In fact, the ripple effect is responsible for many areas, particularly around London, going up in price.
But did you know that there are ways to work this phenomenon to your advantage? One of them is using my very own called Ripple Effect Pentagon.
The term 'ripple effect' refers to a wave of rising house prices from a central point of high activity. These areas have the best property investment fundamentals, which keep demand, and prices, high and they ripple out from there.
Obviously, not everyone can afford to buy in these 'best' areas. Research by the National Housing Federation released in February showed that Londoners would need a 266% pay rise to afford to buy a property in the capital.
Moving out along the 'ripple' to where you can afford.
As a result, many investors and homebuyers look to further out to buy. An example is that London Zone 1 and 2 have the best fundamentals, that's obvious, they are the most expensive and closest to central, including all the transport, schools, everything. Once demand and prices get too high in these areas, then people buy in London Zone 3,4 and 5, and then commuter towns and finally to Major cities with universities and Major towns. This is the ripple effect in a nutshell.
The ripple effect pentagon can be a useful tool in deciding where to place your money, and we recommend these five areas as they offer everything that you need in order to maximize your returns so you can build the portfolio that you want.
So why have we chosen these areas?
We focus on major towns with a population over 100,000 as we are looking for vibrant communities where rentals are easy to achieve and there's access to good fundamentals.
We focus on Major cities with universities, as universities and their students are great from an investor point of view as they tend to take out a lot of the lower end stock, which helps drive demand on the higher end. This is exactly where you want to be as an investor. If you are investing in specialist assets to let particularly to students, it's particularly important to have a well planned property investment strategy and that you've done your research before investing to ensure you build your portfolio in the most efficient and safe way possible.
We focus on Commuter towns which are also great for property investment as they see high demand from City workers and other commuting professionals who can’t afford to buy in London. We focus on areas that are 90 minutes away from London or less.
Why we stay clear of smaller towns and cities.
We avoid smaller areas due to the higher risk of something happening that can affect house and rental prices. For example, a small town may lose a major employer or floods could affect the area.
Hotspots are 3 to 5 years into the future... Not Todays hotspots.
We always think ahead by investing in an area three to five years before it becomes a property hotspot. This is because we want to be able to ride that wave before it’s too late. This is where the ripple effect pentagon is a great tool to have handy.
For example, if prices in London Zone 1 and 2 have shot up by 200% in recent time, it’s unlikely that this level of growth will continue for the next few years when you are looking to get returns off your investment. In this case, it would be advisable to instead put your money into a development in the next affordable area with the best property investment fundamentals where prices haven’t gone up too much but are likely to increase in the near future.
Even if you can’t afford an area today, there’s nothing to say you won’t in the future. Buying in a commuter town or a major town with a university can generate enough money for you to eventually be able to afford a property in London Zone 3, 4 and 5 or London Zone 1 and 2.
It’s important to be flexible as an investor unless you want to create an individual plan and strategy and focus on one or two areas. Even then, it’s important to understand the ripple effect and have a strategy that meets the current market.
Once you’ve decided, based on the ripple effect and with the help of the pentagon, what type of community to buy in, it’s time to narrow it down further by taking a look at specific areas and developers by getting a hold of the Area Investment Guides that apply to that specific town or city.
Questions? The team is ready and waiting to give you help where you need it. Give our Property Consultants a call on +44 (0)207 923 6100.