Approaching half (46%) of Private Rented Sector (PRS) investors are considering purchasing additional PRS assets in London over the coming 12 months. Investment appetite throughout the UK strengthened during Q1 2012, but London assets clearly remain more appealing to investors than those outside the capital.
Among those not actively considering investing in the London market, the reasons given were overwhelmingly finance-related, rather than reflecting a lack of confidence in the market. This was not the case when investors were asked about investing in additional property assets outside of the capital, when concerns over future tenant demand and capital value prospects topped investors’ concerns.
Perhaps unsurprisingly, respondents believe that prospects for capital growth and rental income in London outshine those across the rest of the UK.
Capital Values
Over the past 18 months, respondents’ expectations of capital value movements have fluctuated somewhat. The massive polarisation between London and the rest of the UK shown in Young Index Q4 2011 has tempered this quarter. But positivity for London’s residential property values abounds; 85.4% of investors predict gains in the capital, compared to 41.2% for property outside London.
Property values in London are expected to increase by an average of 2.2% between now and Q1 2013, whereas investors predict that values across the rest of the UK will fall by 0.4% over the same period.
Rental Outlook
Following a dip last quarter, the number of investors predicting rent rises in London has increased once more. 92% of investors expect London rents to rise over the coming 12 months.
Sentiment for the strength of the rental market in the rest of the UK is not as buoyant with 70% of investors expecting rental income to increase; 9% fewer landlords currently predict rising rents than in Q4 2011.
Average rents across London are predicted to rise by 3.25% over the coming 12 months (up from the 2.39% forecast in Q4 2011), whereas investors expect rental income for the rest of the UK to remain largely unchanged (+0.7%).
Commitment to the PRS
Neil Young, CEO of Young Group and Young London comments:
“Investors appear more committed to the Private Rented Sector than ever; a full 100% of respondents indicated that they have no intention of liquidating PRS assets over the coming 12 months. 30% of investors are intending to hold their properties for at least the next 20 years and 62.5% for at least the next 10 years. The average anticipated future hold period increased in Q1 2012 to 15.7 years, an increase from 13.2 years at this point in 2011.
“There is clearly a long term commitment to the PRS. Confidence in the asset class remains strong, particularly for property in the capital where investors see future tenant demand is seen as virtually guaranteed.”
Economic Outlook
At Q4 2011, 58.3% of respondents expected that the Bank of England Base Rate would remain static at the prevailing low of 0.5% (on a 12 month outlook). This figure has since fallen to 43.9% as confidence that a raise will not take place within the next 12 months has waned.
However, it should be noted that of those who predict a rate increase, on average they expect it to increase fairly modestly – to stand at 1.25% by the end of Q1 2013.
Long term focus
- 100% of landlords intend to hold their property for the next 12 months.
- 62.5% intend to hold their property assets for the next 10 years or more.
- 30% intend to hold their property assets for the next 20 years or more.
- 15.5 years is the average future hold period that residential landlords expect to retain their property assets for.
Appetite for investment
- 45.8% of investors are considering purchasing additional residential property assets within London over the next 12 months.
- 23.6% of investors are looking at opportunities in the UK outside of the capital.
Capital growth and income
- 85.4% of respondents believe that London property values will be at current levels or higher by Q1 2013.
- For UK property outside of the capital, 41.2% expect values to be at current levels or higher by this time next year.
- 92.7% of respondents expect rental income in London to rise over the coming year.
- 70.5% of landlords expect UK rents outside London to rise over the coming year.
- Landlords expect capital values in London to see an average increase of 2.2% over the coming year with rental income increasing by an average of 3.2%.
- The predicted 12 month outlook for PRS capital values outside of London UK is a drop of 0.4% and average rental income is expected to remain broadly static, increasing by an average of just 0.7%.
Future base rate expectation
- On average, landlord investors expect the base rate to be 0.85% at Q1 2013.
- 43.9% of investors in the PRS expect the Bank of England base rate to remain static for the coming 12 months.
