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Investors capitalise on falling rental supply

Investment grade stock is attracting professional investors and yields for these properties are being pushed higher – with purchases at and around the 6% level being achieved
"It has been a tough ride for the residential investment sector. In 2008, as falling prices held out the opportunity of stronger yields, then rents fell back by 20% as the market became saturated by forced landlords," said Liam Bailey, head of residential research, Knight Frank.
"However the market is changing direction again; the stronger performance in the sales market means that the forced landlords – who contributed to a 100% rise in stock volumes 12 months ago – are beginning to plan their exit routes from the lettings market."

The most resilient market for yields has been the more lower priced end of the market. The sub-£1.5million capital value segment saw yields hold up at almost 4% in the third quarter. The £1.5million market fell back to 3.31%.
This reflects much more resilient rental performance in the sub £1000 per week market compared to the more expensive rental markets.
Bailey said: "With supply falling back as the forced landlord begins to move towards the sales market, the hope for the professional landlord is that rents will begin to rise again. Our third quarter results confirm that rents rose for the first time in 15 months by a marginal 0.1%.
"This is likely to be the beginning of a period of stability in the sector – with falling supply feeding into rising rents. Landlords might be over-optimistic if they envisage anything more than low single digit inflation in rents in 2010."

In terms of the professional sector, James Mannix, head of residential investments, Knight Frank, said: "The professional investment market has seen a complete turnaround this year, with well located managed blocks and larger portfolios now achieving yields of more than 6% in central London.

"When compared to the low yields of 3.5% to 5% seen at the peak of the market in 2007, this is a huge improvement. Now that prices have come down to what is perceived to be a sensible level, we are receiving high levels of interest from institutional and private investors with funding in place.
"Most investors are coming in with a medium-term view; looking for a five to seven year hold. They are typically purchasing smaller portfolio sizes of between £2million and £10million, and there is very little transactional activity above this level.
"There will be a shift toward much larger transactions in coming months as there is a large pool of both institutional and private money looking to invest in large lot sizes in the sector. They should get their opportunity to do this over the next six months.
"This market is also considered to be fundable by banks, who are typically lending up to 60 to 65% for this type of purchase as, with the benefit of relatively secure income, they regard it more favourably than other investment options."

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