According to the latest research from international real estate adviser, Savills, the role of residential property investment could change dramatically in the post credit crunch environment.
Whilst access to borrowing continues to be rationed, Savills believes that the buy-to-let model which, to date has been the catalyst of expansion in the private rented sector, is unlikely to continue to provide a major source of new rental supply due to the constraints of mortgage funding.
Rental demand, however, is likely to increase for three main reasons. Firstly, from first time buyers who will have difficulty in raising a sufficient deposit to enter owner occupation. Secondly, from a shortage of the types of housing for which there is the greatest demand. Finally, from a lack of funding to provide housing within the social rented and intermediate housing sector.
Management costs, short lease terms and a perceived higher exposure to void periods all have an impact on the level of return an investor can expect. In a market dominated by owner occupiers the influence of investors in setting prices or achieving substantial discounts has been limited, with only those looking at buying high numbers of units off plan, or buying into schemes at early stages as ‘pioneers’ being able to negotiate significant reductions. In addition to this small lot sizes available in many locations have made economies of scale hard to achieve, and one can begin to understand the reluctance in the past, by commercial investors, to invest in residential property.
Whilst investors may be enticed into the market by acquiring distressed stock and thereby seeking to replicate any low return, the current historic low interest rates is limiting the amount of stock available to them.
However, for some, the positives outweigh these negatives. The acquisition of a residential investment portfolio not only diversifies risk exposure but, for those who are cash rich, will provide a medium capital return as current housing affordability has been driven upwards due to lack of mortgage finance. For some, ‘build to let’, – the combination of low land costs with market rents which should provide higher income returns to compete with those of commercial property, is a motivator to enter the residential market.
Jane Ingram, Head of Savills Lettings, comments: “Throughout 2008 and into 2009, lettings has proved to be a viable alternative to selling property in these uncertain times. With rents stabilising and interest rates still at an all time low, investment interest in residential lettings remains high.”