Professional investors look to capitalise on falling rental supply
Date : 02 November 2009
Headlines
· Strong price growth pushed central London residential yields to a new record low in September of 3.49%
· Rents rose by 0.1% in the third quarter, but this growth was offset by a 3.9% rise in capital values
· Investors are beginning to see some respite from competition from the forced landlord, as stock volumes fall 30% year-on-year
· Investment grade stock is attracting professional investors and yields for these properties are being pushed higher – with purchases at and around the 6% level being achieved
“It has been a tough ride for the residential investment sector. In 2008, as falling prices held out the opportunity of stronger yields, then rents fell back by 20% as the market became saturated by forced landlords,” according to Liam Bailey, head of residential research, Knight Frank.
“However the market is changing direction again; the stronger performance in the sales market means that the forced landlords – who contributed to a 100% rise in stock volumes 12 months ago – are beginning to plan their exit routes from the lettings market.”
In detail
The most resilient market for yields has been the more lower priced end of the market. The sub-£1.5m capital value segment saw yields hold up at almost 4% in the third quarter. The £1.5m+ market fell back to 3.31%.
This reflects much more resilient rental performance in the sub £1,000 per week market compared to the more expensive rental markets.
Outlook
Liam Bailey continued: “With supply falling back as the forced landlord begins to move towards the sales market, the hope for the professional landlord is that rents will begin to rise again. Our third quarter results confirm that rents rose for the first time in 15 months by a marginal 0.1%.
“This is likely to be the beginning of a period of stability in the sector – with falling supply feeding into rising rents. Landlords might be overoptimistic if they envisage anything more than low single digit inflation in rents in 2010.”
Professional sector
“The professional investment market has seen a complete turnaround this year, with well located managed blocks and larger portfolios now achieving yields of more than 6% in central London,” commented James Mannix, head of residential investments, Knight Frank.
“When compared to the low yields of 3.5% to 5% seen at the peak of the market in 2007, this is a huge improvement. Now that prices have come down to what is perceived to be a sensible level, we are receiving high levels of interest from institutional and private investors with funding in place.
“Most investors are coming in with a medium term view; looking for a five to seven year hold. They are typically purchasing smaller portfolio sizes of between £2m and £10m, and there is very little transactional activity above this level.
“There will be a shift toward much larger transactions in coming months as there is a large pool of both institutional and private money looking to invest in large lot sizes in the sector. They should get their opportunity to do this over the next 6 months.
“This market is also considered to be fundable by banks, who are typically lending up to 60 to 65% for this type of purchase as, with the benefit of relatively secure income, they regard it more favourably than other investment options.”
Case studies
Knight Frank recently acted for the Grosvenor Estate on the sale of the Grade II listed Chantrey Street in Belgravia for £20.75 million to Native Land, which is yielding 6.25%.
Knight Frank is selling an investment block on Holland Road between Holland Park and Shepherd’s Bush, which comprises 18 units, priced at £2.3million and yielding approximately 6.5%.
For further information, please contact:
Liam Bailey, Residential Research, Knight Frank, +44 (0) 7919 303148,
James Mannix, Residential Investments, Knight Frank, +44 (0) 020 7861 5412
Niki Riley, Press Office, Knight Frank, +44 (0)20 7861 5037
Notes to Editors
Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank and its New York-based global partner, Newmark Knight Frank, operate from 207 offices, in 43 countries, across six continents. More than 6,340 professionals handle in excess of US$886 billion (£594 billion) worth of commercial, agricultural and residential real estate annually, advising clients ranging from individual owners and buyers to major developers, investors and corporate tenants. For further information about the Company, please visit www.knightfrank.com.