An important update on the state of the residential property market from Neil Chatterton, Managing Director of Caxtons.
News that Prudential is to start investing in residential property after a 30-year break marks a significant and interesting development for the sector.
Prudential recently released its plans to buy 500 new homes to use as seed properties for a private rented portfolio.
The move, they state, has been driven by the boom in demand for rental property caused by a strict lending environment and a subsequent move away from home ownership.
This trend has been highlighted in the latest census statistics, which show that 3.8m people are renting today compared with 1.9m in 2001.
The value of the sector is now about £1tn, equivalent to 20 per cent of the entire UK housing stock, and has quadrupled in size over the past decade.
Prudential's return as a private landlord will be a welcome boost to the housing market and it is likely we will see other institutional investors, such as Aviva and Legal & General, enter into the market fairly quickly with similar deals.
Fund managers are now recognising that the level of demand means residential property offers a low risk investment, but one that can also provide attractive returns as well as the potential for longer term capital growth.
The prospect of developers being able to forward sell to investors could also minimise developer’s risk and help encourage further house building.
The establishment of a large-scale, institutional rental market could slow the rate of rent growth too, which has rocketed since 2008.
Many experts are now citing that institutional investment could be the much-needed simple solution to a complicated housing issue.
However, growth in the private rented sector has been restricted to London, the south east region and some large cities in the north and midlands, where property prices have risen at their fastest.
Here rental yields offer an attractive return - an average of around eight per cent per annum when house price growth is factored in . In other areas of the UK, where house prices have been subdued during the financial crisis, yields may not be sufficient to attract institutional investment.
This may mean investment into new housing stock may be geographically limited.
Nevertheless, this void might be filled by small, buy-to-let investors. Higher rents, stable prices and falling buy-to-let mortgage rates are bringing back private investors to the sector in increasing numbers.
It's certainly a trend we've noticed. Over recent months, our property investment advisory team has been dealing with more individuals seeking help to invest in residential property for private portfolios and pension schemes
For more information about investing in residential property, contact Caxtons' specialist investment advisors on telephone 01474 537733.