Economic Roundup

David Mackenzie, DIrector of Asset Management

David Mackenzie, DIrector of Asset Management

With the year coming to a close I thought I would take this opportunity to use the last PRSupdate of 2013 to focus on headline economic data and PRS statistics, and look at their implications for 2014.

YOUNG INDEX

Throughout 2013 through our quarterly Young Index sentiment surveys, we have collected data on investor sentiment for the PRS. This data has provided us with great insight into investor sentiment surrounding the PRS in 2013 and their thoughts on the future of the sector.

In Q3 investors predicted that there will be rental uplifts in London of more than three times the rest of the UK over the next 12 months. The majority of respondents believe that London rent levels will continue to rise, albeit by a modest average of 3.1%.

76.2% of the landlords questioned thought that professional property management is money well spent and 81.8% would recommend professional property management to a peer.

As the PRS continues to develop, it is particularly heartening to see that professional property management – and its impact on asset value – is so highly regarded amongst the PRS investment community. With the continued growth of the PRS, and the influx of institutional investors, it is important that these large scale investors ingrain property management as an integral part of their modus operandi.

RENTAL INCOME

It should be noted that, while rental statistics are great for noticing trends, due to the granular nature of the market they should always be treated with caution.

In October 2013 UK rental amounts were, on average, 2.7% higher than in October 2012. This can be attributed to an increase in demand due to a lack of new stock coming to the market. UK housing supply continues to fall short of covering the number of new households required and this has driven more people towards the PRS, particularly in London.

Even with increasing demand the average rental amounts across Greater London decreased by 4% during October 2013. This is the first time that rents in the capital have decreased since February 2013.

The drop in rental amounts could be due to the fact that wage increases have not kept pace with the increasing cost of living. The average tenant income in Greater London saw monthly and annual decreases of 3.1% and 1.8% respectively. The average London income is currently £34,600 pa. This is the first time since March 2012 that tenant incomes in Greater London have dipped below £35,000 pa.

INTEREST RATES

Now a warning for the future, investors in the PRS should be paying attention to the latest UK employment data and comments from Mark Carney, Governor of the Bank of England (BoE).

There has been a significant drop in inflation, UK unemployment has fallen to 7.6% and the total number of people in employment has risen. The BoE raised its forecast for UK GDP growth in 2013 to 1.6%, up from 1.4%, and the estimate for 2014 to 2.8% from 2.5%.

These factors have lead Mark Carney to state that the BoE now anticipates unemployment to fall below 7% around autumn of 2015. This is significant because unemployment being below 7% is one of the conditions that Carney set before he would contemplate raising interest rates.

These economic improvements means that the date at which interest rates could rise is likely to be sooner than many may have planned for. Any investment decision that was based upon a lengthy period of low interest rates should be reviewed. Young Group would advise against over-gearing and taking on excessive debt without considering a contingency for when rates do begin to climb.

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