1.1 million more rental homes needed by 2016

By 2016 demand for private rented accommodation could reach one in five households, resulting in a requirement for an additional 1.1 million rental homes, a new report from Savills and Rightmove forecasts.

Some £200 billion investment will be needed to provide the homes required, but only £50 billion of this is forecast to come from buy-to-let funding.

The report, Rental Britain, estimates that there are 4.8 million privately rented homes in Britain, up from just 2.5 million in 2002. In London, private renting already accounts for 27 per cent of all homes (900,000), having overtaken social renting in 2010, which now accounts for just 24 per cent of tenure (783,000 homes).

Private renting is big business. The report estimates that in 2011 Britons paid around £48 billion in rent to private landlords and this is expected to rise to £70 billion within five years.

“The dynamics of supply and demand make a great case for investment in this sector.”

“Meeting the growing demand for private renting and the changing profile of tenant demand are perhaps the greatest challenges facing both the housing industry and policy makers,” says Lucian Cook, director of Savills residential research. “The dynamics of supply and demand make a great case for investment in this sector, and rising rents and lower capital values have begun to attract private investors back into the market. Investment returns relative to other asset classes will dictate the pace of investor entry to this sector.”

Demand for private rented stock continues to rise. The situation of first-time buyers unable to access home ownership has been well-documented but they are now joined by a new generation of more mature renters, particularly families. Rightmove estimates that “trapped renters” now account for more than half of the UK rental sector, and more than a quarter of these are aged over 40. Such renters will require a different type and size of rental product, catering for longer term lets.

Rent increases over the past year have averaged 5.2 per cent. Savills forecast 20 per cent rental growth over the next five years (three per cent in 2012), while research from Rightmove indicates that almost two-thirds of tenants are expecting their rents to rise over the next year.

“This illustrates that the shortage of supply is creating severe upwards rental pressure,” says Miles Shipside, director of Rightmove. “This could lead to an over-stretching of tenants’ finances or a ‘rental bubble’ in some locations.

“A shortage of supply is making the situation worse. Our analysis shows that search activity has more than doubled over the last two years while stock available for rent is down by nearly 10 per cent, even though there has been no reduction in stock posted.”

Rental values vary enormously across the UK and regional averages can mask highly localised variations. Proximity to London tends to equate to higher rents, with an average of £10,300 for a two-bed property in the South-East compared to £6,170 in the North-East. And there is a real north/south divide which is shown by the rents across the 30 largest rental markets outside of London. The five highest value locations (Elmbridge, Oxford, Brighton and Hove, Woking and Reading) are all located in the South-East and have average rents of more than £10,000 a year.

Tanya Blake, head of Savills Home Counties Lettings, comments: “Around the Home Counties, the asking rent for an average four-bedroom family home can range upwards of £38,000 per annum but the deposit required to purchase a house of a similar size would be much higher. The continued constraints surrounding the mortgage market have led to many affluent individuals choosing to rent as a lifestyle choice and the figures from our research department do indicate that over a 10-year period, the number of people entering the private rented sector has almost doubled. This demand has created an opportunity for investors, particularly those with cash, to earn a reasonable return on their investment as well as any long-term capital appreciation.

“Additionally, we may start to see an increase in the number of investors looking to the Home Counties market as many will feel squeezed out of the central London market because of the recent increases in stamp duty for property priced at over £2 million.”

In locations where affordability is most stretched landlords will face a trade-off between pushing for higher rents, thereby risking arrears and voids, or opting for a lower rental growth but a more secure income, and renters will face the possibility of long periods in shared accommodation to make renting an affordable necessity.

Individual investors have clearly begun to re-enter the market, but any increase in traditional buy-to-let stock since the credit crunch has largely been funded by cash investors — a source of new supply that clearly cannot keep pace with demand. Large scale investor activity is long-awaited.

“Low yields have been the biggest barrier to much-needed long-term investment, but as yields move out there are early signs of changing investor behaviour,” says Lucian Cook, director of Savills research. “The challenge for the industry will be to attract the £200 billion investment needed to supply forecast demand over the next five years.”

Lower prices and rising rents have pushed out income yields to a point that may just act as a trigger for such investment at scale. Such investors would be expected to achieve bulk discounts of up to 25per cent on vacant possession and there are signs that this may just trigger investment in the right opportunities in the right locations.

“Higher capital growth forecasts mean that London and the South-East are likely to be the focus for investors.”

Buying within a higher value, equity rich, owner occupier dominated location will almost inevitably suppress yields but boost capital growth and, ultimately, the liquidity of the asset.

Private investors with significant borrowing requirements will need to look for high yielding yet high demand locations to service their debt, which could lead to a focus on lower value markets. Higher capital growth forecasts mean that London and the South-East are likely to be the focus for investors.

Rapidly rising demand will need rental stock to be delivered by the new build market, in volume and at a discount to provide the yields to attract vital corporate and institutional funds. Meeting need in volume will require the planning system to formally recognise the need for private rented accommodation to a greater or lesser extent interchangeable with affordable housing provision.

A shift to private renting may go against a nation’s emotional attachment to home ownership and long-established political aspirations of a nation of private sector home owners, but facilitating the supply of new stock into the sector is now critical, the report concludes.

Investors are urged to continue to re-examine the very real opportunities the sector offers and policy makers to ensure these opportunities are not closed down. Rental Britain is here to stay.

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