When it comes to investing in property, how important is price per square foot in your purchase decision? As we’ve seen first-hand over the last two decades, basing perceived value for money solely on price per square foot has its limitations.
More important factors that add value and drive higher rental returns include prime location, premium amenities and sense of community. This is especially true in city centres, where population and development density often means that in the space of one street to the next, an area has a different feel, reputation and value.
This short guide will look into the advantages and limitations of basing an investment decision on price per square foot in residential developments, considering the factors that drive price per square foot, and identifying the qualities of a successful investment.
Why do people invest in property?
UK property has been highly regarded as a stable and reliable investment choice for decades, underpinned by core principles such as: a chronic undersupply of residential property, rising populations in city centres, strong rental and sales price growth, and a low-risk market compared to other asset classes.
Property investors enjoy returns in the form of rental yields and capital growth over time, taking comfort in investing in a physical asset unlike stocks and shares or cryptocurrency. City centres typically offer the strongest returns, with Manchester and Birmingham leading the 5-year growth forecasts for the sales and rental market.
What drives price per square foot?
An important and often overlooked factor is that price per square foot is largely driven by location, based on the cost of the land paid by the developer. For example, in 2021 according to Land Site data, land in prime city-centre Manchester cost £5.24 million per acre, compared with £697,000 per acre in Salford – two locations within walking distance.
This is because land for sale in built up city centres is in incredibly low supply and high demand, making it much higher in value. This is why properties with Zone 1 postcode in London cost more than properties with an Zone 3 postcode, as it’s considered a better location with closer proximity to key amenities and transport links.
The good news for buy-to-let investors? It is also more expensive to rent in a prime central location, as renters are willing to pay a premium to live on the doorstep of all that a city has to offer. Other key factors driving price per square foot are amenities, quality of development, and the associated developer or architect.
What does a cheaper price per square foot reflect?
Some investors may be put off by a higher price tag, especially if they perceive that a ‘similar’ development in a nearby location costs less. But while cheaper apartments can be more attractive to investors looking to invest at the lowest capital entry point, buying cheaper property has its limitations.
A cheaper price per square foot usually reflects a secondary or tertiary location, lower quality, fewer amenities and a lower level of building management. These factors mean your investment property won’t be as competitive in the local market and will be valued at a lower price, thus driving lower rental yields. Although locations such as Manchester and Birmingham have a shortage of residential property, as supply starts to catch up with demand over the next decade, apartments which stand out in the market will make the best long-term investments.
Read our blog on why build-to-rent developments that prioritise the renter experience will make the best long-term investments.
What are today’s renters looking for?
In JLL’s recent resident survey, they summarised key findings of what renters are looking for in their next rental home. Key factors such as location, neighbourhood and community ranked far higher than size of apartment.
Source: JLL Tenant Survey, May 2023.
The survey also revealed that the highest demand amenities among renters are a gym, a swimming pool, and communal working space. In fact, JLL reported that 68% of renters said they’d pay more for a swimming pool; 67% said they’d pay more to be close to public transport links; and 66% said they’d pay more for private outdoor space.
Our latest and fastest-selling development, One Port Street, is the first of its kind in Manchester’s iconic Northern Quarter. Offering prime location just a 9-minute walk to Manchester Piccadilly, and premium amenities including a swimming pool and a rooftop terrace, it’s set to be Manchester’s most popular postcode.
The value of branded residences
When buying a car, a new phone, or booking a hotel, people understand the affiliation of a luxury brand to the product, through the associated quality, design and service that differentiate those brands. For example, when booking a hotel, you’d expect a different experience in the Mandarin Oriental than you would in a Travelodge. While both have an established place in the market, their brands help consumers make a decision on where to stay based on price point and perceived value for money.
Similarly, a luxury residential property brand can provide the incentive for buyers and renters to pay a premium. Savills’ analysis shows that the average global premium for branded residences, over a comparable non-branded product, stands at 30% on an unweighted basis.
Savills commented: “In markets where few to no branded schemes exist, a branded project can achieve pricing double to that of comparable non-branded stock.”
One Port Street is the first development to come from Select Property’s flagship residential brand, the Prestige Collection. With established property brands such as Affinity Living, CitySuites and having played a key role in the Vita Student story, Select Property have a long reputation of evolving UK property brands across multiple sectors.