Why These 5 UK Markets Are Tops for Residential Investment

Over the past decade, the rapid rise of the build-to-rent (BTR) sector in the UK has captured the interest of institutional as well as individual investors seeking ownership positions in commercial real estate beyond the traditional office, industrial or retail sectors. With the BTR asset class essentially in its infancy in the UK, many are looking for guidance about where to find the best opportunities.

Walter Boettcher, head of research and economics, and Oliver Kolodseike, director and head of economic research, both at Colliers, told LoopNet they often found themselves approached by clients that wanted a simple answer to the question: where should I invest in residential properties outside London?

To find out, the two researchers measured the strength of UK cities across 25 indicators that are grouped into five “pillars”, examining metrics relating to economics, research and development, liveability, property type and the environment. These assessments helped them determine the best UK cities in which to purchase residential property. The results were published in their report Top UK Residential Investment Cities, released for the third year in a row by Colliers.

The Colliers economic pillar focus on indicators such as GDP, earnings and income equality while R&D measures components like student enrolment and business start-ups. The liveability and cultural pillar indicators relate to broadband and cultural facilities, and the property category examines house price growth and share of renters, among other metrics. The environmental category (included for the first time in this year’s report) assesses elements like energy performance certificate ratings (EPC) in buildings and recycling rates in communities. The full study provides greater detail about these categories as well as the methodology used to generate findings, which one can learn more about at the end of this article.

The bi-annual Colliers report generates a list of 20 cities, but just the top five are profiled in this public report.

As of mid-year 2022, the top five UK markets for residential investment are:

1. Edinburgh, Scotland
2. Cambridge, England
3. London, England
4. Belfast, Northern Ireland
5. Manchester, England

Some of the other cities that emerged beyond the top five include York, Leeds, Reading and Birmingham but also smaller areas like Slough and Luton, all in England. Boettcher noted that for him, this report aids in his mission to get people to look beyond London. He often likes to encourage global investment audiences to look beyond gateway cities and consider adding value and building scale in smaller emerging markets, rather than simply battling to extract value in highly competitive established markets like London.

While the rankings can be used to inform residential investment of all types – from single-family properties to commercial buildings with 500 flats – the rapid growth of the BTR movement in the UK inspired this residential-focused study.

Boettcher said that BTR as an investment class in the UK has been emerging since about 2012 when demand for flats skyrocketed as international students began to study in London. “We had a huge number of Far East investors that were sending their children to school over here that suddenly needed flats to live in,” Boettcher said. There was a big shortage of houses, specifically one- and two-bedroom apartments.

Kolodseike added that the BTR segment has grown tremendously over the past eight years. “In 2015 the money that investors put into the sector was less than £1 billion and it's gone up to around £5 or £6 billion per annum now, so there's massive growth in the sector.”

He added that while interest in BTR motivated the study, interest in senior family housing is now picking up as well, with a lot of demand from both corporate and individual investors.

The two researchers behind the report spoke with LoopNet about their assessments and why these specific markets have emerged as top residential investment locales.

1. Edinburgh, Scotland
The Scottish capital retains its top spot from the previous list, ranking in the top three in eight of the 25 indicators. Edinburgh ranks top for its highly educated population (i.e., 69% of the population aged 16 to 64 are qualified educationally to at least Level 4 or higher) and a high share of properties (62%) that feature an EPC rating of C and above. The city ranks second across the attractions, house price growth and Google Mobility indicators and performs well for life satisfaction and population growth.

“The only issue with Edinburgh, similar to London, is affordability and income inequality, but you see the same in every city that's a financial centre,” Boettcher said. He explained that in markets with financial centres you often have a very small proportion of very high earners, but there is also a large proportion of low earners, which means that the income inequality can be quite large. “And because house prices have risen quite drastically as well, it's not very affordable,” he said.

2. Cambridge, England
Cambridge remains in second place and leads the rankings in four of the 25 analysed indicators. Unemployment is low at less than 3%, and the city benefits from its prestigious university and highly skilled workforce with 63% of the population aged 16 to 64 qualified to at least Level 4 or higher. Access to leisure facilities and attractions, as well as favourable employment and earnings prospects, are also strong attributes, with only employees in London and Reading enjoying a higher median income. Cambridge is top for life satisfaction, scores well for recycling rates and good for EPC ratings.

Boettcher said that many students that attend the University often stay in town after graduation. “There are other cities where people go to study, but they don’t stay on there the way they do in Cambridge,” he said. That is changing, though. Several UK cities such as Belfast are working to ensure that their universities produce students that satisfy local business needs, as well as the needs of international businesses seeking to locate in the UK.

3. London, England
London remained in third place in the ranking for the first half of 2022, coming out on top in five of the 25 indicators analysed – more than any other city. The UK’s capital improved with regards to unemployment forecasts, earnings and broadband connectivity. It continued to benefit from its large working-age and student population, a great number of high-quality universities, a staggering number (roughly 12,000) of net new businesses in 2020 and a strong economic forecast to grow at roughly 2.4% per annum between 2022 and 2026 (as of mid-year 2022).

London also benefits from large areas (8.4%) covered in woodland compared to the 20-city average of 7%. Also, London counts an above average uptake of electric vehicles, with the number of charging devices per 100 electric vehicles at 28.8, second only to Liverpool at 29.4.

4. Belfast, Northern Ireland
Belfast continued its upwards trajectory, moving from seventh place in the first half of 2021 to fourth in the second half of 2022. Northern Ireland’s capital tops the residential property pillar and ranks third in the liveability pillar, scoring particularly well for its broadband connectivity, high share of renters, rental yields and affordability. The city also benefited from positive economic and unemployment forecasts. Belfast’s GDP is expected to grow at an annual rate of 2.0%, while its unemployment rate is forecast to average 3.2% between 2022 and 2026.

Belfast emerged as “the biggest surprise”, in the rankings, said Boettcher. The city ranked seventh or eighth in 2021 but moved up to the top five. Boettcher noted that if you compare Belfast to London across the 25 attributes measured in this study “they emerge as polar opposites in terms of strengths”.

“The low house prices, the low cost of living, the excellent education; all those things are a bit more problematic in a well-developed centre like London, where the wages are high, but so is the cost of living and all the rest of it,” Boettcher said. He added that Belfast has “become a conurbation for some tech industries, particularly global cyber security”.

5. Manchester, England
Manchester moved from sixth to fifth place, and the area has strengths in each of the five pillars. Manchester’s economy grew at an average annual rate of 5.1% between 2015 and 2019, far higher than any other city analysed in this study. It is predicted to grow at 2.1% per annum between 2022 and 2026. Positive population growth, many students and a high density of schools and leisure facilities are all positive attributes. Strong house price growth and the second-best score for electric vehicles (which covers uptake and charging points) all helped Manchester to break into the top five.

Manchester also posted very strong growth across high-paying sectors. The compound annual growth rate for the information and communications sector grew at 19% between 2015 and 2019, and the financial and insurance sector grew at 8.3% over the same period.

A description of the methodology can be found in the report, but several factors merit mention.

The model is dynamic. This residentially focused study weighs all five pillars equally, “which means 20% for each pillar, and then within each pillar, every indicator is also weighted equally”, Kolodseike said.

However, this is just one report that can be generated from the model that was designed to be modified for clients and interested parties. “It's fairly easy for us to actually weigh [the indicators] according to [a client’s] needs,” Kolodseike said. So, if there's an investor who is more interested in the economics than the property component, for example, they can take out indicators entirely or apply weights differently for a custom ranking.

Top cities for residential investment are generated for this accessible publication but the model enables Colliers to focus on other asset classes and/or change the weighting of the pillars, resulting in completely different city rankings.

Normalising for market size. Other attributes of the model keep very large cities like London from emerging at the top of rankings simply because of their size.

“Often when people create rankings and they look at different indicators, they look at them in absolute terms, which means in absolute terms, London has the highest GDP, highest population, highest number of schools and universities, highest number of attractions, highest everything,” Kolodseike said.

To adjust for what Kolodseike called “distortions”, they look at some of the indicators in per capita terms. “We know there are plenty of schools in London, but what does it mean per a hundred thousand people,” Kolodseike posited. Another example relates to GDP, where they look at GDP growth rates rather than the size of the economy. “Otherwise, you just rank cities pretty much by their size and that's not really the point of the study,” Kolodseike said.

Environmental focus. A characteristic that is just now beginning to appear in assessments like these relates to climate and the natural environment. “It was actually the first time that we included the environmental pillar, just because there's such a growing importance of ESG in everything,” Kolodseike said.

This pillar examines EPC ratings of the local building stock, CO2 emissions per capita, percent of the area covered by woods, recycling rates, and EV uptake and charging points by looking at the share of licensed plug-in vehicles and the number of charging devices per 1,000 electric vehicles. “Everyone's aware of it and few others have done it and we thought, it's definitely time to start doing this,” Kolodseike said.