Q What is the outlook for residential rents and what does this mean for investors’ yields?
A A growing proportion of UK buyers are unable to enter the owner occupier market, and have been forced into rented accommodation. This is fuelling rental rises at a pace in excess of capital growth, pushing out income yields, and making the sector increasingly appealing for investors.
Over the past ten years the average total return from residential investment stock of 10.1% has been driven by capital growth, which has averaged of 6.2% per annum. Looking forward we expect income yield to become more important. In certain markets it will deliver the majority of the investment return.
Already, investments in the North of England are to be acquired as long term holds on the back of current yields and future rental growth prospects. By contrast, in the South East they are more likely to be medium term holds based on prospective capital growth.
Q Where is the increased supply coming from?
A We expect the private rented sector to expand to 20-23% of housing stock in England by the end of 2016. The two big questions are where the rental stock will come from and who will own it.
Prior to the credit crunch the rise in levels of private renting in the lower rungs of the housing ladder was accommodated by the growth in the buy to let sector. However, the expansion of the buy to let sector has slowed as more restrictive buy to let lending criteria have been applied and debt-reliant investors have become more cautious.
Equity rich investors, including those from overseas, are currently leading the charge, but over the longer term greater institutional investment will be critical to deliver more rented accommodation.
Q We hear a lot about overseas investors, why are they so important?
A Weak sterling has made prices in the UK look cheaper, particularly to Asian markets. The UK benefits from few barriers to entry or exit for foreign purchasers, and a trusted legal system. They have been attracted to prime new-build stock in London which has been critical to the residential development market.
Q What will make institutional investors grasp the nettle?
A To ensure that tenants do not have to resort to renting poor quality accommodation because of a lack of choice, we need an investor friendly environment.
Measures such as the change in the stamp duty regime for bulk purchases, forthcoming changes to the REIT regime and limitations on further regulation go some way to overcoming the investment hurdles.
But improving the income yields is the key. To this end a new class of institutional investors are emerging with a focus on build to let, and this will have spin off benefits for house building in de-risking large sites.
Additionally, we are seeing institutions look to joint ventures with registered providers of social housing and student housing operators to provide the economies of scale that improve net to gross yield ratios.
Combined with the increase in yields that flow from the shift to renting, we firmly believe that institutions will become the new buy-to-let landlord.
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