Rental sector surge on the cards for 2012

A major expansion in Britain’s private rented sector is on the cards as big financial institutions, including banks, insurers and pension funds, prepare to invest billions of pounds into providing homes for rent.

Since the end of the Second World War, these mighty institutions have generally avoided much involvement in providing accommodation, because they have been unsure of the returns and fear the prospect of complex management problems.

However, with equities in such poor shape, interest rates at rock bottom and global financial systems dangerously stretched, bricks and mortar is becoming an increasingly attractive option as rents continue to climb.

The latest figures from HM Revenue and Customs indicate that financial institutions ploughed £2.2bn into houses and apartments in the UK in the 12 months to April 2011 – a 189 per cent increase on the previous year, when the total was £765m.

Jeremy Raj, head of the residential property team at City lawyers Wedlake Bell, says: “There has been a startling jump in purchases of UK residential property by institutional investors.

“Institutions are being attracted to residential property because of improving market fundamentals, including high tenant demand, high rents and a supply shortage that shows no immediate signs of abating.

“It will be interesting to see whether this sudden surge is able to maintain its momentum in the year ahead. One area which has seen strong investment is the student accommodation market, both by UK and overseas institutions.”

Rents rose for nine consecutive months to November, to an average of £720 per month. And Wedlake Bell says the shortage of homes in the South East that is underpinning high rents is unlikely to be alleviated in the short term.

Raj explains: “One effect of the credit crunch was to freeze the new build pipeline, meaning the current shortage of properties on the market is unlikely to abate in the near term.

“Unsold housing stock from the new build boom prior to the credit crunch has now been cleared up, making the current shortage of quality rented accommodation more acute.

“In addition, it seems unlikely that any public sector-led affordable homes initiative will meet the shortage of affordable homes.

Wedlake Bell says that this acceleration of purchases by financial institutions reverses years of low investment by them in UK residential property.

Raj adds: “Financial institutions were reluctant to invest in residential property as they felt that the relatively high costs of managing a residential portfolio, made up of so many small individual properties, cut too deeply into returns.”

If plans currently under consideration are fulfilled, this Government could build a reputation as the restorer of the private rented sector which rivals the triumph of Margaret Thatcher’s years in her massive build-up of owner-occupation.

One household in five in Britain could be in the private rented sector by 2016, says an analysis from agent Savills.

Savills research bulletin says: “The dramatic increase in demand for private rented accommodation since the credit crunch should provide an opportunity for large scale investment in the residential sector, particularly given a lack of activity among buy-to-let borrowers.