Demand for rental accommodation has been accelerated by the increasing inaccessibility of home ownership. Would-be first time buyers continue to find mortgage finance at high loan-to-value ratios all but non-existent and where available, lenders’ margins are higher, meaning that it often remains cheaper for this group to rent.

Despite the fact the English Housing survey suggests that over 50% of private renters are under the age of 35, over a quarter of these trapped renters were over the age of 40.

It seems inevitable that we will see a continuation of the structural shift towards renting over the next five years at least. It is equally inevitable that there will be more households renting and they will be renting for longer. Increased demand for private rented accommodation will include family housing.

The profile of renters will change, with more affluent sections of society being forced or choosing to rent. Increased demand for private rented accommodation will include family housing.

Rental Britain needs to boost supply.

Next Generation Landlords Demand will undoubtedly continue to rise but the future supply of private rented sector accommodation is less secure. Until 2007, the rise in demand for private renting was broadly matched by debt-backed buy to let investment.

However, buy to let mortgage lending has fallen significantly post-credit crunch and levels of private house building have fallen by 46% in England (source DCLG) bringing less new stock into the private rented sector.

So where will new rental stock come from and who will be the landlords of the future?

When the sales market faltered the accidental landlord brought supply to the market, but this is not a permanent solution. Attention has therefore turned to cash rich private investors, institutions and investment funds.

Whether private individuals or institutions, investors must understand the returns they can expect and the split between income and capital growth.

A slow recovery in the housing market, particularly in the lower tiers where owner-occupier demand is weakest, suggests income will make a greater contribution to total returns in the medium-term, although some investors remain motivated by capital growth.

The importance of yields

Despite strong total returns fuelled by historic house price growth, low-income returns have been the Achilles heel in the residential investment proposition, but lower capital growth forecasts are now focusing attention on yields.

The mismatch between demand and supply in the rental sector has triggered sharp rent rises (5.2% nationally in 2011, 7.2% in London) and pushed out income yields, albeit slowly. There is evidence that improved rental returns, combined with low returns on cash investments, is beginning to shift the perception of residential property as an investment class. In October 2011, a Rightmove survey found that 41% of existing residential investors saw attractive yields as their main reason for investing in property.

The Bank of England Credit Conditions Survey published in January 2012 reported increased demand for mortgage credit from buy to let investors, the only area of growth in the mortgage market.

Still we expect rental demand to continue to outstrip new rental supply and for rental growth to exceed capital growth over the next five years at a national level.

This is good news for investors but could place increased pressure on rental affordability. In some markets, particularly those dominated by tenants receiving housing benefit, this will temper rental growth prospects.

Against this context, existing landlords, new investors and today’s tenants critically need an understanding of rental levels, their affordability and their relationship with capital values.

Taken from
Special Report: Rental Britain