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Insight & Opinion

Private rental sector delivers quality returns

Author: Gemma

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The private rental sector is delivering excellent returns for investment, with high demand for accommodation across the UK.

That’s just some of the findings in Knight Frank’s inaugural tracking index of performance of rental blocks throughout the country.

According to the property advisor, institutions and private individuals are the biggest players in the private rental market.
Rental performance was tracked in six cities, including London (Zone 1, Zones 2-3, Zones 3-6), Bristol, Birmingham, Leeds, Manchester and Glasgow.

In these markets, rental and capital growth is recorded, as well as discounts, in buildings in the economic and prime rental scale, providing a useful cross-section.

The index is part of a wider report which Knight Frank has also launched, known as ‘The Rental Revolution’, which examines the wider trends in the rental sector.

This document revealed that a sixth of the UK’s population currently resides in rental accommodation, with this set to increase further in the coming years.

Knight Frank predicts 5.3 million people will be in rental homes by the end of 2018, marking an increase from the 3.9 million in 2010. It continued to suggest urban centres will be the most notable areas for tenant demand, but this is set to increase countrywide.

With this in mind, the report has called on the government to extend the £1 billion Build to Rent fund, which is currently over-subscribed, in order to help supply this expected demand.

Returning to the index, it was discovered that the average rental growth in city markets was 2.9 per cent in 2013, ranging from the 0.4 per cent low in London Zone 1 to the 5.3 per cent high in Manchester.

It also revealed that Leeds and Manchester have the highest average initial yields (8.2 per cent) across the cities examined during quarter four 2013.

Across all six city markets, the average yield was 6.6 per cent, while the mean discount fell from 20 per cent to ten per cent, demonstrating the increased activity in these areas.

Grainne Gilmore, head of UK residential research for Knight Frank and author of the report, said: “The rental revolution is here. The dynamics in the housing market in the UK mean that the private rented sector is set to continue growing in the years to come, boosted not only by the difficulties many face in climbing onto the housing ladder, but also the need for flexible tenure among workers who are increasingly concentrated in the key cities around the UK.

“Investors keen to tap into the market are starting to move their attention beyond London to the regions, where, as our index shows, yields are higher.”

The market is currently perfect for buy-to-let investors, especially in these growing city markets. However, with the demand for rental properties on the rise across the UK and the increasing confidence in local economies, the UK’s other regions also present a number of opportunities.

Head of residential capital markets at Knight Frank James Mannix said picking the correct location and the right type of rental units are “critical” when it comes to ensuring quality returns.

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