The results of MSCI Inc’s latest IPD UK Annual Residential Property Index has revealed yield compression, foreign investment and a lack of supply have led to institutional investors being priced out of the London market.
Overall, the UK saw a total return of 13.5% in 2014, placing extra pressure on investors hoping to enter the market, especially in London. The best-performing districts for overall returns were to be found outside of Prime Central London (PCL), with returns in inner and outer London the highest in the UK, boosted mostly by capital growth.
The Index results highlight that the net yield in Central London dropped to 1.8% - its lowest level since the inception of the index - and the first time that the figure has dropped below 2%. Throughout the UK the net income yield has tumbled 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,” Mark Weedon, Vice President and Head of Alternatives at MSCI, said. “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 added: “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.”
Inner London brought total returns of 24.4% in 2014 with a relatively small increase in rental values of 3.1%, whereas Outer London saw returns rise to 21.1% and rental growth of 3%. On the other hand, Central London (zone 1) returns fell to 9.8% while rents rose by 4.8% in this area.
Away from London, the best performing regions were the South West and Midlands, returning 9.7%. Northern England and Scotland also witnessed an improvement in returns to 3.5%, the first time returns have entered positive territory in those areas since 2007 (before the global financial crisis hit).
“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,” Weedon added. “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.”
The IPD UK Annual Residential Property Index is based upon properties let on modern residential leases, primarily assured shorthold tenancies. The index now has fourteen years of historical data. The index tracks performance of 6685 property investments, with a total capital value of GBP 3.5 bn as at December 2014.
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