Mainstream

Over the past 10 years, strong rental growth in mainstream housing across the UK has tended to be limited to London and a select group of regional towns and cities where demand consistently outstrips supply. These conditions exist mainly in locations with major universities or employment centres and where new development has not kept pace with demographic changes.

Focussing on London, we expect demand for rental properties to continue to grow due to affordability constraints in the housing market. Therefore our forecast for rental growth in the mainstream market over the next five years is very strong, outstripping expected wage growth as tenants either pay more of their income to secure properties in locations with good amenities and transport links, or make greater use of sharing to maximise individual budgets.

Outside the capital and the stronger regional cities, the difference in the strength of markets is quite clear, with demand unlikely to outpace supply in many areas. Our “UK excluding London” forecast therefore takes into account that rental growth may not keep pace with wage growth.

Prime

The strengthening UK economic recovery and expanding emerging sectors such as technology and telecommunications will continue to underpin demand for prime rental property.

A potential risk to the sector is the level of new stock being brought to the market by overseas investors attracted by the strong capital growth seen in prime London since the downturn rather than rental yield. In locations of high supply we expect rents to come under pressure, with a potential dampening effect on rental growth across the wider prime rental market despite a broader and deeper pool of tenants.

In the London commuter zone, stock levels will be dependent on the sentiment of accidental landlords who have found themselves renting out their homes for longer than they would have originally expected, but who are increasingly looking to sell as the sales market strengthens. However, some may decide to continue renting out their property as capital value growth in prime commuter zone locations is forecast to overtake London over the next five years.

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Taken from
Residential Property Focus Q4 2014