Savills give there outlook for PRS

Rents across the UK will continue to rise well ahead of inflation over the next five years, as growing numbers of young singles and families remain unable to raise the deposits necessary to access home ownership says global real estate service provider Savills in their forecasts, released today. But, they say, a North South divide will open, reflecting the ability of tenants to afford rent rises. Higher economic and wage growth in the South East, coupled with strongest demand and most limited supply will mean greater increases in London and its commuter belt.

Average rents are expected to rise by 2.5 per cent in 2013 and 18.2 per cent over the next five years, the firm forecasts. The amount of rent paid by the under 35s is forecast to rise by 53 per cent from £24 billion to £37 billion over the period, making this a growing and attractive destination for investment. “This is particularly for those investors seeking long-term income streams, linked to wage growth and underwritten by fundamental human need, says Yolande Barnes, director, Savills world research. “If utilities, water companies and food production appeal to this type of investor, so too should residential property.”

London rents to rise fastest

The growing need for shelter from ‘rentysomethings’, particularly in and around Greater London means that over the mid term, mainstream rents in the capital will outperform both the UK average and even prime central London. Greater London average rents are forecast to rise by 3.0 per cent next year, slightly ahead of the UK average, but will significantly outperform over the next five years, rising by 26.4 per cent.

5 year rental forecasts

Rental Growth	2013	2014	2015	2016	2017	5 years to End 2017
UK Mainstream	2.5%	2.5%	3.0%	4.5%	4.5%	18.2%
Greater London	3.0%	4.0%	4.5%	6.0%	6.5%	26.4%
Prime Central London	3.0%	5.5%	4.5%	4.5%	4.5%	24.0%

Source: Savills Research

Prime central London rents are driven by City sentiment and corporate demand, with strong ties to the health of the FTSE and are more volatile than the city’s mainstream rental market. Growth is expected to be 3.0 per cent in 2013 and 24 per cent by the end of 2017. Prime central London investors will, however, benefit from higher capital value growth over the forecast period.

Rents are taking up a growing percentage of tenant’s income, but this stretched affordability is still within normal bands at a national level, says Savills. Although, in the North, the lack of income growth is limiting the potential for rental growth, the fundamentals of occupier demand and affordability remain sound (though more uncomfortable for tenants) at a national level.

“Different borrowing and demand conditions will reinforce the very varied rental market conditions across the UK and determine the potential for rental growth at a local level,” says Barnes. “Deposit affordability will continue to be the main brake on home ownership levels, fuelling demand for rented accommodation, while income growth will ultimately determine the ability of rents to continue to rise.”

“For investors, the UK’s private rented sector looks an attractive option. Rental growth is a function of constrained deposit affordability and underlying demand for shelter, while recent population trends suggest that demand will continue to increase in coming years. This is especially true for London where the relative strength of the economy and strong international in-migration continue to put upwards pressure on rental values. 

“Indeed, current levels of occupier demand make the private rented sector the only truly fully-functioning market in the UK residential sector. Yields and income in London remain strong by world city standards and make the capital an attractive buy in a global context. This is particularly the case when compared to ‘new world’ cities, such as Shanghai, where the motives of capital investors have driven values way above the underlying growth in rents.

“If rental levels are a good indicator of underlying occupier fundamentals, then low yields can be an indication that capital values are overheating. Given the disparity between the two, there is little chance that this is the case in the UK.