Returns from commercially owned residential property in the UK increased to 14.7% during 2013, a six-year high, as demand from investors and residents surged. ?
The IPD UK Annual Residential Property Index shows that rents from market rented homes rose by a cumulative 32.9% over the past ten years, compared with 5.9% from commercial property.
This rise was far more closely aligned to inflation of 38% and wage growth of 32.4% (RPI/ONFS).?During 2013, residential rents increased by 3.5%, compared with 1% across the UK commercial property sector.
As demand for residential property is driven by social-economic and demographic changes – as opposed to demand for luxury retail or City office space – institutions are increasingly looking to develop large blocks of market rented homes, the IPD said.
Recent investors into the UK market include Essential Living, which is backed by M3 Capital Partners and APG, the Dutch pension fund.?The latest findings of the English Housing Survey for 2012-13 show that of the estimated 22m households in England, 4m (18%) were renting privately, while 3.7m (17%) were in social housing.?
The latest IPD report highlights how commercial demand for residential stock is seeking to take advantage of this strong structural imbalance in the market place, which has driven continued growth in the sector.?This competition for assets meant capital growth continued to dwarf rental increases.
Values rose by 11.7% last year, their highest annual growth since 2007, leading to further yield compression, with income returns 2.7%.?Despite this, institutional investors will be buoyed by the fact that a long-term trend in declining management costs has meant net income has been increasing as a proportion over time.
Management costs have declined from almost 40% of income in 2009 to 32% in 2013, meaning improved management efficiency on large schemes has helped investors to secure income.?This has allowed income returns to average 3.2% pa over the past decade, remaining relatively unchanged despite the extremely high capital growth.?Management efficiency is also leading to increased lease lengths, with new analysis from the index finding that the average tenancy length for a commercially let residential unit is now three years.?Although residential property generally has a lower yield than commercial property, its differing investment qualities make it attractive for investors seeking to diversify risk and with continued rental growth, this remains a positive sign for long-term investors.?
The strongest districts for overall returns were to be found outside of prime central London, with returns in inner London (zones 2-3) and outer (4-6) the highest in the UK, driven by a combination of rental and capital growth.
Inner London delivered total returns of 17.5% in 2013 and saw rents rise by 2.8%, while outer London saw returns rise by 17% and rental growth of 4.6%.
Central London (zone 1) delivered 14.7% to investors, while rents increased by 2.4%.?Outside London, returns for residential stock, where demand is less acute, were considerably lower, though the South East saw a turnaround in performance – in part driven by the extremely expensive South East housing market, which is driving more people into renting. ?
Comparatively, commercial real estate returned 10.7% in 2013 and unlisted property funds 9%, according to the IPD UK Annual Property Index and the IPD/AREF Property Funds Index. Bonds and equities returned -5.2% and 18.5% (JP Morgan 7-10yr and MSCI UK).
Phil Tily, executive director and head of UK & Ireland at IPD, said: “The latest returns will add further impetus to the growing number of developers and institutions looking to enter the PRS in the UK, where returns are some of the highest of any UK real estate type asset – with a far superior risk/reward profile than bonds, equities and commercial real estate.”
bridget.oconnell@estatesgazette.com
