Spotlight on Investing in Rental Britain takes an in-depth look at Britain's rental market and also features an exclusive survey 'What Tenants Want'. Download here.

As an emerging asset class, the private rented sector (PRS) has taken some significant steps in the year following Sir Adrian Montague’s proposals for encouraging greater institutional investment into the sector. The Government’s PRS Taskforce, formed earlier this year to help drive growth in the sector, has identified £7 billion of investment aimed at rental stock.

The sums are already coming in. Savills own investment database shows that £1.36bn has traded in the residential investment market up to the end of Q3 2013.

This is up on the levels of activity we saw at the same time last year. Over half of the money flowing into the sector occurred at the start of the year with the two large institutional deals involving M&G Real Estate and APG Asset Management that contributed a substantial chunk of investment in the first quarter.

The amount of stock turning over in the market is a small fraction of the £893bn tied up in the private rented sector. New product is needed to create scale in the market and bring it more in line with the level of stock that trades in other real estate sectors.

Market activity

There has been a significant weight of capital chasing residential product over the past year. Investors, along with housing associations, developers and housebuilders are carving out stock to create the critical mass of product that attracts institutional investors.

Based on deals since the start of 2013, gross initial yields for diverse UK-wide rental portfolios are averaging 7%, increasing to 11% in some northern regions. Yields from investing in residential property are starting to look highly competitive against other asset classes fuelling higher equity allocation to the sector.

London and the South East has seen the lion’s share of investment, accounting for 80% of deals. Outside London, the North West has seen the highest number of deals with total investment of £220m, including some significant portfolio deals. Manchester is emerging as a hot spot for investors.

Worthy of note is Places for People’s (PfP) acquisition of 1,800 rental units from Terrace Hill, Grainger and Urban Splash. For an investor such as PfP, that has been investing in the sector for 10 years, these strategic acquisitions offer strong performance prospects bought with the benefit of a discount to owner occupier values and high yields.

A number of housing associations are proving they can make the quick investment decisions necessary to compete in a market where demand is strong for a finite amount of standing stock. Housing Associations have become one of four core buying groups in the residential investment market. L&Q has made 10 separate acquisitions this year and the importance of HAs in PRS will continue to strengthen over the next 12 months.

The market remains characterised by small lots sizes with over 60% of activity in the sub-£10m price band. Finding unbroken blocks, especially in the regions, is difficult, masking the appetite that we are seeing from PRS developers and aggregators, UK and Overseas High Net Worth’s, Sovereign Wealth, HAs and Institutions for high yielding, good quality, stock in urban markets across the country.

Portfolio performance

Voids

In London and many regional cities, voids are negligible and marketing periods have reduced. Let up rates on new schemes are short, with landlords such as Fizzy and A2Dominion reporting typical let up rates on new schemes of 4 to 5 units per week. Genesis at Stratford Halo is seeing an average of 14 units let per week.

Rents

Rents have grown strongly over the past three years. London and southern parts of the country have fuelled the strong national average growth of 8% over the same period.

Market prospects

The investment market will continue to get more sophisticated, as more management platforms emerge designed to attract large scale investment. Detailed portfolio measurement will be key to securing third party capital.

The strong population and household growth outlined in this report, indicates sustainable levels of new household formation to see continued demand in the PRS sector.

Taken from
Spotlight: Investing in Rental Britain