The importance of diversification has long been drilled into professional financial investors, but does diversification benefit property investors too?
Although property values have generally appreciated over the long run, they can fluctuate significantly in the face of economic shocks. And some geographic areas experience much greater volatility than others.
Traditionally, landlords have concentrated their holdings in a single neighbourhood, city or region, typically driven by local knowledge or convenience. However, in an era marked by widening regional economic inequalities, distinct regional house price cycles and evolving government policies, relying on a single geographic area can present financial risks.
Our research suggests that investors are becoming far more comfortable with buying further afield than they were in the past. The typical investor today purchases a buy-to-let property 5.5 miles away from home, double the distance recorded back in 2008. This year, nearly threequarters (72%) of London-based investors purchased outside the capital, up from just 18% in 2011. This predominantly reflects how a harsher tax regime and higher mortgage rates have sent landlords in search of higher-yielding properties, more likely to be found outside of London, in a bid to turn a profit.
"This year, 72% of London-based investors purchased outside the capital."
However, geographic diversification offers several other key advantages. Most importantly, it provides a hedge against regional differences. When some areas may experience a period of slower price growth or even a correction, others may simultaneously be thriving, allowing diversified landlords to balance their portfolio risk.
History shows us that there’s a clear regional property cycle in the UK. Typically, during an economic downturn when house prices fall, London and the South of England see the sharpest price declines, followed by the quickest recoveries. In the second half of the cycle, growth in these areas tends to slow while Northern areas catch up. Having properties in multiple locations enables landlords to effectively balance out these variations, helping to stabilise their overall returns.
Additionally, diversification allows investors to tap into different tenant demographics and rental yields across the country. For example, while London and the South have typically delivered stronger capital growth over the long term, prices can be more volatile in the short term. In contrast, Northern regions often provide higher rental returns.
So, how diversified are property investors today? To answer this, we’ve analysed the holdings of buy-to-let limited companies. There are now over 415,000 buy-to-let companies operating in the UK, more than any other type of business. Their number has more than trebled since 2016, when a raft of tax changes incentivised investors to build and move their portfolios into a limited company structure.
While larger portfolio landlords have long favoured a limited company structure, more recently, smaller landlords, looking to reduce their tax burden, have incorporated, or moved their properties into a company. Today, half of all limited companies own a single property.
As a general rule of thumb, investors tend to broaden their geographical horizons as they expand their portfolios. The second purchase is more likely to be further away from home than the first. This pattern continues when investors add their tenth or hundredth home, too. This means that as portfolios grow larger, they nearly always become more geographically diverse.
"46% of investors with between two and five properties have diversified geographically."
In our analysis, diverse portfolios are classified as those which are spread across more than one region, more than one local authority or at least three different postcode districts. We found that 46% of investors with between two and five properties have diversified geographically. The figure rises to 73% for investors with six to ten properties and 84% for those with 11-50. Only a small core of 10-15% of larger landlords keep all their properties close to home.
There are clear signs that landlords have become more diversified over their lifetime. 63% of investors who established a limited company in 2014 have since bought a property in a different postcode district, with 49% moving into a new local authority.
Landlords who have diversified across the country have been much more likely to expand over the last decade as well, suggesting successful portfolio performance. Over half (54%) of landlords who already had a geographically diversified portfolio in 2014 have since expanded, compared to just 14% of those who operated in a single area.
