What is Good Capital Growth?
Alongside rental yields, capital growth is the main way that property investors can make returns on their investment.
In this article, we take a look at the most important aspects of capital growth to understand how to maximise investment opportunities, what to look for when considering a capital growth-led investment, the difference between rental yield and capital growth and where you can find good capital growth property investments in the UK property market.
What is Capital Growth?
Capital growth is the profit made on a property investment, i.e. the increase in its market value from the cost that was paid for the property. In other words, the difference between the purchase price and what the property could be sold for at a later date.
Also known as capital appreciation, usually, a property investment will increase in value over time. Capital-gains-focused investors tend to have a longer-term buy-and-hold strategy to maximise the amount of profit they make before selling their property.
However, that’s not the only option. Property investors can also make a profit through rental income. By renting out a property, investors can generate a steady income stream from the rent paid by tenants. This type of strategy is called yield-focused investing and usually requires more frequent management of the property.
What is Rental Yield?
Considering that many investors will purchase a property and rent it out while it appreciates in value, rental yield is another important factor when considering a buy-to-let-property investment.
Rental yield is the income you earn on a property on an annual basis. It’s important to distinguish between gross and net rental yield to assess the viability of an investment.
Net rental yield is calculated by subtracting expenses from the annual rental income, then dividing by the total cost of the property before multiplying the result by 100 to get the net rental yield percentage.
The net yield calculation does involve a few extra steps so to make it a bit easier here’s the breakdown:
- Tally up all the costs and expenditures associated with owning the property.
- Sum up the yearly rental income you will receive from the property.
- Deduct the total expenses from the annual rent.
- Divide the number by the value of the property.
- Multiply the result by 100.
When buying a rental property, getting good rental yields is of paramount importance to investors. Ideally, any property investment should be sustainable. Landlords should ensure that a property can pay for itself to cover expenses like:
- mortgage repayments,
- rental income tax,
- property maintenance
- and other costs associated with owning a property.
When you do take these expenses into account, you can establish a realistic rental yield and determine if the property is a viable investment for you as a property investor.
Is Good Capital Growth More Important than Rental Yield?
No two property investors are alike and each is looking for something different from their investment. Most property investors state that both capital growth and rental yield are important. And taking both into consideration before purchasing an investment property is essential for most.
Of course, achieving both is not impossible, but it does require far more research and preparation before investing. Additionally, having a mix of properties and using different investment strategies might help balance out any potential losses in the case of any unexpected changes in the market.
Understanding the capital growth prospects of a property can give you an idea of how long you might plan to hold onto a property before selling it. For some investors, getting a lump sum return may fall into their plans for retirement or savings, while rental yields may be important for those looking to gain monthly passive income (find more details on where to invest money to get monthly income in this post).
With careful planning and research, you can make an informed decision about your investment and the type of financial returns you might get from it.
How to Find Good Capital Growth
Early in your process of finding an investment property, there are several things you should keep in mind that can help you to maximise capital growth potential.
Location is one of the prime considerations for property investors and will have a huge impact on the capital growth you may achieve. Investors should look at property prices within the local area to see a property’s value and compare it to others close by to see what features can maximise its value. Be sure to research the past and current performance of properties in the area which can give you insight into how a property might perform.
Real estate tends to appreciate in value where there is a growing population. As the population rises, demand for property increases and available properties become scarcer, pushing up both rental and property prices. For good capital growth, look for areas and cities where the population is set to increase in the coming years.
Areas with good transport links, shops and restaurants and supermarkets as well as good schools increase the likelihood that your property will see positive capital growth. Good amenities will also make the area attractive to rental tenants if you plan to rent it out in the meantime.
Since the pandemic, houses with large gardens and extra rooms that can be converted into an at-home office are in high demand. Buyers are reconsidering the quality of life a property offers. Now, they’re looking for specific features that can increase their quality of life.
Purchasing an off-plan property can be one of the best ways to boost your capital growth prospects. When it comes to off-plan, investors can often secure a good deal on a property. Usually under the market rate, sometimes securing a discount of between 20 – 50%. Many developers will be willing to drop the price of a property. Particularly at the start of a development or when they need to sell units to fund the next phase of the property development.
The only downside to off-plan is that the investor will need to wait until the property is completed in order to make money from the property, but taking a long-term view of returns can be lucrative.
Which areas of the UK Have the Strongest Capital Growth Projections?
Leeds is one of the UK’s most in-demand property markets. According to Zoopla’s UK House Price Index Report, in 2021, homeowners in Leeds earned £11,500 in profit thanks to rising house prices. The average price of a house in Leeds now stands at £187,500. Up from £176,056 in 2020 and house prices are expected to continue to rise at an above-average rate in 2022.
Sky Gardens is one of the best investment properties on the market in Leeds. The 32-story luxury skyscraper is set in the heart of the city’s £350m Southbank Project. This is a perfect location to capitalise on Leeds’ phenomenal growth and appeal.
Liverpool is another city tipped to experience good capital growth in the coming years. According to Savills, the average house price will probably rise by an astronomical 28.8% by 2025! Which is the highest in the UK and double that of London.
Units in Alexandra Tower in the city centre are currently available at 10% below market rate. Completed and tenant ready, investors have the opportunity to make immediate rental income! Not to mention, take advantage of the strong capital gains that you could make in years to come.
The Northern city of Manchester offers attractive capital gains prospects. The average property price in Manchester currently sits at £231,000. In the last year alone, the average price of a property increased by over £13,000.
A growing population means that the city centre population should surpass 100,000 by 2025. Which means adding 5,000 people per year. House prices in Manchester are expected to grow by around 18%. Meaning in the right property and area of the city, investors can expect good capital growth on their property.
Bridgewater Wharf is close to the city centre and with a waterfront location and due to demand is set to benefit From 6% NET project returns.
When it comes to good capital growth, the benchmarks for what is considered “good” will vary. Namely according to each individuals property investor and their aims. Generally speaking, areas undergoing regeneration with growing populations tend to indicate rising house prices. Investors can maximise their returns by focusing on properties with in-demand features. Like outside space and extra bedrooms, and by going off-plan there are potentially huge capital gains you could make.
What is a good capital growth rate?
Capital growth rate will largely depend on the type of asset and the market conditions. In the UK property market a good capital growth rate should give a return of around 4%. Anything that surpasses 4% is already an exceptional growth rate.
How do you identify a high growth suburb?
Gentrification, ongoing regeneration, a growing population and demand for housing outpacing supply all indicate one thing. That a suburb could offer good capital growth projections. Investors should look at a few telling signs. Such as property price growth in recent times, the current value of other properties in the local area as well as property price growth projections.
If you’d like more info on this topic, head over to our “5 Ways To Spot Up-And-Coming Areas” article to learn more.