Private Rented Sector set to keep expanding

The UK’s private rented sector (PRS) has more than doubled in size in the past 14 years, and it is set to keep expanding, according to the findings of Knight Frank’s Private Rented Sector Report .

The report features the Knight Frank PRS investment index which shows the performance of rental units in residential blocks in key rental markets in the UK: Leeds, Bristol, Birmingham, Glasgow, Manchester and London.

The index shows that average rents paid rose by an average of 2.9% last year – ranging from 0.4% in London zone 1 to 5.27% in Manchester. Capital values for residential blocks rose by an average of 6.4% last year, taking the average gross yield to 6.6% in Q4 2013.

Initial yields have not only been squeezed by rising capital values, but also the erosion of the discount on offer for the purchase of residential blocks.

At the start of 2012, investors could obtain a discount of more than 30% on the full capital value of some residential blocks reflecting the minimal activity in the market – especially the regions.

Today, the discounts on offer are between 7% and 16%, a reflection of increased activity. If the discount is factored into the capital growth of the rental blocks, it rises to 13.8% for 2013. The total return on investment private rented sector blocks in our index was 11.3% in Q4 2013.

More than 10 million people – around a sixth of the UK population – are living in privately rented accommodation. The sector accounts for around four million households, some 17% of the total number of households in the UK. Knight Frank forecasts that the number of households in the private rented sector will continue to rise over the next 10 years.

The report examines the supply and demand factors in the private rented sector, and considers how these might move in the future. It also tracks how demand in the PRS is robust in urban centres, and that targeting workers looking for flexible tenure may at this stage offer the biggest benefit to investors.