probably too late.
(In fact, if I’m investigating a particular investment then I happen to read about it in a newspaper, I tend to assume that the ship has sailed and lose interest in it.)
As an example, I bought a flat in King’s Cross in 2005. At the time, the area was a total hole – nothing but fried chicken shops and pubs you really wouldn’t want to go into.
Eight years later, Google and the Guardian have moved there, gastropubs and trendy shops are opening up, and it’s being talked of as the next hotspot. But the prices have already gone up – if you’re reading about it in the media now, you’ve missed the boat.
In reality, hotspots are about short-term price jumps – which are nice, but as investors we should really be looking for steady long-term income and growth.
What indicates steady long-term demand?
To get that steady long-term capital and rental appreciation, you need strong fundamentals: the factors that will keep an area in demand over the next 20+ years.
So what are those fundamentals?
Good transport links
If it’s not a major town or city itself, does it have good links to places lots of people will want to go for work, leisure and shopping?
Even within London, Nationwide reported that properties within 250m of a tube station were worth 7.2% more than those 1500m away. The higher prices don’t mean anything in themselves, but suggest that long-term rental demand will be strong too.
Good employment levels
High levels of employment suggest that the area will be in demand from local employees for a long time to come.
Ideally it’s good to see a mix of employment from different sectors, so if one industry (or even one big local employer) deteriorates, there are others to pick up the slack.
Good mix of local shops
Not every area can have the biggest shops (which is one of the reasons why transport links are so important), but does the area have the basics that residents need day-to-day? If not, the appeal of an area seems unlikely to last for the long term.
Good local schools
Good schools almost always mean strong tenant demand – and better yet, tenants with children in school are likely to stay for longer than unattached professionals.
As another indicator, a Zoopla report found that properties in the catchment area of the top 100 state secondary schools were worth 25% more than the regional average.
Focus on fundamentals – and if it’s “hot”, that’s a bonus
No-one would say no to some rapid short-term growth, but investing purely because an area is “hot” isn’t really investing at all – it’s a gamble.
If an area exhibits signs of being a hotspot, but the yields still meet your criteria and the fundamentals are solid, there’s no reason not to invest. Just see any short-term gains as a bonus, and make sure you’ve got a steady long-term bet on your hands.
The fundamentals seem obvious, but use them as a reality check: if ever you’re in danger of being sucked in by marketing spin, check that it ticks the basic boxes above all.