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Property: rising rental yields may entice institutional players

guaranteed rent scheme

Property: rising rental yields may entice institutional players

History tells the UK property investor that if they are looking for income, they want exposure to commercial property, while if capital growth is more important, residential real estate is where to invest.

But this trend could soon switch as the private rental sector looks to expand considerably over the next five years.

Forecasts from the real estate advisor Savills predict that the number of people renting their homes will rise from today’s levels of 3.4 million to around 4.3 million by 2016. This would represent one in five UK households, the lowest levels of home ownership since 1961.

The trend is driven by a market that is increasingly pricing out first time buyers, who face the added difficulty of risk averse banks reluctant to approval new mortgages.

guaranteed rent scheme

The potential yield has tempted fund management groups into direct property ownership. Several are known to be looking at how to manage economies of scale.

Rental growth of the scale forecast by Savills would see the headline average gross yield on residential stock (IPD) rise from 5.4% to 6.1% across the five year period.

guaranteed rent scheme

guaranteed rent scheme

In areas of low owner-occupier demand, and associated suppressed capital values, yields are already high and could see an even greater shift, perhaps averaging nearer 9% by the end of 2016.

Stephen Elliott manages the Royal London’s property fund, which has yielded 9.25% over three years versus the IPD all property index’s 11.8%. He says well-known institutional names are already interested in the sector.

‘The big fund management houses are looking at it but they’ve decided that as an institutional business, there needs to be critical mass for an investment.’ he said.

‘Tenancies are shorter and rental yields are lower than commercial property, plus you have the management headache, so the big names have to buy huge blocks of units for it to work.’

Changes to the legal framework regulating real estate investment trusts (REITs), mooted in the last budget and to be presented in the upcoming draft 2012 Finance Bill, could make it easier to invest in the residential housing sector.

‘We are watching the announcements from the Treasury very closely,’ said Martin McGann Chief Finance Officer at property company London&Standford. ‘If the regime does change, the market trend we are starting to see will really take off.’

For the ‘second steppers’ – those relying on their property to appreciate to finance their next move – the subdued housing market has not given them the equity they needed for another deposit.

When coupled with a lack of new builds in the pipeline, economic indicators point to rapidly rising demand for private rented accommodation.

As Peter Winfield, partner at Thomas Round Winfield Real Estate, explained, ‘there has been a fundamental restructuring in the market…There’s a hell of a demand for residential property but people can’t buy them.’

‘Effectively there in an imbalance between demand and supply, as property prices remain pretty flat while rents are rising. Now funds and a number of UK investors want exposure to the UK residential market as an income play,’ he said.

Lucian Cook, director at Savills Residential Research, said he has seen a ‘groundswell of demand from institutional investors for the private rental sector.’

‘The income rental yield play from residential is something people have been talking about for a long time…but we are now at that point when you will start to see money flowing in,’ he said.

Savills forecasted that growing competition among renters will boost mainstream rents in the UK by 20.5% over the next five years, outpacing capital growth which they expect to reach just 6% over the same period.

‘This differential will push out yields and is likely to be the catalyst for renewed investment activity in the sector by corporates and institutions looking for income rather than individuals looking for capital growth,’ said Yolande Barnes, director of Savills residential research.

Source:http://www.citywire.co.uk/wealth-manager/property-rising-rental-yields-may-entice-institutional-players/a543824?ref=wealth-manager-latest-news-list by Alex Plough

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