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British residential returns lead Europe and North America, says IPD

Commercially held residential property in the UK generated higher returns than any other major European or North American market last year, according to IPD.

Residential returns totalled 14.7 per cent in the UK last year, against 9.7 per cent in the US, 8.3 per cent in Germany, 0.6 per cent in the Netherlands and 7.4 per cent in the Nordic markets. 
 
The research was based on the IPD Multinational Property Index and measured 10 major private rental markets around the world worth over GBP100bn combined.
 
Despite the comparatively small size of the UK’s institutionally-owned rental market, growing numbers of renters and the ongoing housing shortage are boosting returns across the sector.
 
Households renting in the UK doubled by volume over the last decade to more than four million, according to the government figures. Private renting has also overtaken social housing as the second largest housing tenure by volume.
 
International institutions have been quick to capitalise on Britain’s supply shortfall. They have identified not just a strong potential for growth, but the diversification benefits and defensive tendencies of residential real estate when placed in a balanced portfolio of other assets.
 
Often with experience in more mature international markets, investors have also welcomed growing support from government ministers who last week eased new capital gains tax rules to ensure that institutions would be exempt when acquiring portfolios of residential property to rent.
 
Global residential markets have shown vastly differing levels of performance during and after the downturn. Yet none have matched the returns delivered by the UK over the last five years. 
 
German residential returns have averaged 6.8 per cent over the last five years as the sector experienced a relative boom, compared with relatively flat returns that occur as a result of strict regulation and rent controls in the commercial market.
 
Dutch returns were far more muted, at just 0.7 per cent over the same period.
 
In the US, returns have been stronger. The multi-family housing sector – as it is known Stateside – has returned 7.9 per cent on average since 2008. However, volatility in the market has been far more marked, with property value falls of over 30 per cent during the recession – the highest decline in values seen in any major market.
 
Comparatively, residential real estate in the UK has returned 11.2 per cent on average each year during the last five years.
 
Residential returns have been higher than commercial property returns across Europe and North America in each of the last five years. This is partly due to the a-cyclical demand for housing: even during a downturn, people still need houses.
 
While UK returns have outperformed Europe and the US, this performance has been disproportionately fuelled by capital growth – to a far greater extent than in other countries. With ongoing political concern having been recognised in recent months by Bank of England chief Mark Carney, capital value growth is still leading to caution from many investors.
 
Property values have risen by a cumulative 47.7 per cent over the last five years in the UK, compared to 12.1 per cent in the US and 11.7 per cent in Germany. This has taken its toll on income returns. In the UK income returns were 2.7 per cent for 2013, although this reflects the prime nature of the IPD sample to a large extent.
 
However, a strong rise in demand had led to strong rental growth. Rents have risen by 16.3 per cent across the UK during the last five years, higher than most other European markets.
 
Mark Weedon, head of business development for alternative sectors at MSCI, says: “Demographics and the housing shortage in the UK are continuing to attract investors to the PRS. While returns have been driven by rising property values – especially in central London – it’s the potential upswing to be gained in rents and long term secure income return that many are focused on.
 
“Around Europe and the US, commercially held residential real estate has generally been performing very well in the years since the recession, as investors look for alternative asset classes linked to different drivers of growth from GDP – but few markets demonstrate such an opportunity for growth as in the UK.”

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