Investing in rural residential property – part two

By Ben Gosling of Commercial Trust

In the first instalment of our article on rural residential property investment, we focussed on the social benefits and drawbacks. In this second part, we come to the nitty-gritty of the matter – the bottom line.

The economics of rural property investment

Due to constraints of space and land in rural areas, rural property is less vulnerable to the vagaries of market forces. (In layman’s terms: because there’s less of it, there’s more demand for it.) This was evidenced during the recession, when rural property experienced both a less severe drop in value and a quicker recovery.

In a report released last October, Halifax cited the ‘rural premium’ (popularly known as the ‘River Cottage effect’) as pushing the cost of idyllic rural properties far beyond that of urban properties [1]. However, the same report noted that rural prices had underperformed urban prices since 2009, with the average price of a rural home rising by only 2% in those four years compared to 10% in urban areas.

This could be due to the rising cost of petrol and public transport, and also to the economic pick-up creating more employment opportunities in the cities. For now, rural property remains stronger than urban property in all but a few regions – but of course, this is just looking at the wider picture.

A closer look

Properties in the country tend to be larger than urban properties, and have more land. Comparing average property prices in predominantly built-up settlements to predominantly rural settlements is bound to show a discrepancy. It is more logical to compare properties like-for-like.

A quick trip to the Homes 24 property portal allowed me to compare the average asking price in two postcodes: NR1 (the centre of Norwich, East Anglia’s largest city); and IP25 (the heart of Breckland, one of the least densely populated districts in the United Kingdom).

Four-bedroom properties were, on average, 8.4% more expensive in the rural postcode. One-, two- and three- bedroom properties, however, were all cheaper, with two-bedroomers – the mainstay of the buy to let investor – costing 19.8% less outside of the city.

Rental returns

To the buy to let investor, yields are a more important consideration than up-front cost.

In August 2013, Home.co.uk and Move with Us compared average asking prices and average asking rents for two-bedroom properties, and compiled a list of gross rental yields for every postal district in England and Wales[2].

Their research showed that urban areas tend to attract the highest yields for this property type, with more isolated areas trailing far behind. Locations such as the Peak District and Yorkshire Dales only saw returns of around 2% for the average two-bedroom property.

Rural areas tend to attract more homeowners than renters. This, coupled with the income pressures of country life highlighted earlier in the article, will restrict the rent that you can charge for rural properties.

This said, the age of the average renter is climbing, and there does seem to be a growing demographic of older renters who are starting, or already have, a family. These tenants are seeking larger homes that are close to good schools and transport links, but not necessarily close to the hubbub of urban or suburban life.

In short, the question ‘should you invest in rural property?’ does not merit a simple yes/no answer. The standard buy to let rules apply – if you do your homework, research the area, plan your budget and target the right market, then you can make the investment work for you.

Sources
[1] Source: Lloyds banking group Rural homes are more expensive than urban homes in all regions 2013

[2] home.co.uk Rental Yield Heat-Map 2013

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