It’s a great term. The media love it. In the boom years countless column inches were devoted to it. But what does it mean? How can you spot them & do they actually exist?
The term – 'property hotspot' is almost guaranteed to cause minor palpitations amongst the property investing fraternity.
During the boom years – football pitches of apartments were sold off the back of the concept that a once derelict piece of urban wasteland was in a matter of years even months going to become the provincial equivalent of Islington or Chelsea.
Half of London appears to be in a constant state of gentrification with areas being lifted from obscurity to almost cult status with the mere hint that a new tube line or rail link will connect the area with central London, Paris the world. So what’s the reality behind this hype?
What’s not a property hotspot
The idea of a property hotspot emerged during the rampant house price inflation which started in London during the mid 1990’s. It was synonymous with the wave of house price inflation which started out from a booming London economy and then went south-west and north in a kind of house price tsunami. The game for many property investors became all about getting ahead of the wave, getting to the next town before the next trainload of investors hitting town and the prices boomed. This was let's be clear, not the manifestation of the existence of property hotspots, but a case of a general house price inflation travelling out from a London based epicentre, as the effects of a general economic recovery and house price and lending boom exerted themselves.
Landlord insurance – professional rates – discounted
A property hotspot is different. In my view it’s a residential area which for reason of perception or geography has been overlooked by the local housing market.
The result, so the theory goes is that the area remains relatively undervalued.
A hotspot is an area that in response to a change of local or national circumstances; either bought about by a regeneration initiative or transport improvement changes the markets perception of the area. The result is that the areas inherent value is recognised leading to a re-rating and it’s significant out performance over the values of other areas over time.
The theory is that property investors in such areas, if they buy earlier whilst prices are cheap, can potentially make far more money than by buying in traditional and established higher value areas.
What triggers a hot spot?
The general triggers to producing a property hotspot are:
1. Major infrastructure initiatives – the classic trigger for an area becoming a property hotspot is the potential or actual arrival of a major infrastructure initiative which improves connectivity with an area. The classic example of this would be say in London Docklands where the Docklands Light Railway (DLR) was built to improve the areas connectivity with central London.
2. Area perception – areas are frequently blighted by poor perceptions meaning that they are seen as being slightly ‘dodgy’. The emerging dogma of the new breed of regeneration professionals. I can be critical – I was one. Now peddle the mantra that if the issues around poor image and stereotyping can be addressed then the inherent appeal and attraction of many areas will be apparent for all to see
3. Joined up approach - What the regeneration professionals, who often are in cohorts or co-opt developers and builders advocate is a combination of 1 & 2. The public sector often providing the finance for the enabling infrastructure works needed in 1, such as new road or rail link. The professional will also appoint architects and designers to create the plans and vision of the revitalised area with parks, shiny new blocks of apartments, transformed high streets.
Examples of areas that have been transformed.
One of the most famous areas that have been changed in recent years is Islington in north London. An area which during the 70s was a run down inner city ghetto. In the last 30 years it has transformed itself into a thriving and desirable middle class enclave with large areas of large attractive historic buildings and home to our own former Prime Minster Tony Blair.
More recently London Docklands and the East End have seen a transformation of image and fortunes and there are many more areas within London that have benefited in differing degrees from a change of image and gentrification of the housing stock.
Our view of property hotspots
Property hotspots exist, ostensibly because of a fundamental imbalance in demand and supply in the wider housing market. This exists generally in two scenarios:
Firstly, in the case of established quality areas which have good schools, environment and an aspirational element which makes them ‘the place to be’. This is normally associated with a restrictive supply of new housing because of physical capacity or tight planning controls in the area. The other scenario is where you have strong demand and a willingness of young potential housebuyers to transcend the perceptions of existing areas stereotype as they seek to find places to live and call their own.
The latter only exists in one place - London. Anybody who tells you they can identify them outside the capital in the UK is either a property professional on the make, a regeneration professional who is paid to believe, or a fantasist. I have watched provincial towns for evidence of the so called gentrification sweep, through transforming run down areas into pseudo middle class enclaves. It doesn’t happen! Not in a property investors lifetime.
The type of dynamism required in the housing market doesn’t exist in areas outside London, simply because of the lack of sufficient excess demand. In London you have in migration from all parts of the UK and the world which means there is always a flow of young dynamic individuals, a fresh generation of inhabitants without postcode prejudice seeking out places to make their own. Look at Hoxton in the ‘noughties’, Clapham in the eighties and Islington in the seventies.
Outside London ‘hotspots’ have promised much but the evidence in our view does not substantiate them.
The cult of the property hotspot
The phenomenon of the property hotspot is all about the medias’ need for good news, get rich stories along with the regeneration industry, exploitation of the starry eyed greed of the public and investors looking to make a fortune out of property.
The reality of area based regeneration schemes is they generally produce bland uniform blocks of apartments with slightly improved access to somewhere half decent.
There are numerous examples of these types of areas.
Why are property hotspot regeneration areas such bad investments?
Investing in area regeneration schemes are bad investments because they break all the rules of good property and investment practice. For a start, these hotspots are often in areas where there is lots of land. Therefore, supply is in effect unlimited. A property investor there is investing in an area which has no defined character. In essence you are investing in an unknown. Most importantly with no or few inhabitants, you really don’t know what type of neighbours and area you are going to get. The reality is that they are going to be people that are too poor to afford the nice areas or speculators like you. Speculation often runs ahead of reality with the hope and expectation that prices will rise means that prices increase even before there are any improvements. Not a good basis for an investment that outperforms!
The reality is that you are always better off putting your money in a nice old characterful property in attractive village or suburban location than trying to second guess the next hotspot. In London a nice period apartment would probably be best.
In London, despite the concentration on infrastructure improvements none of the evidence suggests that areas locating next to new train stations are going to jump dramatically in value.
David Lawrenson a respected commentator on buy-to-let commented recently in his blog about his recent impressions on Ebbsfleet in Kent. Ebbsfleet is one of those areas to benefit from the upgraded channel tunnel link. His experiences indicate that a new super fast train link does not transform an areas fortune.
How many of your friends buy their home because it is next to a train station, tube or bus stop? If the area is attractive then it may be an added bonus and probably make the property more rentable. It is very unlikely and there is no evidence that shows it will add much to the value of the property or area.
Find your own hotspots
If you want to find your own property hotspot you should look for:
1. Tony Blair was a right about one thing & only one thing. Locating your hotspot is all about education, education. Looking for an area to outperform it’s all about the quality of the local schools stupid.
2. Established areas with good facilities, shops, restaurants and good gastro pub will all add to an areas allure and attraction.
3. If you do want to take a punt look at a slightly run down area next to a good quality established community which may be ripe to expand into adjoining neighbourhoods.
4. Hotspots can exist in small middle class enclaves such as attractive market towns and villages where tight planning controls limit supply and their historic, environmental or architectural attractions make them attractive to a variety of buyers. An example of these places would be market towns such as Harrogate, York or North Oxford, Padstow in Cornwall or Aldeburgh in Suffolk
Looking for info about the next property hotspots?
If you still think that improvements in infrastructure are going to transform London’s property market then one of the most useful sites carrying information on the latest developments in London infrastructure is propertyinvesting.net
A word of caution though, if you think the Olympics is going to represent a property investing bonanza research from previous Olympics suggest that the Olympic effect has little impact in the long-term on residential property prices in larger host cities.
Looking for a PROPERTY HOTSPOT. Here’s a selection but be warned, don’t always believe the hotspot hype!
Home in on the property hotspots - The Independent
Ten towns to defy 2008 property price gloom - Thisismoney