How to choose the best location for property investment?
When investing in property, analysing whether a location is an investment hotspot or somewhere you should avoid is vital. We explain how to choose the best location for property investment with these five key indicators.
Property investment can deliver a regular income and long-term growth – even during a recession and uncertain times. So, as more people look to invest in property, one of the most critical questions is: How to choose the best location for property investment?
Location is essential when looking for property investment in a prime market for future growth. Therefore, it is critical to understand the fundamental indicators that suggest a property market will increase in rental and capital values.
What factors determine whether a property market location is a good investment?
Good locations for property investment opportunities that result in strong growth and the best rental yields in the UK all have these five factors in common:
- Affordability ratio
- Population growth
- Business activity
- Wage inflation
Understanding how to analyse a location for these five factors will help you identify the best location for your property investment.
The first thing you should look at is the affordability ratio for the location you are looking to buy a property in.
The affordability ratio is a simple calculation that acts as an indicator of whether housing is affordable for people living there.
Housing affordability is calculated by dividing average house prices by average annual earnings for a specific location.
Housing affordability ratio = average house prices / average annual earnings.
For example, let’s say the average price of a property in a location you were looking to invest in was £150,000, and the average salary was £25,000
The affordability ratio= 150,000/25,000 = 6
Therefore the affordability ratio would be six.
The affordability ratio for housing allows us to see whether a particular property market is either overheating or undervalued.
Regeneration is another critical fundamental that suggests an increased demand for property in a particular area in the future. Infrastructure drives property prices, so the most successful and experienced investors follow infrastructure trends.
Regeneration will either provide social, economic or environmental benefits. Some examples are:
- Transport links such as a new train station or airport.
- Education in the way of new schools or universities.
- Environmental factors such as the government’s decision to create a new park.
- New commercial properties and business hubs.
The most crucial regeneration factor from a property investment perspective is commercial property.
If you can identify areas where additional office space is being added, this will lead to an increase in business activity, job opportunities and overall demand for property.
“Cranes dominating the skyline should be a welcome sign for property investors”. Sam Barrett, AHR Global Property Director
Let’s look at the most densely populated areas in developed countries. It is no coincidence that these areas generally command the highest property prices.
- London – Affordability ratio 10
- New York – Affordability ratio 11
- Paris – Affordability ratio 19
- Tokyo – Affordability ratio 13
We can see the affordability ratios of these cities all exceed ten times earnings. That doesn’t mean that there aren’t areas within them that are good for investment.
However, there are other locations with more affordable housing and better fundamentals, which will produce a greater return on investment.
One of the factors you need to consider when choosing the best location to invest in is the area’s population growth:
- Booming population: Increase in property market growth and valuation, the higher the return due to demand.
- Declining population: You may struggle to sell or rent your property, and the value may drop as there is less demand.
What property investors are constantly trying to identify is whether the population in a particular area will increase, which will lead to a higher demand for property and, consequently, higher rental and capital values.
To achieve a premium rent and higher asking prices for your property investments, you need to find locations with an undersupply of properties compared to the demand from potential tenants and buyers.
An increase in population can also affect the other key factors determining if a location is a good investment. For instance, population growth can result in new infrastructure and regeneration – which contributes to increasing the value of your investment.
A population can grow for many reasons, and not all of them translate to higher property prices.
However, suppose you can identify that the population has grown in line with business activity. In that case, you have a realistic potential for organic capital appreciation – a rise in an investment’s market price.
People move to areas where there are job opportunities. Therefore, identifying a significant increase in business activity within a particular location will lead to a rise in population as workers move for work, which leads to an increase in wages.
To identify this, you can research the area you are thinking of buying a property by looking at the historical trends for unemployment rates.
This will highlight if the location has consistent job growth and stability – an excellent indicator for housing demand – compared to a more unstable location.
Wage inflation is a key metric that can allow you to predict whether a property market will see future growth.
Wage inflation means people are earning more in real terms. Therefore, if wage inflation outpaces normal inflation, consumer spending will increase, and potential tenants and home buyers will have more disposable income.
This leads to rental and capital appreciation – this is what we would consider organic capital growth.
Talk to a property investment specialist
We have explained how important location is when considering a property investment and how to choose the best location for property your investment.
If you are new to investing in property or wanting to expand your portfolio, why don’t you book a complimentary call with an AHR property investment specialist or download our free Investing in property guide?