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Rents defy the wage squeeze

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London & Stamford has announced yet another acquisition in the housing market. The real-estate investment trust (Reit) set up by industry veterans Raymond Mould and Patrick Vaughan already owns two London developments, one in the old Arsenal football stadium in Highbury and the other on the Thames in Battersea, and now it has agreed to buy 107 homes under construction just north of the City of London. There are even rumours of a long-term plan to build a stand-alone residential Reit.

This is odd, because London & Stamford – which we recently tipped (Buy, 131p, 27 May 2011) – was launched in 2007 specifically to buy crashed-out commercial property, and still defines itself as a commercial property investor on its website. Yet Mr Mould and Mr Vaughan have been seduced into housing by expectations of strong rental growth. They are not alone: British Land recently bought a courtyard development in the City, and those few analysts that cover the residential sector are also unanimously bullish on rents, even outside London.

That’s good news for buy-to-let investors, as we have reported (IC, 6 Apr). But the bullishness demands further attention, because it runs against the prevailing economic wind. The Office for National Statistics recently reported a 2.7 per cent year-on-year drop in the real disposable income of households in the first quarter of 2011. That well-documented ‘squeeze’ – the result of a public-sector pay freeze and private-sector wage restraint combined with inflation – is playing havoc with retailers and retail landlords. So why are the same forces not depressing residential rents?

The most obvious reason is that housing is a basic human need, unlike many goods for sale on the high street. In theory, households can choose between renting and buying. But in the current climate for lending, only the privileged few can afford to buy. “It’s no longer sufficient to have a good income, or lots of equity – you need both,” observes Mark Weedon, head of residential services at data provider IPD. The sale and purchase market is consequently depressed and the rental market buoyant, even in economically challenged areas of England such as the North East.

Second, the infamous UK housing shortage is not going away. The number of households in England has grown every year since annual records began in 1971, at a rate averaging 0.8 per cent per year, and nothing indicates this growth will stop. Meanwhile, tight lending conditions are keeping a lid on house building. Just 146,960 UK homes were finished in 2009-10, by far the lowest figure since records began in 1951 (although housing starts have since bounced back slightly).

That imbalance leaves households with little choice but to put up with higher rents, even if it means they have less income for other goods. Lucian Cook at Savills says the poor outlook for household income is already factored into his estimates of 7 per cent growth in mainstream (ie non-prime) rents this year and 6.5 per cent in 2012. “There will be some hardship, and it will make it harder and harder for people to save for a deposit to buy, but housing is a necessity,” he says. Paradoxically, rising rents may entrench the growth of the private rented sector by making home-ownership even more unattainable.

Neil Young, chief executive of Young Group, which owns and manages properties in South London, thinks tenants will cope by trading down to smaller properties rather than compromising on location. But he also warns landlords not to be too “greedy” and to carry out checks to make sure tenants can afford a rent hike.

Otherwise landlords may face arrears and voids, which can be far more costly than the potential gain from a higher rent. According to LSL Property Services, 9.3 per cent of all UK rent was unpaid or late at the end of June, and commercial director David Brown expects that figure to rise. “We’ve yet to see the full effects of public-sector job losses, and as inflation remains high many tenants’ finances will face mounting pressure,” he warns.

By Stephen Wilmot from http://www.investorschronicle.co.uk/InvestmentGuides/Property/article/20110722/263b2ad4-b2e2-11e0-a7cc-00144f2af8e8/Rents-defy-the-wage-squeeze.jsp

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