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Is Edinburgh still a good choice for your BTL Investment?

Posted by Barry Burton on November 29, 2018
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I speak to property investors from all over the UK and beyond and there are several questions that always come up:

 

  • Should I Airbnb my flat in Edinburgh?
  • Where should I buy a property in Edinburgh?
  • Can you get decent yields still in Edinburgh?
  • Is Buy to Let still a good investment with the LBBT changes and Section 24.

 

The first question has been answered in a previous post; however, things are moving quickly in this world and I plan to update it/respond to the change of atmosphere in recent weeks, in a new post in the coming weeks. Basically the answer is “it depends; if it is in a tenement block, then No. If it is main door, I am happy to have a look at it and discuss the best course of action for it”.

 

The second question is going to form the backbone of a series of shorter blog articles where we examine area against area, property type against property type. We will look at real-life, live properties and look at yield, refurb costs and pit them against different options. I aim to cover at least one a week of these until early spring.

 

The next two questions I intend to answer in this article.  I will be using statistical data, drawn the CityLets Quarterly report, Issue 47 (Q3 2018) and the most recent statistical data from The Registers of Scotland alongside personal knowledge and experience gained from over 4 years of business as a letting agent in Edinburgh.

 

I first wish to examine the data contained in the City Lets report and look at Scotland as a whole; I will then dig down into details about Edinburgh and compare the data to that of Glasgow (Edinburgh’s closest property rival in Scotland). The last question will only have an implied answer, as I recognise that every investor has different personal circumstances; will be offered different mortgage products and will be affected by S24 in different ways – depending on Income Tax rates and whether purchasing within Limited Company or personally. I always recommend you speak to a qualified tax or financial advisor about your own personal circumstances – any information contained below will only be generic in nature and not tailored to your individual position.

Scotland’s Performance

Beds Average rent Rent Change 1 year Rent Change 5 years Rent change 10 years Average time to let % let within a week
1 £581 2.7% 14.8% 18.6% 29 23%
2 £743 1.8% 15.4% 19.1% 31 18%
3 £973 2.3% 15.8% 16.1% 34 16%
4 £1408 5.5% 15.0% 18.9% 34 15%
Total £789 2.2% 14.8% 19.0% 31 19%

Let’s dig in to the above table a little bit.

So, 4 bedroom homes have seen the biggest rent rise in the year, but over 5 and 10 years, the average rent growth is very similar across the spectrum. My own hypothesis about the rise in rent for 4 bedroom homes is twofold.

  1. Fewer families are able to buy properties hence more are renting for longer, increasing demand for family-suitable housing
  2. The introduction of the PRT and recent tax changes, has encouraged landlords – particularly those who were used to the 10 month student let, 2 month festival let model, try their hand at letting their property out as Short Term Rental (sometime with up to 16 beds) full time. This in turn has restricted supply of traditional student HMOs leading to lower supply of suitable properties.

These figures are for the whole of Scotland and on average, there have been healthy, though not spectacular rent rises. Using the City Lets Rental Index, which puts Q1 in 2008 at 100, by Q3 2018, the current rental index is 122.3. Again, this shows solid growth within the Scottish Private Rental Sector (PRS).

Lastly, using the table above, you can see that 1 bedroom flats rent the quickest (average 29 days) but the 3 and 4 beds that are the slowest to let are not far behind with a Scotland average of 34 days to let.

 

Edinburgh – In Focus

 

Beds Average Rent Rent Change 1 year Rent Change 5 years Rent Change 10 years Average Time to Let Let within a week
1 £780 4.4% 38.3% 43.4% 17 35%
2 £1033 6.8% 37.5% 47.2% 21 25%
3 £1394 5.4% 32.4% 41.7% 29 20%
4 £2003 10.8% 36.1% 53% 29 21%
Total £1107 5.6% 35.00% 45.3% 21 28%

 

I am not a statistician but anyone can clearly see that Edinburgh’s figures are leaps ahead of the Scotland’s Averages in all areas.

Rents are rising faster – over 1 year, 5 years and 10 years – for all property types; Properties take less time to rent – on average 33% quicker and rents are clearly higher too.

Yes, I hear you scream – of course rents are higher; it is the capital city and property costs a fortune to buy. I will come on to that – don’t worry.

So, as far as rent figures go – if you purchase a property in Edinburgh for your Buy to Let portfolio, you will benefit from rents that, on average (over 1, 5 and 10 years) beat the rest of Scotland – this has the effect of increasing your money in your pocket as your mortgage – since the credit crunch has been historically low and stayed low – yet, rents have risen, on average in Edinburgh 45% over that time. So, if you had bought a property (let’s say outright) you could be receiving 45% more rent than you were in 2008. This more than offsets the negative effects of Section 24. Will these rent rises continue and will Rent Pressure Zones be introduced – both of these are purely speculation and not something I have time to write about today.

 

I know many Glasgow property professionals (letting agents, investors, sourcers etc) and they will always argue that Glasgow is a better place to invest for BTL investors due to low entry points and high yields. Therefore, does Glasgow make a better place for investors or not?

When I look at a property investment, I always look at two things – cash flow and potential for appreciation and capital growth. Yes, cash flow is king but true wealth is created through the appreciation of assets. However, future price forecasts are mere speculation so I will keep my finding grounded purely with statistics from the documents quoted above.

Caveat Emptor – Past performance is no guarantee for future growth.

 

Glasgow – In focus

 

Beds Average rent Rent change 1 year Rent change 5 years Rent change 10 years Average time to let % let within a week
1 £596 4.2% 24.7% 27.6% 22 31%
2 £798 4.5% 28.7% 33,7% 24 25%
3 £1132 5.9% 33.2% 37.4% 31 16%
4 £1633 17.1% 28.1% 46.7% 30 14%
totals £785 4.9% 27.0% 32.4% 24 26%

 

Looking purely at the figures above, Edinburgh beats Glasgow. Rents are higher, rents are rising more quickly, (over 1, 5 and 10 years) and properties let more quickly.

 

Fewer voids lead to greater returns, an increasing rental amount per year helps offset increasing costs and this pattern is repeated across the board. On average, Edinburgh’s rents have increased by 45% over 10 years, whereas Glasgow’s rents have increased (well above the Scotland average) at 32.4%.

 

Statistics have shown that Edinburgh property is outperforming Scotland and Glasgow on all of the indicators above. However, it is important also to look at cash flow, yield and return on investment too.

So, if we are looking purely at Gross Yields (as shown in the CityLets report) let’s look at the highest yielding Postcode zones for both Edinburgh and Glasgow (I am aware that there will be higher yields available both in Glasgow and Edinburgh); however, I am using the report which collates information across the nation and dispels areas with not enough results.

Further, from an agent and investor standpoint, some of the areas of potential highest gross yield do not and have not performed as well for investors due to a number of factors, including long voids, bad paying tenants and damage to property.

So, according to the above City Lets Report, EH8 has the highest average yield in Edinburgh for flats. In 2017, this yield was 6.8 %. That is a healthy yield. When this is leveraged through a mortgage (personal financial/tax circumstances aside), this becomes a very healthy return on capital employed. Even if you leave the money in. Surely much better than 0.2% you can find in your average High Street Bank. So, EH8 – where is that? It is a large area that covers Eastern parts of Old Town and down towards Willowbrae and heads up Pleasance towards Newington.

So, what is Glasgow like in comparison? In the report, postcodes beginning G5 show the highest yield of 7.2%. G5 is generally seen as the Gorbals. I am not an expert in Glasgow property, but I do know that considerable regeneration has been happening over many years and will not deny that the Gorbals represents good value for money and offers a good return on your money.

So, both Edinburgh’s and Glasgow’s best performing postcodes are similar (6.8% vs 7.2%).

I would love to drill down further and look at yields for one, two, three, four beds and also individual postcodes across both cities. However, that would constitute a larger undertaking than I have time for just now.

What I will do is, using the Registers of Scotland Information (as detailed above) is give an overview of house prices within the two cities.

When looking at investment, it is important to examine both trends and movement over time, although I will remind you that past performance should not be seen as a guarantee of future performance.

 

Using the data from the Registers of Scotland, and using the Tab entitled ‘Average Prices’, I can extrapolate the following chart.

City Ave Price 2004 Ave Price 2008 Ave Price 2018 2004 -2008

£ Growth

2008-2018

£ Growth

2004 –2018

£ Growth

Edinburgh 141,280 201,021 266,646 59,741 65,625 125,366
Glasgow 93,349 135,115 165,922 41,766 30,807 72,573

 

These figures are useful for total overall returns but, due to different starting prices, are not very helpful for the investor. We need to dig deeper to find out the % return on the average property.

To find percentage growth, we subtract the difference between two figures and divide by the original figure.

 

Doing so, create the following chart:

City 2004-2008 % Growth 2008-2018 % Growth 2004– 2018 % Growth Total Appreciation Annual Appreciation 2004-2018 Monthly Appreciation
Edinburgh 42.3% 32% 88% £125,366 £8,954 £746
Glasgow 44% 22% 77.7% £72,573 £5183 £431

 

Okay, with similar yields (see above), and similar appreciation (Edinburgh still edges appreciation), we can conclude that both Edinburgh and Glasgow have provided landlords with an excellent investment.

I have long held that buying quality, desirable properties in good locations holds the key to long term wealth; with a decent yield, decent appreciation and fewer voids, Edinburgh’s buy to let still offers an excellent proposition for investors with funds to invest.

I also am a great advocate of the saying, “You make money on property on the purchase”. Currently, neither city offers many opportunities for Below Market Value deals. However, it is by being active in property, knowing your market, understanding tenants and being able to move quickly, you are most likely to pick these up.

That said, property has and always will be a long term game and you should be prepared to hold on to your property for 5-10 years at the absolute minimum. If you mortgage your property, you will gain extra Return on Capital employed through leverage (Individual circumstances should be taken into account).

Edinburgh’s rental market at the moment is very buoyant and, with Brexit coming in a few months, I do expect a slowing and some turbulence (one reason why I am not suggesting Buy to Sell as a current strategy) in the markets but, as a long term bet on the future is true – they aren’t creating any more land and, if I can make a political side swipe, the Governments and Councils are not building enough homes.

If you would like further information on the Edinburgh market, my views on a potential property that you are buying or disagree with my article, please comment below or get in touch either by sending me a message, email or picking up the phone.

 

 

 

 

 

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