Analysing Private Rented Sector investment and yield

Neil Young

Neil Young

Current Private Rented Sector (PRS) market conditions are such that finding the next ‘hidden gem’ for an investor is proving to be a challenging task.

This is due to a continuation of overseas money chasing, and overpaying for, property situated in London. The factors that drive this situation are; favourable exchange rates due to a weakening pound sterling, favourable interest rates on debt (especially in the Far East) and capital protection in countries such as Greece, Portugal and Spain.

In the UK there has been a much stricter policy in regards to mortgages and a historic tightening of lending criteria for individuals, especially first time buyers, which has prevented natural sales turnover in the market. The current inability for many to get on to the housing ladder has helped to generate growth in the rental market, especially in highly sought after London locations. The low UK base rate has helped to provide artificially high cash flow for existing investors. All signs however, indicate that the government’s new Help to Buy Scheme should act as a catalyst for first time buyers to step onto the property ladder.

Early in 2013, seasonally adjusted rental demand volumes were down on aggregate by around 11%, with achieved rents generally remaining flat. In some areas, rental levels for larger properties contracted by up to 10%. While this may seem worrying this should be viewed as part of the natural cyclical movement in the market and not as a long term downward trend. According to the Office for National Statistics rental levels have risen by 8.4% in England and Wales since May 2005, driven by an 11% increase in London. More recently, over the past 12 months, rent levels rose by an average of 1.3% across England, buoyed by a 2.2% rise in London.

In terms of investment returns, over the past couple of years we have seen a gross yield of between 5.5% and 6% as a good buying signal. Taking into consideration current market conditions, the gross yield benchmark needs to be revised to between 5% and 5.5%, which is still in line with the long run average for the London market which sits at around 5.2%. Conditions are such that good value assets are hard to come by, but not impossible to obtain. Overall demand for PRS property remains high and is still trending upwards.

On going regeneration plans for many areas in London has had a massive impact on the Private Rented Sector – this is a key feature when sourcing investment opportunities for clients. As a rule of thumb, these units will provide a balanced mix between capital appreciation and yield returns from the offset and will attract medium to long term investment.

The number of PRS developments in the pipeline is beginning to increase as large scale institutional investors and developers start to show increased confidence in the sector. As interest in the PRS increases there will be improved opportunities for investors.

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About Neil Young
Chief Executive, Young Group

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