How do university cities compare for property investment?

Because of their international reputations for academic excellence and rivalry, Oxford and Cambridge are often compared to each other.  With Oxford university recently confirmed as the top UK and Global University rankings, Oxford currently has the bragging rights, but does that hold true for property investors?

Most property investors invest close to where they live or in a single geographical location that they feel they know well.  Investors become loyal to an area, particularly where their investments have experienced a period of strong performance.  In any area there is an ebb and flow of investment returns, and property investment rewards long-term investment.  As property prices and rental values rise over time, rental yields improve, progressively supplementing capital growth to drive up returns.  The new stamp duty supplement on second homes and next year’s changes to the tax treatment of mortgage interest payments, the costs of new investments are higher for landlords, and should be taken account of when forecasting investment returns.  These changes look most likely to dissuade speculative investors.  Professional investors will forecast returns over 5 and 10 years and will compare those return to alternative investments available to them.  But should they also consider widening their investment geographically and broadening the type of property in which they invest?

At face value Oxford and Cambridge are comparable property markets.  Over all OX (Oxford) post codes the average earnings of people is £22,987 vs. £21,731 over all CB (Cambridge) post codes.  Across the same post codes the average property value in OX post codes is £385,300 and in CB post codes £369,500.  So on face value bragging rights remain with Oxford!  Or do they?  A key measure of a property market is the price to earnings ratio – for owner occupiers the lower the ratio the more affordable the market is.  For an investor landlord, markets are often more attractive where the ratio is high.  That’s because fewer residents can afford to buy a property, increasing demand for private rented homes.  At the aggregate level, Cambridge has a price to earnings ratio of 17 with Oxford at 16.8.  So virtually identical right?

I thought I’d dig a little deeper and narrow the comparison to the central post codes for each City as it is those post codes that most interest buy to let investors and where demand is strongest.  Here the picture diverges.  In Cambridge the average earnings in the central post codes is £30,906 compared to Oxford at £20,076.  That’s 52% higher average earnings in Cambridge.  The average property price in Cambridge is £488,520 vs Oxford at £453,560.  That’s just 8% difference.  So the difference in the price to earnings ratio is substantial with Cambridge being 16.0 vs Oxford at 22.6.  This identifies a stark difference in the affordability of property between the Cities, and goes someway to explaining the continued attractiveness of Oxford to investor landlords.

Over recent years Cambridge has offered investors with a superior return on investment.  As I wrote recently, the latest LendInvest survey shows that Cambridge has offered substantial increases in the capital value of properties over the last 6 years (9% vs 5.8% for Oxford), mirroring the increases that Oxford experienced between 2008 and 2014.  Oxford has continued to offer the better rental yield (5.5% vs 5.1% for Cambridge), but overall Cambridge has offered the better short-term returns 14.1% return on investment vs. 11.3% for Oxford.  However, the affordability ‘gap’ in Oxford points to a better more stable long-term investment proposition.

Increasingly, I am being asked by my landlord clients to advise them on how they should alter their portfolio to optimise their medium and long-term returns in Oxford.  The best portfolios give exposure to the breadth of Oxford demand, including the student market and the growing number of young professionals who want to live and work in the City.  I then work with these clients to assist them to source new properties and divest property as necessary to re-shape their portfolio.  This demonstrates the need for professional investors to properly plan their portfolio and accurately forecast investment returns.