Property investors will have noticed that, for the last few years, the East Midlands has regularly appeared at, or near to the top of UK regional league tables when it comes to vital metrics such as capital growth and rental demand.

One of the nine official English regions, it is composed of Derbyshire, Leicestershire, Lincolnshire, Northamptonshire, Nottinghamshire and Rutland – counties which encompass some extremely robust and fast-growing city economies. As a result of this growth, local populations are expanding in certain districts, employment is rising and – in areas seeing investment in knowledge-driven sectors – average earnings also look set to improve. Moreover, average property values tend to be lower than the UK mean, so yields are often good and rental demand is buoyant.

The region might not make so many memorable headlines as London or Manchester, but it has consistently been a strong performer, delivering steady and positive returns, year after year. Importantly, although it has been generally rewarding, it has been subject to relatively little volatility. Looking back at the last twelve months, the East Midlands market has served landlords well in terms of capital values, absolute rental returns and gross yields.

Residential Property Values

In its February 2022 House Price Index, Halifax ranked the East Midlands fourth in the UK for capital growth, having delivered a very respectable average gain of +11.6% year-on-year.

According to ONS data, published on 23 March, the East Midlands ranked top overall, delivering the country’s strongest growth. The organisation writes:

“The East Midlands was the region with the highest annual house price growth, with average prices increasing by 11.6% in the year to January 2022. This was up from 10.4% in December 2021.”

In its own House Price Index, Nationwide indicates even faster growth of +13.5% over the preceding 12 months. Zoopla puts the figure at close to +10%, while Rightmove indicates an annual change of +13.3%.

The ONS is often regarded as the most accurate barometer of property values, but whether the true figure is closer to +10% or +13.5%, it’s clear that the region has reliably outpaced inflation. In short, investors have seen real-terms gains through capital growth alone. When rental returns are added to that, most investors with property in the region will have enjoyed an excellent year.

That is not to say that the East Midlands has always led the tables; in recent months, Wales and Scotland have produced faster price growth according to most sources, but while these and others have bobbed up and down the rankings, the East Midlands has stayed resolutely towards the top. Over the longer term, the region has done very well.

The Rental Sector: Supply and Demand

Rental demand has tended to be very strong in many parts of the East Midlands. We’ll look at some of the reasons for this later on, focusing on particular cities by way of example. For now, it’s enough to point out that this demand is coinciding with very restricted supply, and that combination typically pushes rental values upward.

In March, PropertyMark published the results of a member survey. It found that across the UK, “the average branch had just five properties available to rent in February… This is a 44 per cent decrease from a four-year average of nine.” Significantly, the organisation noted that stock levels were lowest in the East Midlands and the North West, where members reported the lowest stock, with “an average of two per branch.”

Having just two properties to let per agency constitutes a pretty extreme situation and it undoubtedly makes the East Midlands an investor’s market. Faced with a real scarcity of available homes, prospective tenants will likely compete amongst themselves, leading to higher rental values and shorter void periods. In the same report, PropertyMark states that 74% of agents reported rising rents, most commonly in the East Midlands, London and Wales.

Affordability and Yields

Another of the region’s obvious benefits for investors is that despite strong price growth, average residential property values have remained well below the UK average.

Nationwide, for example, puts the East Midlands average at £227,275, which compares against the UK average of £260,771. Similarly, while Halifax estimates an East Midlands average of £228,289, it calculates a UK mean of £278,123.

Sources generally agree that prices in the region are well below the national norm, so investors’ budgets stretch further and higher yields tend to be correspondingly easier to achieve. LiveYield suggests a gross regional average of +4.2% but within that lies considerable variation, ranging between +3.1% and +5.9%. And, as we’ll explore shortly, even those subregional figures conceal further variation; in some districts in and around of Nottingham, for example, yields can reach nearly +7%.

Affordability and Growth Potential

However, there is another dimension to the question of affordability, which concerns tenants’ ability to pay. This issue has become especially acute as the cost-of-living crisis worsens. With inflation predicted to rise above 8% and with another big energy price hike expected in October, many tenants will struggle to pay their rents in the coming months.

For investors, that presents a significant challenge, but risks will tend to be much less pronounced in markets where tenants’ budgets are less strained. And here is where the East Midlands offers a further advantage.

In late March, the lettings platform Rentd published figures examining tenants’ current average incomes in different regions and how they compared against average rental costs. It notes the rule of thumb that tenants should work to a rental affordability ratio of earning 2.5 times their rent in order to live comfortably. On that basis, only four UK regions currently allow tenants to do that, and one of them is the East Midlands.

Overall, the region comes in second place for rental affordability, with only the North East offering a more affordable ratio of rental costs to average earnings. Whereas tenants in most regions live below this ‘comfort threshold,’ those in the East Midlands have a sizeable income buffer. Here, Rentd calculates that the average tenant has an income +£4,878 above the threshold. For investors, that translates into more capacity for longer-term growth in rental values without incurring a high risk of making tenancies unaffordable.

Living costs are likely to have an ever more significant impact on the property market in the coming year, so it’s important to recognise those markets, like the East Midlands, where market potential will be least constrained by affordability pressures.

Subregional Differences: Nottingham

The East Midlands is home to a number of large and populous cities: Chesterfield, Derby, Leicester, Lincoln, Northampton and, one of the country’s favourite property investment destinations, Nottingham.

We clearly don’t have room to examine all of these markets in a single blog, but it’s worth focusing on Nottingham for a short while for a number of reasons.

First, it’s a popular choice for further education, with two universities and a host of colleges, business schools and technology centres. This inevitably gives rise to a large student body (around 43,000) and a dependable student accommodation market. However, it also means that it’s a major centre for R&D and the creation of high-value start-ups that spin off from its academic institutions. Key growth sectors include advanced manufacturing, financial and business services, digital industries, life sciences and others.

As a result of healthy inward investment, infrastructure improvements and organic growth in the private sector, employment opportunities are booming in the city. In February 2022, the Nottingham Post wrote that “for every unemployed person in Nottingham, there were 13 jobs in 2020 and 14 jobs in 2021.”

Similarly, Invest Nottingham notes that it is “the top city for small business growth, fast growing fintech and life science sectors, and the biggest business centre in the East Midlands.” It adds:

“Over 50 national and regional companies have chosen Nottingham as their headquarters including global giants like Boots, E.ON, Speedo, Experian, Capital One and Paul Smith. Nottingham is embarking on an intense period of economic regeneration, with a £2bn redevelopment of the 'Southside' of the city centre underway… (which) only adds to the £1bn which has already been invested in Nottingham’s infrastructure.”

Nottingham was originally expected to link to the new HS2 network via a new hub at nearby Toton. The government axed the plan in November 2021, but the village is still benefiting from a new main rail network station and substantial highway improvements. Nottinghamshire County Council has spent a reported £22 million to create associated development land for jobs and business growth, and it has approved plans for a £30 million link road.

The remaining plans include a new innovation campus, which is expected to create around 10,000 new jobs. The East Midlands Development Company notes that it is one of three developments that provide:

“a once-in-a-generation opportunity to supercharge (the) economy and create tens of thousands of new jobs. These new plans could create 84,000 jobs and add billions in value to the regional economy… Toton is one of the best-connected places in the UK, equally distant from Derby and Nottingham, on the M1, within a few miles of East Midlands Airport. It is set to have a new mainline station and will connect to the existing networks and HS2 services on the new high-speed lines,”

In economic terms, there is no doubt that Nottingham is recovering well from the pandemic and as job numbers, average earnings and the local population continue to grow, so the conditions for investors are looking increasingly attractive. In March, for example, Hometrack listed Nottingham second only to Liverpool in terms of annual house price growth, having seen an average rise of +9.5% year-on-year.

Subregional Differences: Derby

Though it’s a relatively small city, Derby boasts many of the same attractions as its larger neighbour. Like Nottingham, it can point to a buoyant university sector (with a 34,000-strong student body), continuing growth in high-value industries such as aerospace and automotive engineering, and the potential to benefit economically from better transport connections via nearby Toton.

Moreover, it is attracting considerable inward investment. Marketing Derby writes that:

“Our vibrant economy has been … strengthened by significant public and private investment.

This includes £250 million at Toyota Manufacturing UK, £350 million at Nestlé, £150 million in the Rolls-Royce aerospace campus, and is supplemented by hundreds of individual investments by SMEs.”

In terms of strategic urban regeneration, one of the most notable schemes has been the £100 million mixed-use development at Castleward, which is now in its third phase. It will create new homes, jobs, open green spaces and 3,250 square metres of commercial retail space.

This regeneration project is just part of Derby’s much wider 2030 City Centre Masterplan. It has already attracted millions of pounds of regeneration investment and it includes further plans to develop a £20 million innovation centre led by local universities. By the end of the decade, the Masterplan aims to leverage around £3.5 billion in investment and to create an extra 4,000 new jobs.

An unusually high proportion of Derby’s workforce operate in highly skilled industries. It’s estimated that nearly 40% of workers are employed in professional roles, and a further 12% work in high-tech scientific and digital roles. Consequently, continuing growth in employment bodes well for average disposable incomes and, consequently, for growth in both capital and rental values.

This potential is further emphasised by the fact that Derby is one of the UK’s best locations for affordability. In fact, it is reported to be in the top 5 across the whole of Europe. In April 2022, Property Reporter magazine wrote:

“Renters living in Derby are left with the most disposable income every month of all UK cities. This is predominantly because of the lower rental costs which are nearly five times less than in London - Derby renters pay on average just £762 per month. Additionally, the cost of living is £680 per month, which is nearly £200 less than the capital’s average. Consequently, Derby renters are left with £1,100 more in disposable income.”

Investment Outside the Cities

Many East Midlands cities and towns can boast significant attractions to investors. Here, we have picked Nottingham and Derby as examples, but a strong case could also be made for other thriving centres of commerce and industry, such as Leicester. However, it’s beyond the scope of this article to examine them all in detail. Instead, let’s consider how opportunities differ outside the city centres; in the smaller communities that lie between them.

The agencies responsible for promoting Nottingham and Derby both refer explicitly to the new transport hub and innovation campus at Toton, a small community that lies between the two. The improvements will undoubtedly reduce journey times for commuters from either city. However, they could have a particularly pronounced impact on Toton and its surrounds, turning them into a very attractive new ‘commuter’ district. Not only will residents be able to take advantage of faster connections to Nottingham, Derby, Leicester, Sheffield and Birmingham; the district will also see the creation of a new innovation centre and rapid growth in local job numbers.

For all these reasons – to say nothing of the shortened journey times to London via the HS2 line from Birmingham – the communities around Toton could now be poised to see a surge in demand from both home-buyers and prospective tenants.

Toton, Stapleford and Ilkeston

Given the advent of better connectivity and job-creation at the innovation campus, together with ongoing improvements in the local economy, these three property markets could see some of the fastest growth in the whole of the East Midlands.

Derby is regarded as the country’s most central city, and with excellent rail and motorway connectivity, the Toton area clearly makes an excellent strategic base for businesses and their employees.

Distances from Toton

M1 motorway (J25) 3km

Nottingham 9km

Nottingham Airport 11km

Derby 15km

Leicester 31km

Sheffield 55km

Birmingham 63km

For the time being, however, despite their growth potential, the three districts are characterised by relatively affordable property prices. In Ilkeston, for example (DE7 postcode), average values are well below the UK norm.

Prices and Yields in Ilkeston

According to Zoopla, “the average sold price for a property in DE7 in the last 12 months is £196,924.” This compares against its UK average figure of £245,200 (March 2022.)

Propertydata shows a similar pattern. It puts average values in DE7 at £210,442, compared against a UK mean of £273,762. Notably, it is another agency that lists the East Midlands as the region producing the country’s fastest capital growth (+11.6%).

In the last 12 months, average yields for the DE7 outcode area have averaged around 4.2%. However, as new road, rail and commercial developments approach fruition, investors can reasonably expect tenant demand, rental values and gross yields to rise considerably.

The new plans for Toton will be a regional game-changer, but as more investors recognise that, and as more people seek to move to the area to take up new jobs, local market values are likely to rise. Consequently, the window of opportunity will not remain open forever, and those who act early should be well placed to earn the greatest returns.

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To find out more about investment opportunities in the East Midlands, please call our advisory team on 01244 343 355 or email sales@residential-estates.co.uk

Spotlight on the East Midlands