Soaring British house prices have left stagnant rents lagging behind and a resulting correction in the residential investment market is inevitable, a key survey of the sector showed on Thursday. The findings from a survey of institutional residential holdings, suggests new investors in Britain's huge private buy-to-let housing market are finding it increasingly difficult to achieve yields to cover interest payments on their mortgages. Average residential yields in the portfolios of British pension funds, life insurers, charities and property companies fell to 3.8 percent in 2003, below the current base rate of 4.0 percent, fund benchmarker the Investment Property Databank said.
Yields (rent as a proportion of capital value) have declined from 4.4 percent in 2002 and 5.2 percent in 2001, IPD added. "For the three years we've published the index capital values have been rising, yet rents haven't, so yields have been squeezed," Ian Cullen, head of information services at IPD said. "These trends can't be sustainable indefinitely. It's as simple as that." Britain's buy-to-let market doubled between 2001 and 2003 as investors fled into housing to escape plunging equities and there are now 400,000 investors with outstanding mortgages of 39 billion pounds.
Analysts have voiced increasing concerns rising UK interest rates may pressure housing investors to lock in their capital gains and become net sellers of property, triggering a broader slump in prices across the entire owner-occupier market. Any collapse in the housing market could have a profound impact on the British economy as surging prices have sustained consumer demand in the face of the economic slowdown of the past three years. The potential profit to be realised from property sales is clear, with housing investment outperforming every other asset class on average annual returns of 16.5 percent, IPD said. Cullen cautioned that the institutional investments included in IPD's analysis aren't directly comparable with the much larger buy-to-let sector, but they share the same pool of tenants and would show the same lack of rental growth.
IPD's survey includes 10,000 properties in fund portfolios worth over 2.0 billion pounds and is the only in depth analysis of Britain's residential investment market, as opposed to pure house price indices produced by banks and building societies The survey showed there are marked regional disparities in the housing investment market driven by capital movements. London experienced the lowest growth in values last year and had the lowest income return on capital employed. Northern England and Scotland saw the largest rises in capital values in 2003 -- averaging 19.3 percent -- and also the strongest total investment returns at 24.6 percent.
In comparison, London residential investments showed capital growth of only 1.2 percent and total returns of 4.9 percent. "Over the last three years we have seen significant regional differences in capital growth at the same time as stable or falling rental levels. This means that in investment terms the regions outside London are now as keenly priced as the capital," IPD director Kevin Swaddle said in a statement.///