Manchester has dramatically narrowed the gap with London as a buy-to-let hotspot after a barrage of tax and regulatory changes deterred landlords from investing in the capital.

London has been by far the most popular city for landlord investment in the past decade, with three times the number of buy-to-let mortgages than its north-west counterpart, reflecting its much larger population and rental market.

But new data show landlord investment in the capital has more than halved since the introduction of a buy-to-let stamp duty surcharge in April 2016.

In the first three months of this year, there were just 1,126 mortgaged purchases by buy-to-let landlords in London, compared with a quarterly average of 2,500 in 2014 and 2015, according to research from UK Finance, the industry body, which surveyed lenders accounting for 85 per cent of the market.

Property investment in Greater Manchester also dipped after the stamp duty changes but to a much lesser degree. The Manchester total was 840 mortgaged buy-to-let purchases for the first three months of 2017, down from a quarterly average of 1,000 in 2014 and 2015.

John Eastgate, sales and marketing director at One Savings Bank, said: “I wouldn’t be surprised if Manchester moved ahead of London because in the short term there is still going to be negative sentiment around London. The yield and the capital play isn’t there any more.”

Manchester is undergoing a building boom, with a record 6,900 residential homes under construction this year and four high-rise tower blocks being raised, according to a Deloitte survey of construction activity. Other factors driving the rental market are a growing student population and BBC’s MediaCityUK development in Salford, which has boosted the media sector.

Stephen Johnson, managing director of commercial lending at Shawbrook Bank, said the bank had seen average buy-to-let mortgage sizes fall in the past year, indicating borrowers were heading ; to locations with lower average house prices. “We’ve seen a reduction in loan size and have tracked that straight back to geography. It’s a shift in activity among our customers.”

Average rents in London will fall by 1 to 2 per cent this year, according to housing market analyst Hometrack, as affordability comes under strain and jobs growth slows. However, rental prices outside the capital are forecast to rise by 2 to 3 per cent, with the Midlands and eastern regions rising at close to 5 per cent a year.

Karl Griggs, director at buy-to-let mortgage broker CPC Finance, said lower relative yields in London and affordability constraints for investors seeking high leverage had driven interest north. “In Manchester you’ve got the BBC and a lot of other investment going on,” he said. “People are relocating there so the investment side is quite good.”

Regulators and politicians have sought to curb growth in buy-to-let, introducing a 3 percentage point stamp duty surcharge for new purchases and this year starting the phased removal of valuable tax relief on mortgage interest. More stringent affordability tests have frustrated borrowers’ attempts to obtain buy-to-let mortgages in areas with high property values.

Bernard Clarke, a spokesman for UK Finance, said a spike in buy-to-let purchases before the stamp duty change had been followed by a contraction that was much more pronounced in London than in Manchester.

“There are many differences between the two markets, but higher property prices in London can mean that rental yields there are often lower than in Manchester. That would make it more difficult for landlords in London to recover higher stamp duty costs and may be deterring them from investing.”

When landlords invest far away from their home turf, though, they run the risk of falling foul of local knowledge. Mr Johnson of Shawbrook Bank said: “It’s important for buyers to make sure they understand the localities and the local supply and demand. Smarter local investors may be seeing an opportunity to divest themselves of their less desirable stock.”

Landlords who invest farther afield may be unprepared for managing a rental property hundreds of miles away from their base. Costs can escalate if an agent is used to manage the property and landlords may find it harder to nip problems with tenants in the bud. Peter Foulds, director of risk management at Appraisers UK, said: “If it’s on your doorstep you tend to have a really strong relationship with your managing agent or you’re managing it yourself. You know where potential issues are brewing.”

Without deep local knowledge, long-distance investors may also risk purchasing the wrong homes. Mr Johnson of Shawbrook Bank said: “It’s important for buyers to make sure they understand the localities and the local supply and demand. Smarter local investors may be seeing an opportunity to divest themselves of their less desirable stock.”

A Treasury spokesperson said: “We reformed stamp duty so that more people can achieve their dream of owning a home, and cut the tax for 98 per cent of people who pay it.

“HM Revenue & Customs statistics show that since stamp duty changes were made at Autumn Statement 2014 residential property transactions above £1m have been broadly flat.”

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