Rent­ing cre­ates a golden age of prop­erty in­vest­ment

Prop­erty in­vest­ment is the height of fash­ion once again say Savills. Sharon Dale takes a look at their lat­est mar­ket re­port and pre­dic­tions.

Yorkshire Post - Property - - FRONT PAGE -

CASH buy­ers are find­ing that res­i­den­tial prop­erty in­vest­ment stacks up, ac­cord­ing to Savills’ lat­est re­port on the mar­ket.

Yolande Barnes, head of res­i­den­tial re­search, says that rather than look­ing at bricks and mor­tar as a cap­i­tal as­set and re­ly­ing on house price growth to fuel a profit, buy­ers are now happy to de­rive an in­come from rents.

“When we first started to look at res­i­den­tial prop­erty as an in­vestable as­set class 25 years ago, it was deeply un­fash­ion­able.

“There was only a tiny, ves­ti­gial mar­ket rented sec­tor left in the UK, fol­low­ing reg­u­la­tion-in­duced as­set dis­posal by in­vest­ing in­sti­tu­tions,” she says.

At that time, Mar­garet Thatcher wanted ev­ery­one in Bri­tain to own their own home and rent­ing be­came less com­mon.

This trend be­gan to re­verse at the mil­len­nium, so in fu­ture it might come to be viewed only as a late twen­ti­eth cen­tury phe­nom­e­non.

“Post credit-crunch a new form of mort­gage ra­tioning, for­got­ten since the 1970s, has re-emerged.

“The im­po­si­tion of very low loan-to-value ra­tios and strin­gent qual­i­fi­ca­tion of ap­pli­cants has cre­ated a ma­jor bar­rier to hous­ing ac­ces­si­bil­ity,” says Yolande.

“The cost of de­posits has over­taken the cost of debt re­pay­ments as the is­sue de­ter­min­ing af­ford­abil­ity.

“The sub­se­quent growth in the num­ber of mar­ket-rented prop­er­ties over the last five years has re­minded us that the new prop­erty world is dom­i­nated by cash and not bor­row­ing.”

But ty­ing up cash in an as­set like hous­ing is only worth­while if it pro­duces a re­turn greater than that avail­able else­where and at equal or lower risk.

For most owner-oc­cu­piers and pri­vate in­vestors, there are very few al­ter­na­tive in­vest­ments that are gen­uinely “as safe as houses” or as high yield­ing, ac­cord­ing to Savills.

De­mand for pri­vate rental accommodation is not only ex­pand­ing but be­com­ing more long-term.

Joint re­search with Rightmove shows av­er­age gross in­come yield now stands at 5.8 per cent na­tion­ally and yields are much higher on smaller prop­er­ties, where owner-oc­cu­pier de­mand has been hard­est hit by the squeeze on mort­gage lend­ing.

In­come yields on one-be­d­room prop­er­ties av­er­age 6.7 per cent. Af­ter ac­count­ing for costs and void pe­ri­ods, the av­er­age net yield for typ­i­cal pri­vate land­lords comes in at around 4.1 per cent.

Ul­ti­mately, say Savills, as the res­i­den­tial rental mar­ket gains in sig­nif­i­cance as an in­come- gen­er­at­ing as­set class, it’s likely that in­vestors will move away from their his­tor­i­cal fo­cus on a prop­erty’s cap­i­tal value and will con­cen­trate in­creas­ingly on the in­come stream as a mea­sure of value, just as they do with other in­come-pro­duc­ing as­sets such as bonds and com­mer­cial prop­erty.

Ben Prid­den, head of res­i­den­tial at Savills in York, says: “The one sec­tor to have thrived through­out the credit crunch has been pri­vate rentals.

“The shift to pri­vate rent­ing has ac­cel­er­ated, thanks to con­strained mort­gage fi­nance and the sig­nif­i­cant de­posit hur­dle for would-be home buy­ers. In fact, rapidly ris­ing de­mand will re­quire rental stock to be de­liv­ered by the new build mar­ket.”

Savills five-year fore­cast pre­dicts that prices in the north will hover be­tween one and two per cent be­low their 2007 peak un­til 2016 when they will rise three per cent above it.

Ben Prid­den says: “The main­stream mar­ket shows neg­a­tive growth fore­cast over the next five years in York­shire.

“Cer­tainly, there are some ar­eas where sell­ing houses, par­tic­u­larly those with prob­lems of one kind or an­other, is very tough.

“Two mar­kets that seem to be more re­silient than most are York and the prime area to the north of city. In re­cent months some houses in York have sur­passed prices not seen since the top of the mar­ket.”

Stamp duty rates for higher value prop­er­ties have been on the rise since 1997. Re­ceipts from hous­ing rose by 670 per cent in the 10 years to 2007/08, while house prices in­creased by just 180 per cent.

Renters may think of it as “dead money” but it may be cheaper than buy­ing if they take the cost of re­pairs and main­te­nance into ac­count. If you do this, say Savills, the bal­ance tips in favour of rent­ing, with home own­er­ship cost­ing £1,300 more than rent­ing over the course of a year.

The in­crease in ten­ant de­mand in the UK has been dra­matic: over the five years to the end of 2011, the to­tal value of hous­ing in the pri­vate rental sec­tor was up 42 per cent, while the num­ber of house­holds rent­ing pri­vately had leapt al­most 50 per cent, from 3.4 to 4.8 mil­lion. And the trend is set to con­tinue: by 2016 Savills es­ti­mate that fig­ure will have risen to 5.9 mil­lion.

In Ox­ford, av­er­age rent on a two-be­d­room prop­erty amounts to 57 per cent of av­er­age in­come.

COUN­TRY RE­TREAT: The farm­house and its new ex­ten­sion make up a lux­u­ri­ous coun­try home that is en­ergy ef­fi­cient and cheap to heat thanks to its log boiler and so­lar hot water pan­els. The barn ex­ten­sion houses a liv­ing kitchen with oak beams and up­stairs there is an enor­mous mas­ter be­d­room.

SAFE AS HOUSES? Rental prop­erty can be a good in­vest­ment but check the yields. In­vestors are likely to fo­cus more on in­come streams.

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