Yields harden marginally in private rented sector

Key facts Q4 2014

  • Average initial gross yields in London, Leeds, Bristol, Birmingham, Manchester and Glasgow at 6.3% in Q4 2014
  • Average total returns at 11.2% in Q4 2014
  • Average capital growth was 6.5%, down from 7.3% in Q2 2014
  • Gross yields range from 4.2% in central London to 8% in Leeds

The private rented sector index, encompassing key city markets across the UK, shows that initial gross yields hardened slightly in Q4 2014.

Activity levels in the market are robust, and this is reflected in the shallower discounts on offer, while capital growth tracked the wider market to come in at 6.5% year-on-year. Grainne Gilmore examines the latest trends in the market.

Total returns from PRS investment-grade blocks slipped towards the end of 2014, as a result of slightly more modest capital growth and a moderate slowdown in
average rental growth across the six cities monitored by the Knight Frank index.

The trend in capital growth reflects the wider market, with average pace of growth UK residential prices for owner-occupied properties also easing from 11% annual growth in the summer to 7% at the end of the year.

It is interesting to note, however, the shallower discounts on offer on institutionalgrade blocks, a reflection of the increasing interest in the PRS sector in some key city markets. In Q4 2013, the average discount on offer for purchase of whole-sale block in Manchester was 13%; this has now fallen to 11%. Likewise, average discounts in Birmingham have fallen from 14% to 12% over the same period.

The fundamentals for private rented sector investment blocks remained regionalised in 2014, with capital growth ranging from 3.2% in Bristol to 11.4% in outer London in Q4. Average rental growth was also spread over a wide range across the UK, not only by region but by type of property. Annual growth in rents in a typical ‘secondary block’ in London Zones 3-6 rose by 0.96%, while average prime blocks in Manchester saw annual rental growth of 2.99%.

The regions also commanded the highest yields, with average gross initial yields in Birmingham of 7.9%, and Leeds of 8%. In contrast, yields were tightest in central London, at 4.2%. The index is comprised of rental data collected from large rental single-block properties classed as prime, median and economic. The classification of these blocks takes into account location, monthly rents and also the type of unit on offer – a prime block will have units in the most desirable
areas. In contrast, economic blocks are the least expensive for tenants, but their capital value is also lower, indicating higher initial yields for investors.