Investment Market – First Half 2013
YIELDS HIT NEW LOW
Typical income yields on one bedroom apartments fell in the first six months of 2013 from an average of 5.4% to 5.1%. The decline in the income yield is the simple and direct consequence of a rise in capital values (of around 5%) combined with static rental values. This divergence between growth rates for capital and rental values could continue over the next 3 years, as more investment properties reach the rental market, causing yields to drift below 4%. The average yield on two bedroom apartments is already approaching 4% across the market areas that we cover.
It is a fact that, while capital values are supported by inherent supply constraints, rental values are suppressed by a rising supply of rental property via buy to let investors and which might be significantly expanded in future with the emergence of a more formal Private Rented Sector.
While there remain significant obstacles to the emergence of a Private Rented Sector, we saw more signs this year of investor interest. Essential Living is set to buy a site in Poplar with consent for 345 private and 60 intermediate homes in 2 towers with 34 units for sale and 28 reserved for private rental. In April the housing minister announced a shortlist of 45 projects that could benefit from the £1billion Build to Rent Fund, set up to facilitate private rented sector construction. A quarter of these were in London.
At the time of writing there were no examples of Help to Build being offered by housebuilders in Midtown, City or Docklands. Telford Homes, in their 2013 Annual Report confirmed:
“While the board anticipates that Telford Homes will join the ‘Help to Buy’ scheme in London it has not done so to date and has not needed to participate in any of the previous government initiatives.” Telford Homes Annual Report 2013.
It is an indication of the strength of the market in London that developers have not felt the need to offer such incentives to buyers and, in fact, many of their buyers are cash purchasers. (see page 3 – buyer profile: funding).
Serviced apartment operators and student accommodation providers continue to be active in the investment market. Landlords and developers benefit from longer leases and savings in management costs by entering into tenancies of multiple units with a single provider.