Our analysis suggests that the value of housing in the private rented sector in the UK is now just short of £900 million. But what are the prospects for those looking to invest?

Q What is the scale and distribution of growth in the private rental sector?

A Census figures show that the number of households renting privately increased from 2.6 million to 4.2 million between 2001 and 2011 across England and Wales. Across the UK, we estimate that some 4.8 million households were in the private rented sector in 2012.

Most tenancies are concentrated in urban areas, typically reflecting the demographic profile of these areas. In Birmingham, Leeds, Manchester, Liverpool and Bristol, the number of private rented sector households has risen by 77% in the last decade and now account for 23% of all households in these cities. In London, however, where high property prices are an even greater barrier to home ownership, the size of the private rental sector is larger still. The highest concentration of tenancies is in the inner London boroughs, where some 40% of households occupy rented housing. This is expected to rise to 50% by 2017.

Q What has driven this shift towards renting?

A Reduced accessibility to homeownership, the lack of new social housing and the increasing social acceptability of renting at all stages of life, have boosted the demand for privately rented homes.

Of these, the biggest driver has been the increased difficulty in accessing home ownership. As house prices rose relative to incomes through the late Nineties and early to mid Noughties so the cost of raising a mortgage deposit increased.

The shift to renting, which importantly began at the turn of the millennium, gathered pace post credit crunch as deposits required by banks rose.

Q Is this a permanent or temporary phenomenon?

A There is evidence that accessibility to mortgage finance has improved but the improvement is not significant.

The number of mortgage products available at loan to value ratios of in excess of 90% have increased. However those mortgage products carry a significant interest rate premium. At the end of December the average rate for a 90% fixed rate mortgage was 5.31%, compared to 3.35% for the equivalent 75% LTV loan.

Consequently, the increase in mortgage products is failing to have much of an impact on lending at the bottom of the housing chain. Whilst the number of first time buyer loans increased by 12% in the year to the end of November, they remained 42% lower than in the period from 2003 to 2007.

This continues to cause a split between buyers with access to equity, usually via the Bank of Mum and Dad, and those who would like to own their own homes but are forced to rent for longer.

So the indications are that recovery in the mortgage markets will be slow and gradual. Given the credit constraints, and the shortfall in social housing, we estimate that by 2016, one in five households in England, a total of 5.9 million households, will be renting in the private sector.

Q What does all this mean for rental growth?

A With increased demand for rental accommodation set against the context of low levels of house building, a simple mismatch between demand and supply has driven rental growth, despite the underlying economic conditions.

Evidence from asking rents suggests that this rental growth has been highest in London and the South East, particularly in markets attractive to more affluent young households.

As we look forward, rents will continue to be pushed up where there is a mismatch between supply and demand. We forecast that average rents in the mainstream market will increase by 18.2% by 2017, though a weaker economy and fears of public sector cuts are likely to keep a lid on rent rises in the cities of the North and the Midlands. Rental growth in areas dominated by tenants on housing benefits is also likely to be limited.

Q What are the investment prospects?

A In the medium-term, the prospect of capital growth in London and the South East will deliver highest overall returns. However, we expect income yield to become an increasingly important driver of investment demand, particularly amongst institutional investors who have become increasingly active in the market.

For those investors, the ability to drive additional income returns from the emerging build to rent model will widen the appeal of residential investment across the cities and towns of the UK.

Taken from
Residential Property Focus Q1 2013

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