Institutional investors being priced out of London market, index suggests

Taylor Scott International News

Yield compression, foreign investment and a lack of supply have led to institutional investors being priced out of the London market, according to the latest IPD UK Annual Residential Property Index. The UK as a whole saw a total return of 13.5% in 2014, putting extra strain on investors hoping to enter the market, particularly in London. The strongest districts for overall returns were to be found outside of prime central London, with returns in inner London and outer London the highest in the UK, driven largely by capital growth. The Index results show that the net yield in central London has fallen to 1.8%, its lowest level since the start of the index, and the first time that the figure has fallen below 2%. Across the UK the net income yield has fallen to 2.4% across all residential market lets. ‘If you invested in London residential at some point during the last 10 years, the chances are that you’re laughing all the way to the bank,’ said Mark Weedon, vice president and head of alternatives at MSCI. ‘However, if you are looking to put money into the sector now, our data shows that investors seeking income will find themselves’ priced out by foreign investors and owner occupiers when trying to buy existing stock in London,’ he explained. ‘There is now a de facto exclusion loan on central London for most institutional investors, at a time when concern over access to housing has seldom been higher,’ he added. Inner London delivered total returns of 24.4% in 2014 with a comparatively small rise in rental values of 3.1%, while outer London saw returns rise to 21.1% and rental growth of 3%. Central London (zone 1) returns slipped to 9.8% from 14.7% in 2013, while rents also increased by 4.8% in this area. Outside of the capital, the South West and Midlands performed the strongest, returning 9.7%. Northern England and Scotland also saw an improvement in returns to 3.5%, the first time returns have entered positive territory in those areas since 2007. This area also experienced a rise in rental growth from 1.5% to 2.4%, the only region outside of London to see this. Comparatively, commercial real estate returned 17.8% in 2014 according to the IPD UK Annual Property Index. Bonds and equities returned 11.8% and 0.5% respectively. ‘It is clear that market forces not related to the underlying rent generating capability of residential property are affecting values and that this is pricing large investors seeking long term stable income out of the London market,’ said Weedon. ‘It is no surprise that investors are now considering building to let which will enable them to achieve a decent percentage income return in areas of high employment and strong owner occupier demand,’ he added. The IPD UK Annual Residential Property Index is based upon properties let on modern residential leases, primarily assured short hold tenancies, the index now has 14 years of historical data. The index… Continue reading →

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