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Forecasts for the private rented sector

publication date: Aug 28, 2008
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AT over £500 billion, the value of the Private Rented Sector now outstrips the total of all privately-owned commercial property, including offices, shops, hotels, factories, warehouses and leisure facilities.

In a report for ARLA, published on 14 July, the Private Rented Sector is forecast to continue outstripping other types of investment property and rents will rise significantly in the short term. House prices will almost certainly increase faster than commercial real estate over the longer term, as housing supply is less responsive to demand than commercial property but consumers demand more and better housing as living standards rise.

The report, Part I of “The Modern UK Housing Market - Origins and Prospects” by Professor Michael Ball, Professor of Urban and Property Economics at Reading University, forms part of a wider study into residential housing commissioned by the National Federation of Property Professionals, to be published in the Autumn. This will cover the market sectors of both its residential housing divisions, ARLA and the NAEA.

Professor Ball forecasts rents to rise by 10% to 15% in both 2008 and 2009. Despite this, he says that the modern Private Rented Sector is helping to stabilise housing because it accommodates those who, by this stage in the housing cycle, would be over-stretched borrowers with rising negative equity. A re-run of the 1990s, when negative equity prolonged the housing market recession and blighted the lives of many is less likely to occur in this downswing as a result.

Commented Ian Potter, ARLA’s Head of Operations, “It was as a result of the appalling effects on young owner occupiers last time that ARLA took the initiative and launched Buy to Let to re-build and re-finance the Private Rented Sector and to mitigate the dreadful social consequences of housing boom and bust. It has proved to be remarkably successful.”

The report points out that it is now feasible for younger households to rent decent accommodation on a scale impossible for older generations. This has helped delay the age at which people buy their own homes.

Affordability problems are likely to continue even if the housing supply increases. The current 56% of 30-34 year olds who are able to afford a purpose build flat will fall to 45% by 2016 and only 34% by 2026. The fundamental cause of so many of the UK’s housing problems is that rising affluence is being crushed against static housing supply as standards of living double every 25 years,provoking more demands for space and privacy, the report claims.

Meanwhile, tenant mobility in the Private Rented Sector has increased, while it has fallen for home-owners with a mortgage. A typical rental property is a terraced house in an outer or inner town or city suburb. The property will rarely be new, only 13% are post 1985 and about two thirds are pre-1945 but recently modernised. This type of housing matches the preferences for accommodation, location and affordability of the majority wanting to rent.

Rents have been outstripped by house price rises for much of the past 15 years, although they have risen faster than general price inflation. Landlords’ yields have not been particularly high because the rise in house prices has eroded the uplift in rental income. The report comments that the DCLG Rent Index suggests rents have risen by almost 40% since 2000 and ARLA’s own research shows that rents rose by around a fifth between 2003 and 2007.

However, averages are driven by London and surrounding areas and there are significant regional variations especially when taking Scotland and the North into account. There are also variations in property types and rents achieved.

Investment in residential property is driven by capital gains, which, the report suggests, partly explains the low rental yields. Capital appreciation has been good over the long term. Real house prices rose by 4.2% a year on average between 1981 and 2003, while capital values for commercial property fell by 1.2% by the same measure.

A steady growth in the number of private tenancies of about 3% a year is expected. At this rate, renting will sustain its current overall share of housing provision. The share of private renting is likely to grow faster in the economically strongest parts of the country, especially London and surrounding areas. This means that the overall value of the Private Rented Sector is likely to grow at a faster rate than the UK housing stock as a whole as it will be concentrated in the most expensive, price-dynamic parts of the country, the report states.

Part I of the report “The Modern UK Housing Market - Origins and Prospects” is available on http://www.arla.co.uk.