UK Residential Property returns defy wider economic uncertainty

By Bridging Loan Directory -


Despite the downturn affecting the wider commercial property market, UK residential property continued to deliver strong returns throughout 2011, at 11.3%, off the back of high tenant demand and optimistic valuer sentiment surrounding the sector. According to the IPD UK Annual Residential Property Index , returns were driven by high capital growth, of 8.2%, while income return remained steady, at 2.9%.

“Whilst valuer sentiment deteriorated towards the back end of 2011 in the commercial property market, partly a result of falling occupier demand, the unavailability of mortgage finance has led to continuing strong demand in the private rented sector – rents rose by 4.5% – and the limited stock in the market, particularly in London, is putting a premium on values,” says Mark Weedon, Head of UK Residential Services at IPD.

Residential investments outperformed all other asset classes, though the income return offered was almost as low as that for UK Gilts.

“The income yield delivered by residential property remained low, an inevitable bi-product of the strong rise in values, which may be off putting to investors, who are constantly looking for secure, long term income streams,” says Weedon. “However, residential investors are clearly continuing to vote with their feet, and reaping the rewards from the sector, while a more even balance of capital and income return are available to investors outside of Central London. It’s the relatively a-cyclical characteristics of the sector that have made it so desirable amidst the wider economic uncertainty.”

Despite this, it is notable that analysis of specific residential units from held property companies and funds (excluding traditional estates) showed an income return of 4.0% for 2011, with 70% of this income retained after costs. This is considerably closer to the income delivered by commercial property, especially when rent free periods and other incentives have been taken into account.

James Bloom, CEO of Regentsmead commented:

“Clearly as a result of a stagnant mortgage market the rental market continues to boom. Availability of stock has now become a key issue due to the number of people renting rather than buying. Like any min-boom this will not last forever and at some point when the liquidity crisis eases there will be a move towards buying and there will be an over supply of rented properties.

In the short term I can only see this yield increase continuing and particularly in London and the South East. However the amateur buy to let landlord should be wary of the pitfalls involved in owning tenanted property as there are issues such as voids, dilaps, non-paying tenants all of which can drive the net yield down.

Good times for returns on residential property at the moment but nothing lasts forever”