Renting creates a golden age of property investment

Yolande Barnes, head of residential research, says that rather than looking at bricks and mortar as a capital asset and relying on house price growth to fuel a profit, buyers are now happy to derive an income from rents.

“When we first started to look at residential property as an investable asset class 25 years ago, it was deeply unfashionable.

“There was only a tiny, vestigial market rented sector left in the UK, following regulation-induced asset disposal by investing institutions,” she says.

At that time, Margaret Thatcher wanted everyone in Britain to own their own home and renting became less common.

This trend began to reverse at the millennium, so in future it might come to be viewed only as a late twentieth century phenomenon.

“Post credit-crunch a new form of mortgage rationing, forgotten since the 1970s, has re-emerged.

“The imposition of very low loan-to-value ratios and stringent qualification of applicants has created a major barrier to housing accessibility,” says Yolande.

“The cost of deposits has overtaken the cost of debt repayments as the issue determining affordability.

“The subsequent growth in the number of market-rented properties over the last five years has reminded us that the new property world is dominated by cash and not borrowing.”

But tying up cash in an asset like housing is only worthwhile if it produces a return greater than that available elsewhere and at equal or lower risk.

For most owner-occupiers and private investors, there are very few alternative investments that are genuinely “as safe as houses” or as high yielding, according to Savills.

Demand for private rental accommodation is not only expanding but becoming more long-term.

Joint research with Rightmove shows average gross income yield now stands at 5.8 per cent nationally and yields are much higher on smaller properties, where owner-occupier demand has been hardest hit by the squeeze on mortgage lending.

Income yields on one-bedroom properties average 6.7 per cent. After accounting for costs and void periods, the average net yield for typical private landlords comes in at around 4.1 per cent.

Ultimately, say Savills, as the residential rental market gains in significance as an income-generating asset class, it’s likely that investors will move away from their historical focus on a property’s capital value and will concentrate increasingly on the income stream as a measure of value, just as they do with other income-producing assets such as bonds and commercial property.

Ben Pridden, head of residential at Savills in York, says: “The one sector to have thrived throughout the credit crunch has been private rentals.

“The shift to private renting has accelerated, thanks to constrained mortgage finance and the significant deposit hurdle for would-be home buyers. In fact, rapidly rising demand will require rental stock to be delivered by the new build market.”