Is it better to buy property in the city centre or the suburbs? To some extent the answer probably depends on who's asking, but unless you're a large institutional investor looking to deploy £30 million or more in a single transaction the answer is almost certainly the suburbs.
I recently wrote about the problems associated with buying leasehold property and it is certainly harder to find freehold property in built up urban areas near the CBD. But there are many other reasons why investing in houses in the suburbs can be a superior investment strategy compared to investing in city centre apartments.
1. Competition: First and foremost is competition. In Manchester city centre for example, you are competing with some of the country's largest and most sophisticated institutional investors.
Pension giant Legal & General owns two of the towers at Manchester's Deansgate Square development comprising over 600 rental apartments. With that kind of scale, the service offering, on site amenities and operational efficiency mean that it is going to be extremely hard for a small investor to compete.
In addition, the cost basis for institutional investors buying 200+ unit buildings is going to be significantly lower on a per unit basis than for an investor buying one or two apartments. In a distressed market the institutional investor can discount their rent to a much greater degree in order to maintain occupancy levels whilst still achieving a reasonable yield. In addition, their enormous marketing budget is divided amongst hundreds of apartments - the small investor simply can't compete.
In the suburbs, you are almost exclusively competing with individual landlords who may own only a single property or possibly a small portfolio. Most of these properties are managed by letting agents who are not especially incentivised to provide a quality service or respond promptly to maintenance requests.
Retired pensioners owning one or two properties may not have the resources necessary to continually invest in their properties and make them appealing to the average renter. A quick look through suburban rental listings online will reveal that a large number of these properties look at best a little dated and in need of refurbishment, and at worst, downright unpleasant. Making your property the most appealing on the street is therefore a relatively straightforward task by investing only a small amount of money and thinking carefully about design choices for things like paint, flooring and bathroom tile.
2. A shortage of new supply: There is very limited new development of houses in well connected, well located suburbs close to transport links and popular amenities. Due to the lower density of housing developments and the fact that the supply of land is fixed, the possibilities to significantly increase supply are very limited.
City centres on the other hand have plenty of brownfield sites where even a small plot is ripe for a fifty story tower with hundreds of new apartments. This imbalance between supply and demand in the suburbs is likely to lead to higher rent growth in the future. Moreover, in the market for city centre apartments there's nearly always something newer and shinier coming down the track. The new build premium you pay for your brand new apartment is going to disappear pretty quickly when an identical tower goes up next door a couple of years later (and it might even block your lovely views).
3. Tenure: Average tenure affects investment returns because the longer a tenant stays put, the smaller your vacancy and the lower your annual costs for re-leasing the property. Tenants typically stay for longer in houses where they have more space and a garden in which to make themselves at home, especially if they have a family and children in a local school.
4. Affordability: A nice two bedroom apartment in Manchester city centre could easily set you back £1,300 - 1,500 per month in rent. With median earnings in the UK of £31,772 in 2021 that would equate to over 56% of a single earner's salary being paid on rent. In the suburbs a two bedroom house might rent for £800 equating to only 30% of a single earner's salary.
Clearly at the more expensive end of the market in city centre apartments the depth of available renters is going to be significantly smaller compared to your average two bedroom house a little further out. The prospects for rental growth are also lower when you are already pushing up against affordability constraints for a large number of renters.
5. Schools & families: The population of Manchester is growing rapidly as new university students come to study in the city by the tens of thousands each year. With a retention rate among graduates of over 50% (Centre for Cities) there is plenty of demand for city centre apartments.
Whilst graduates might rent a city centre apartment for a few years in their twenties, eventually they are likely to have families (and pets!) requiring additional living space, larger properties, gardens and proximity to good schools. As things stand it is difficult to find all of this within close proximity to the urban centre. Increasingly, these urban apartment dwellers will look to the suburbs where they can get much more for their money and a significant proportion of them may choose to continue to rent.
Properties in well located, suburban sub-markets with good transport links and local amenities will remain a strong investment proposition for a long time to come.
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