How have prime residential yields performed in the last 12 months?

As we discovered in the recent English Housing Survey, there’s been a significant and sustained shift towards renting over home-ownership, with England’s Private Rented Sector doubling in size in the last decade.

Knight Frank now estimates that, by 2021, nearly one in four households in England will be living in the private rented sector.

Such a fundamental movement in lifestyle trends is throwing up a realm of opportunities for investors, despite let’s-say erratic short-term performances for rental growth and capital values – largely because of macro-level political/economic uncertainties and a suite of tax and policy changes over the last few years.

Average UK rents have, according to ONS data, escalated by 15% since 2011, and by 1.8% in the year to July (0% growth in June 2017).

The 3% SDLT levy on additional homes, plus new restrictions on mortgage rate relief, is continuing to quell interest in buy-to-let, but investors and developers are increasingly looking to build-to-rent as a vehicle for longer-term returns. Nearly 16,000 build-to-rent units have been completed across the UK, says Knight Frank, with a further 20,600 under construction and nearly 50,000 with planning.

Over half of these build-to-rent units are being delivered in London, reflecting earlier findings from Knight Frank’s Investor survey: on average, institutional investment was split 65:35 between London and the regions – although the firm flags that “in time this might be expected to develop into a more even split between the capital and key regional cities”.

The Investor Survey also found that the majority of investors are planning to hold the assets for longer than 10 years.

It’s hardly surprising, then, that Knight Frank is taking a largely rosy view of the investment potential for the prime PRS, pitching market sentiment in every prime region as either “stable” or “positive”. Prime assets in secondary regional cities are currently offering the best of it, with average gross yields coming in at a fairly consistent 5-5.5% over the past year – well above Prime Central London’s “stable” 3-ish%.

Illustrating this, the firm has handily mapped out how gross yields in the prime PRS have been performing over the last 12 months: