5 Reasons to Invest in Tier 2 Cities

What are the Property Market Tiers?

At CityRise, we loosely categorise UK towns and cities into three Tier’s, namely Tier 1, Tier 2, and Tier 3. These tiers reflect a locations economic development and the strength of their property market.

Each market tier has defining characteristics:

• Tier 1 towns and cities are the largest and most developed in the UK. They have strong economies, good infrastructure and lots of opportunities for its residents. They also have the most expensive property markets in the country. Places falling under the tier 1 category would be London, Manchester and Birmingham to name a few.

• Tier 2 towns and cities are those that are in the process of developing. In a nutshell they are areas of the country that are up and coming but still have ample room for growth. Some have begun to attract higher calibre of businesses and their economies are improving. The property markets of these are usually inexpensive. Examples of cities falling under the tier 2 category would be Hull, Wakefield and Derby.

• Tier 3 towns and cities are the least developed in the UK. They are usually categorised by the weakest economies, the lowest salaries and severe lack of good employers in the area. Property prices are very low but benefit from very little capital growth. Places falling under the tier 3 category would be Middlesborough, Sunderland, St Helens and Hartlepool.

Affordability

Of the five reasons to invest in tier 2 towns and cities affordability is arguably the most obvious. There are a couple reasons for why affordability is important. Firstly, property prices in tier 2 locations are affordable for the many. Traditionally, investing in property has been seen as a wealthy person’s game, but this is not entirely true. Although the average person cannot invest in London, they probably could in cities such as Hull and Wakefield. For instance, the average property price in Hull is only £155,000 and in Wakefield £173,000.

Secondly, with lower house prices, not only will you see strong returns but will be less exposed financially, reducing the risk of loss. For example, if a property bought in London for £700,000 lost 5% of its value, the buyer would make a loss of £35,000, something we saw during coronavirus. A 5% loss on a £150,000 property bought in Hull would be a more reasonable £7500.

Strong

Rental Yields

With low property prices but relatively strong rental markets, tier 2 towns and cities benefit from attractive rental yields. Whereas in London you can expect on average gross yield of only 3.6%, property in tier 2 areas you can expect over 8% gross yields. Even in cities such as Manchester and Birmingham, rental yields are only around 5%.

A strong rental yield is good for cash flow and ensures the property is unlikely to become a financial burden after all costs involved with owning it. Investment property in tier 1 locations will provide investors with very little if no passive income after all costs. This means that should a large, unexpected bill arrive you will almost certainly be paying with your own money. Property in tier 2 locations will invariably provide you with an attractive passive income and ensure the property always remains profitable.

Furthermore, rental yields are far easier to determine than capital growth. A good investment should take both into consideration, but the rental yield can be decided with a higher degree of certainty. If you can achieve a good rental yield and have the added bonus of attractive capital growth, then you have a very good investment property. If you purchase an investment property with a good rental yield that does not achieve strong capital growth it can still represent a good investment. Essentially, investing in tier 2 property can be a safer bet offering more certain returns.

Attractive for

Businesses

Tier 2 cities have, in the past, been categorised as areas with low employment and struggling economies. However, in recent times, commercial rents and business rates have increased and space in major UK cities has decreased. This has led to some of the UK’s largest employers move some or all of their commercial space to more affordable tier 2 cities. There are two key reasons for this shift: cost and Location.

Tier 2 towns and cities are primarily located in the Midlands and the north of England. Despite not having the same level of economic development as many southern towns and cities, they are often strategically located and benefit from good transport systems. Large companies prefer to place distribution centres in central UK locations where they can access all parts of the country with ease. Furthermore, there are tier 2 towns and cities such as Rotherham and Wakefield that are within 15 minutes of major cities and are excellently connected into them.

Furthermore, with enormous investment in the Northern Powerhouse many tier 2 cities are improving at a rate of knots unseen in other UK locations. With businesses relocating in search of savings, their economies are improving quickly. This coupled with the low property prices means that tier 2 areas have solid foundations for excellent future growth.

Surprisingly High

Capital Growth

One of the most prominent reasons many investors choose not to invest in tier 2 towns and cities is that they do not believe in the capital growth there. Although tier 1 cities have seen extraordinary growth over the last decade this does not mean that tier 2 cities have seen no growth.

In fact, even cities such as Hull and Wakefield have enjoyed growth of approximately 10% in 2021 alone. Over the last decade property prices have increased around 34% whereas property in Manchester has increased 43%. Of course, that is an extra 9% growth. However, when you take into consideration the lower rental yields in these tier 1 cities, the difference in return is not as large as you might first think.

As mentioned previously, the foundations of a good investment should be a good yield. Capital growth is an attractive bonus. Tier 2 towns and cities are well-placed to give you both.

Government Backed

Regeneration

It is no secret that tier 2 locations are less developed than their tier 1 counterparts. However, there has been a push in recent years to level out the playing field in many areas of the country through strategic regeneration. There as been large scale public and private investments in many tier 2 towns and cities.

A great example of a once down-trodden city coming to life through huge public and private investment is Hull. Together with Siemens, the UK government has pushed to make it the country’s main hub of renewable energy. The Siemens new turbine blade factory is one of the largest of its kind Europe and will help the UK achieve its goal of net zero carbon. Marc Becker CEO of the Siemens Gamesa Offshore Business Unit said:

“Since our offshore blade factory opened in Hull in 2016, Siemens Gamesa has proudly served as the catalyst for the powerful growth the area has seen. The rapid development of the offshore wind industry – and continued, strong, long-term support provided by the UK government for offshore wind – has enabled us to power ahead with confidence when making these plans. We’re committed to unlocking the potential of wind energy around the globe, with solutions from Hull playing a vital role,”

It is because of these government back initiatives that tier 2 cities can thrive. Their property markets are undoubtedly some of the best in the country and with so much room left to grow you can be confident in your investment.