UK rental property demand expected to stay high in 2013

A rising demand for rental properties in the UK, especially in London, is likely to continue for some time with the main threat to the sector the rise of assisted mortgage schemes. Also, the appetite for investing in residential property is the strongest it has been for decades, according to the research from Hometrack which has found that this appetite is translating into a growing volume of deals.

This is not just new investment in fully let private rental portfolios but also sale and leasebacks and even stakes in private house building companies. ‘The case for residential has been made on the back of strong returns over time, with capital growth a key driver of returns historically. As more money flows into the UK residential market so a greater understanding is needed of the total return dynamics of different markets,’ said Richard Donnell, director of research at Hometrack.

Long term, London has delivered the highest rates of capital growth with surprisingly limited variation between East London and the more established, higher value markets of South West London. Yet in terms of yield there is a 1.2% differential. At the other end of the spectrum there are markets such as Liverpool and Glasgow where rates of capital growth may have been below average but yields have been above, the research has found.

‘As the market for investing in housing evolves there will be a much greater emphasis on cash flow and tapping into the long run relationship between rents and earnings/inflation,’ explained Donnell.

Quote from PropertyCommunity.com : “People living in London believe that house prices in the borough of Kensington and Chelsea will rise more in the next five years than any other London area, a new poll shows.”

In terms of growth rate of rents since 1995 compared to average growth over the last four years, the long run trend is clear with rental growth averaging just over 3% per annum. ‘More recently we have seen a significant increase in demand for renting but with sustained downward pressure on household incomes, rents have been doing well to rise. The average level of growth over the last four years has been 2% per annum nationally,’ said Donnell.

The private rental market may have undergone rapid growth in the last decade but as a tenure it is still considered immature. Some seven in 10 rented homes are owned by private landlords, whose housing stock comprises standard property types. ‘However, as the sector begins to attract new sources of finance we are likely to see the emergence of a new type of rented housing designed to meet the needs of tenants while optimising income and minimising management costs. Affordability constraints at a local level will set a cap on how high rents can rise but investors will look to maximise net operating income from rents as well as additional services,’ Donnell pointed out.

‘In the near term the primary risks to rental growth across the mainstream market will come from an improvement in mortgage finance for first time buyers or a rapid expansion in the supply of homes to rent,’ he said.

Overall the research shows that there was a decline in rents in the early part of the downturn as owner occupiers unable to sell became accidental landlords and pushed new supply into the market. But for the last few years new supply has remained in check while rising demand has kept rents under upward pressure, a trend the firm expects to continue over 2013.