Back in April 2020, we published a spotlight article looking at the whole of the East Midlands. In it, we noted the particular importance of two cities: Leicester and Nottingham. A lot has happened since then – an understatement if ever there was one – so we thought we’d take this opportunity to revisit the region and to look in more detail at everything that Leicester can offer the property investor.

Leicester – an Overview

Leicester is the East Midlands’ largest city, with a population of approximately 418,000. Before the pandemic, it had an economy worth around £8 billion – the largest in the region – and it was growing steadily.

Like all parts of Britain, it suffered a setback with the advent of Covid-19 but it has performed well since, and it has big ambitions. According to Leicester and Leicestershire Economic Partnership, the county as whole is seeking to recover lost ground quickly and to increase its GVA from £23 billion to £30 billion by 2030.

Coping with Covid and Other Challenges

The LLEP has undertaken extensive research to quantify the impacts of Covid, both in waves 1 and 2. There is little doubt that employment and growth suffered after March 2020, but there is now considerable optimism amongst the city’s business community. The Business Tracker Survey (Wave 2) reports that 63% of small business expect to recruit within the next six months, a statistic which the authors believe “suggests a fairly optimistic approach for recovery.”

Recruitment demand on the part of local employers is an important consideration for residential property investors because it will have an indirect bearing on demand for housing – whether that housing be purchased or rented. First, of course, new jobs often draw in new people to an area, so demand for both types of accommodation will tend to increase. Second, when more people are in paid jobs, they tend to have more disposable incomes. Thus a greater number of potential buyers may bid up the price of property – thereby driving capital appreciation. The same broad principle holds true for tenants and average rental values.

The fact that so many businesses are now seeking new staff to support their recoveries is therefore good news. However, the same report notes that, post-Brexit, 21% of employers have experienced difficulties in actually recruiting suitable staff. It’s difficult to predict how long that skills gap could persist but potential solutions include upskilling existing staff (raising the prospect of corresponding pay-rises), increasing salaries to attract new workers from elsewhere, using local contractors or “redefining existing jobs” in order to address productivity challenges in other ways. Some or all of these could ultimately help to restore average incomes and fuel further demand for accommodation.

The hiatus presented by Covid and the accompanying furlough period has also helped to deliver new thinking and innovation – improvements that should see Leicestershire businesses increasing their competitiveness in the years ahead. The report notes that “Two in five have invested in digital technology” in recent months, and that “over a third (35%) have taken action to reduce carbon impact”. Encouragingly, data from wave 2 showed that 39% of respondents have seen an increase in turnover since wave 1.

There are still challenges ahead, of course. 37% of businesses have experienced “Brexit-related supply chain disruption” in recent months, and 31% believe that Covid will continue to have a “medium or significant impact” on turnover in the next 6 months. However, these figures are not markedly different from other comparable cities. What is different is the strength of local market sentiment: the LLEP writes that “Nine in ten (90%) feel confident about the future of their business… (and) two in three businesses (64%) expect to grow during the next 12 months – a significant increase compared with wave 1 (38%).”

Similarly, when asked, 26% of businesses said they expected sales to return to 2019 levels “within two years” while a full 23% of businesses said that had not seen any decline in turnover at all.

Published back in December 2020, the LLEP’s Economic Recovery Action Plan observes that “Covid-19 was the most damaging economic shock in a working generation” but, equally, it notes that local businesses and support agencies have responded with great energy and commitment.

As elsewhere, the hardest-hit sectors have tended to be travel, tourism and hospitality sectors, with knock-on effects on retail and the creative and cultural industries. However, while these are important elements of the local economy, Leicester has been more resilient than most because it is home to one of the UK’s densest manufacturing clusters.

Its strength in manufacturing and engineering has been good news in terms of weathering the Covid storm. However, the same report warns that “the predominance of manufacturing across Leicester and Leicestershire, which exports to the European Union, could increase the area's vulnerability following the Brexit deal with the EU.”

Economic Growth and Recovery Plans

In order to insulate local businesses against these various economic shocks, local authorities have distributed hundreds of thousands of pounds in grants, delivered over a hundred webinars, and launched a Tourism Recovery Framework and a Regional Entrepreneurial Acceleration Programme. They have also developed Business Improvement District, City and Town Centre Recovery Plans, and allocated £1 .6m of LLEP funding to support a host of recovery projects.

These projects go and in hand with £20 million of new infrastructure spending, an array of business-start-up support initiatives and additional investment in skills, digital connectivity and sustainable technologies.

In addition to all these schemes, planners and commercial investors have also committed to the £250 million Waterside Regeneration Area. Work began in 2015 and is currently ongoing. Business Live writes that it will see the creation of “new hotels, PRS and student schemes, offices, shared workspaces and the recent transformation of the semi-derelict Leicester Central Station.” In all, it is expected to create over 450 new jobs and to attract £80 million of follow-on investment.

Other regeneration projects include:

Great Central Railway (heritage railway line)
The Leicester North West Investment corridor (£19 million)
Space Park Leicester (a new global hub for space research and innovation)
National Space Centre: Vision 2025 (extension)
Pioneer Park (new innovation facilities on a brownfield site: £2.6 million)
New flood defences
Superfast broadband connectivity
St. Margaret’s Gateway (regeneration focusing on the city’s main bus station)
North City Centre Accessibility Improvement Programme (transport and public realm improvements)
Connecting Leicester - Market Area (£7.2 million of investment in Leicester city centre)
Loughborough and Leicester Science and Innovation Enterprise Zone (3 sites)

The list goes on but it’s abundantly clear that a considerable amount of work is now being done to return quickly to a new period of economic growth.

Growth Sectors

Financial services, food, construction, energy, telecoms, logistics and retail are all important growth sectors in Leicester and its surrounds, but perhaps the most notable of them all is advanced manufacturing.

The sector encompasses numerous other industries that support large numbers of jobs. Examples include textiles, automotive, aerospace, building products, heavy engineering, life sciences and healthcare, amongst others. More recently, a new focus on low carbon technologies has emerged and given the city’s aspiration to become carbon neutral by the 2030s, this should prove to be a sector that employs local people in ever greater numbers.

These, of course, are generally private sector employers but it’s important to note the importance of public sector organisations to the local employment market. Many thousands of livelihoods are supported by schools, colleges and local authorities, and by the University Hospitals of Leicester NHS Trust, which sustain over 15,000 workers.

Employment and Population

In short, although Leicester has had to contend with many of the same challenges as other British cities, it seems especially well placed to emerge strongly from them. Business confidence is good and the city’s traditional focus on manufacturing has protected it from some of the worst effects of the Covid lockdown.

Now, with the UK economy recovering much more quickly than many had predicted, the city could well be one of the country’s earliest success stories. Job growth looks all but certain in the months ahead, and the pandemic afforded an opportunity for many businesses to move towards greater efficiency and higher value activities.

If Leicester does indeed become a key attractor of new jobs, then the LLEP’s growth target of an extra £7 billion in GVA would seem realistic and achievable. Likewise, as employment growth pulls in additional workers from outside the city, it’s reasonable to expect the urban population to rise. The World Population Review, for example, expects the city to gain around 58,600 new residents by 2035.

For property investors, these are clearly good signs. Leicester is already characterised by a pronounced shortfall between housing supply and demand, and with many thousands more people set to move to the city, this gulf will only widen. The wider it is, the more likely it is that demand on the part of tenants will drive up rental values, and demand on the part of prospective buyers will see capital values continuing to rise steadily.

The Student Population

Although the pandemic has radically changed the university experience for thousands of students, it has done nothing to dampen demand for degree courses, apprenticeships and higher learning.

In July 2021, UCAS announced a record level of university applications for the coming academic year and “a corresponding rise in offers from universities.” This has been attributed to the success of the NHS vaccination programme, amongst other factors.

This is a nationwide trend but, as city with two local universities, Leicester will inevitably benefit from it. Student enrolment at the University of Leicester is typically around 17,000, while approximately 22,000 students attend De Montfort University. If these numbers begin to creep up, this will add further demand to the local rental market.

Leicester’s Housing Market

The UK residential sector performed beyond all expectations in 2020 and in the first half of 2021. Every week has seemed to bring news of some new record being broken, with respect to capital growth, rental values or tenant demand.

The pandemic precipitated a clear shift in people’s housing preferences, and while the market in Central London suffered, investors elsewhere made significant gains.

As an economic hotspot, Leicester has been no exception. Rightmove, for example, finds that average values rose by 11% year on year. This is in agreement with data from Plumplot, which also reports growth of 11% between July 2020 and June 2021.

However, despite this impressive rate of growth, prices have remained relatively affordable. Different agencies offer varying estimates of average values, with extremes ranging from £197,400 (Hometrack) to £272,000 (Plumplot.) But by any measure, these are substantially below the averages for England and Wales, and a combination of low investment costs and high tenant demand has translated, inevitably, into some very respectable yields.

According to LiveYield, the average gross yield for the top 10 LE postcodes varies between 4.3% and 4.9%. The PropStats website puts the average city-wide mean at 4.21%. These aren’t record-breaking numbers but, taken into consideration with strong capital gains, they certainly amount to good overall returns for investors with property in the city. Moreover, as Leicester begins to feel the effects of large-scale urban regeneration and growth in both employment and population, market conditions should only improve.

In its recently revised 5-year House Price Forecast, Savills predicted that average values would rise by 23.90% across the East Midlands. The figures only drill down to the regional level, not to individual cities. However, as the largest city in the East Midlands, and with such an ambitious recovery programme now in progress, it’s reasonable to expect Leicester to outperform this regional average.

Summary

Leicester offers obvious attractions for property investors. First, it has a strong economy that’s being supported by substantial spending by both public and private sector bodies. The prospects for employment growth are excellent, as evidenced by a healthy degree of optimism amongst the local business community. As a result, demand for housing can be expected to rise steadily in the coming years, and that’s a force that should underpin continuing growth in property values and rental returns.

Second, the population is rising, and if student numbers continue to climb too, residential landlords should not have any trouble in finding tenants. Investors can therefore expect good gross returns, minimal void periods and – thanks to generally affordable prices – very respectable yields.

Find Out More

To find out more about investment opportunities in the East Midlands or elsewhere, please call our advisory team on 01244 343 355 or fill out the form below.

Spotlight - Leicester