Micro-apartments – the new trend in buy-to-let investment

Could smaller properties be the key to profitable inner-city property portfolios?

Generation rent looks set to underpin buy-to-let investment in the UK for decades to come. According to a survey carried out earlier this year, most don’t plan to buy. Almost half wouldn’t pay more than 30% of their monthly income on housing costs. So where is generation rent choosing to live, and why? And which types of property are most in demand? And how much rent are they paying?

The answers to these questions could give property investors the knowledge they need to buy the best property in the best places to invest in property UK.

Tenants are choosing lifestyle locations over size

Residents are increasingly seeking properties near where they work or study. They don’t want the frustration of hours spent in traffic doing the daily commute. We’ve seen this trend developing over the last few years.

A new trend is emerging, however. It appears that tenants are increasingly happy to sacrifice size for location. Almost half the properties being let in prime central London over the last year are studios or one-bedroom apartments, according to London Central Portfolio. Transport links and lifestyle are being prioritised over property size, as well as affordability. Welcome to the age of property investment into ‘micro-apartments’ – well-optimised space at an affordable rent.

Greater certainty of rental income

LCP’s report also suggests that property investment into micro-apartments could secure tenants faster, and with much lower discounts to advertised rents. The average discount to advertised rent on two-bedroom homes in prime central London is 7.8%. It rises to more than 11% for properties with four or more bedrooms. Meanwhile, studio and one-bedroom apartment rents are discounted by an average of 5.2% and 6.2% respectively.

And when it comes to void periods, micro-apartments are in such high demand from singles and couples that their void periods are half of those for larger properties. Lower rental discounts, higher demand, and shorter void periods are all positives for your cash flow from property investment.

What rent can you expect from a micro-apartment?

Research shows that price point also plays a part in demand for micro-apartments. More than two-thirds of this type of property are rented below £750 per week in prime central London, with 37% rented under £500 per week.

Rental increase data gives a big clue as to which properties are in most demand, too. New build or newly refurbished micro-apartments are posting the best rental increases. Over the last year, the average rental increase for a one-bedroom apartment in prime central London is 6.9%. Older, less well-equipped properties have seen rents fall by 1.9%.

The market is building to the demand for micro-apartments

According to research by consumer group Which?, 8,000 new micro-homes were built in 2016. Analysis of Land Registry data shows that this is the highest number on record, and has been prompted by the Permitted Development Rights (PDR) introduced by the government in 2013. These rights allow disused office space and other buildings to be converted to residential without planning permission. The resulting smaller homes are well located, with a great use of internal space, and constructed using the best materials.

Where can you invest in micro-apartments?

The demand for micro-apartments is not limited to prime central London. Property investors are buying and letting these properties in large numbers in all the major towns and cities across the UK – urban locations such as Liverpool, Manchester, Birmingham, Cambridge, Leicester and Bristol. Towns and cities that benefit from strong local economies and exceptional higher and further education facilities.

Demand in these locations is supported by the need for businesses to hire well educated, young professionals, and the need of these professionals and students to live close to work or university.

Is it easy to finance the purchase of a micro apartment?

In its report, Which? says that two mortgage providers (Nationwide and RBS) are hesitant to lend on micro-apartments. We haven’t found that property investors are unable to get a buy-to-let mortgage for such a property investment. It may be because we advise investors to do exactly what Which? says they should: use a good buy-to-let mortgage broker to source the best deal.

All things being equal, obtaining a mortgage for investment into a micro-apartment shouldn’t be any more difficult than obtaining financing for other types of buy-to-let property.

What features should you look for in a micro-apartment?

Micro-apartments are cheaper to buy than larger properties in the same location. They are in demand from singles and couples. But it’s important to buy the right property in the right location. A poorly refurbished or older property in an inner-city location won’t attract the best tenants or the numbers of tenants to support higher rents.

Here’s a brief recap of the features you should look for when investing in a micro-apartment:

  • New build or newly refurbished
  • In a great location, near to transport and lifestyle amenities
  • Well-appointed and imaginative use of space internally
  • Modern appliances
  • Ideal for singles and couples
  • In prime central London, a rental value under £750 per week will attract the highest demand

In conclusion

Tenants want affordable rents, in a location that suits their lifestyle. Young professionals are making up an increasingly large part of the rental market. These singles and couples want to live near good transport links and within touching distance of bars, restaurants, and other leisure amenities. They are happy to sacrifice space for lifestyle living. For long-term property investment and great rental potential, new build micro-apartments in the best locations tick all these boxes.

To discover which are the best places to invest in London and other regions of the UK, contact one of the Gladfish team today on +44 207 923 6100.

Live with passion,

Brett Alegre-Wood

Brett Alegre-Wood
August 28, 2017

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