Given the limited extent to which we can rely on a recovery in mortgage transactions, there is a clear role for the private rented sector to fill the gap in demand for new build housing. We expect the private rented sector to expand to 20% of housing stock in England by the end of 2016.

The key variable is the price at which investors are prepared to buy new homes from developers. In the past, individual buy-to-let investors have bought at prices close to the price paid by owner-occupiers, or early ‘off-plan’ at a discount. As these investors, constrained by more risk averse mortgage lending, have faded into the background, professional investors, including property companies and institutions, have been the main driver of the investor market.

New reality

These investors appraise their acquisitions with reference to income return and rental growth prospects and in some markets make their purchases at substantial discounts to owner-occupied values. The gap is greatest where rental demand and rental growth prospects are weakest and conversely at its narrowest in strong markets. This is the new reality of residential development viability and needs to be understood by developers.

On many larger sites, most notably in urban areas where tenant demand is high, market absorption will depend on substantial investor acquisition at discounts to owner-occupied values.

Taken from
Residential Property Focus, Q4 2011