What is Capital Growth & Why is it Important?
In addition to rental yields, capital appreciation is the primary means by which property investors can generate returns on their investments.
This article examines the most important aspects of capital growth in order 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 to find good capital growth property investments on the UK real estate market.
WHAT IS CAPITAL GROWTH?
Capital growth is the profit made on a property investment, which is the increase in the property’s market value from its purchase price. In other words, the difference between the purchase price and the property’s potential resale price.
Often referred to as capital appreciation, a property investment will typically increase in value over time. Before selling a property, capital-gains-focused investors typically employ a longer-term buy-and-hold strategy to maximise their profits.
However, this is not the only alternative. Investors in property can also profit from rental income. By renting out a property, investors can generate a steady stream of income from tenant rent. This strategy is known as yield-focused investing and typically requires more frequent property management.
WHAT IS THE DEFINITION OF RENTAL YIELD?
In light of the fact that many investors would buy a home and rent it out as its value appreciates, rental yield is another key consideration when evaluating a buy-to-let property investment.
Rental yield is the annual income earned from a rental property. It is essential to differentiate between gross and net rental yield when evaluating the profitability of an investment.
The net rental yield percentage is determined by deducting expenses from annual rental income, dividing by the entire cost of the property, and then multiplying the result by 100.
The computation of net yield involves a few additional steps, so to make things a bit simpler, here is a breakdown:
- Compute all expenses and costs related to property ownership.
- Compute the annual rental income you can expect from the property.
- Subtract the total costs from the annual rent.
- Divide the number by the property’s value.
- Increase the result by one hundred.
Investors place a premium on obtaining favourable rental yields when acquiring rental properties. Any property investment should ideally be sustainable. Landlords should ensure that a rental property can meet expenses such as:
Mortgage payments, rental income tax, property maintenance, and other expenses related to property ownership.
When you account for these costs, you can calculate a realistic rental yield and assess if the property is a viable investment for you as a real estate investor.
IS CAPITAL APPRECIATION MORE CRUCIAL THAN RENTAL YIELD?
No two investors in real estate are alike, and each seeks something unique from their investment. According to the majority of property investors, both capital appreciation and rental yield are essential. Before purchasing an investment property, it is crucial for the majority of buyers to evaluate both aspects.
Neither goal is infeasible, but obtaining both requires far more research and planning prior to investment. Also, having a diverse portfolio of properties and employing a variety of investing strategies may assist mitigate any possible losses in the event of unforeseen market fluctuations.
Knowing the capital appreciation potential of a property might help you determine how long you intend to keep it before selling. For some investors, a lump sum return may fit into their retirement or savings goals, whereas rental returns may be crucial for those seeking a passive monthly income.
With careful planning and research, you may make an informed decision regarding your investment and the potential financial rewards it may yield.
HOW TO LOCATE STRONG CAPITAL GROWTH?
Many considerations should be made early on in the process of acquiring an investment property in order to optimise the possibility for capital appreciation.
Location
Location is one of the most important factors for real estate investors and will have a significant impact on the capital appreciation you may realise. To determine a property’s value, investors should examine local property prices and compare it to similar properties in the region to see which attributes can increase its value. Researching the historical and present performance of properties in the neighbourhood might provide insight into how a particular property may perform.
Increasing Population
The value of real estate tends to rise in areas with an increasing population. When the population grows, the demand for property increases and the number of available properties decreases, causing rental and property prices to rise. Look for places and cities where the population is projected to grow in the next few years if you’re interested in capital growth.
Amenities
There is a greater possibility that your property’s value will increase if it is located in an area with excellent schools, stores, restaurants, and transportation links. If you plan to rent out the property in the interim, the area’s facilities will also make it desirable to renters.
Property Type
Since the epidemic, spacious gardens and additional rooms that can be transformed into a home office are in hot demand. Buyers are reevaluating the property’s quality of life. Now, people seek specific characteristics that can improve their quality of life.
Off-Plan Real Estate
Buying a home prior to its completion can be one of the best methods to increase your capital appreciation prospects. When it comes to buying off-plan properties, investors can often find favourable deals. Typically below the market pricing, occasionally securing a 20–50% reduction. Several developers will be willing to reduce a property’s price. Especially in the beginning of a project or when they need to sell units to finance the next phase of a property development.
The sole disadvantage of off-plan investing is that the investor must wait until the property is built to earn a profit, but adopting a long-term view of returns can be advantageous.
WHICH REGIONS OF THE UNITED KINGDOM HAVE THE STRONGEST PROJECTED CAPITAL GROWTH?
Leeds
Leeds is one of the most in-demand real estate markets in the UK. According to Zoopla’s UK House Price Index Report, Leeds homeowners made a profit of £11,500 in 2021 as a result of rising home prices. The average cost of a home in Leeds is currently £187,500. In 2022, house prices are projected to continue to rise at a faster-than-average rate, having increased from £176,056 in 2020.
Sky Gardens is one of the top investment properties available on the Leeds real estate market. The 32-story luxury tower is located within the city’s £350 million Southbank Project. This location is ideal for capitalising on Leeds’ remarkable growth and allure.
Liverpool
In the future years, it is anticipated that Liverpool will also enjoy significant expansion in its real estate market. According to Savills, the average home price will likely increase by a staggering 28.8% by 2025! This is double that of London and the highest in the United Kingdom.
Now, units in the city centre’s Alexandra Tower are 10% below market value. Investors have the potential to generate instant rental revenue from a property that is completed and tenant-ready! In addition, take advantage of the substantial capital gains you may realise in the coming years.
Manchester
Manchester, in the north, offers significant opportunities for capital gains. Currently, the average house price in Manchester is £230,000. About £13,000 has been added to the average price of a home in the last year alone.
As a result of population growth, the population of the city centre should top 100,000 by 2025. Which means adding 5,000 individuals annually. Manchester home prices are projected to increase by approximately 18%. In other words, investors can anticipate good capital growth on their property if they purchase it in the suitable property and city neighbourhood.
Due to demand, Bridgewater Wharf’s proximity to the city centre and waterfront location will result in 6% NET project returns.
When it comes to what constitutes “excellent” capital growth, the standards will vary. Specifically suited to each individual investor’s objectives. In general, places undergoing reconstruction and experiencing population growth are associated with rising home values. Investors can maximise returns by concentrating on homes with desirable characteristics. As well as outdoor space and additional bedrooms, going off-plan could result in substantial monetary gains.
FAQs – Capital Growth
What Is A Healthy Capital Growth Rate?
The rate of capital growth will largely depend on the asset type and market circumstances. A strong capital growth rate on the British real estate market should yield a return of approximately 4%. Any growth rate that exceeds 4% is already outstanding.
How Can You Identify A Suburb With Rapid Growth?
Gentrification, continuous regeneration, a growing population, and housing demand exceeding supply all point to the same conclusion. That a suburb’s capital growth prospects are favourable. A few indicators should be considered by investors. Such as recent property price increase, the current worth of neighbouring properties in the neighbourhood, and property price growth forecasts.
