Residential property investment returns outperform inflation and commercial real estate

Tuesday 12th March 2013

Investment returns from residential property portfolios in the private rented sector for 2012 reached 8.9% in 2012, ensuring that the sector continued to outperform both inflation and commercial real estate, according to IPD’s UK Annual Residential Property Index.

The residential property market in London offered the greatest returns, with Central London providing total returns of 10.1% and Outer London (zones 4-6) giving returns of 8%. Inner London (zones 2-3) proved the top performing region in the UK with returns of 10.7%.

Greater capital appreciation made up the higher portion of returns in central London, while values outside of the Capital fell. Due to the price premium for central London property, income returns of 2.3% reflected a lower yielding and more prime asset.

London and the South East has driven overall performance, but for the growing number of investors seeking to invest in build-to-let, where homes are built to generate rental income over the long term, many eyes may be on inner and outer London performance due to the strong rental growth in inner London of 7.7%, which has kept pace with capital appreciation of 7%.

The index, launched in 2001, gathers data from investors on the value of commercially let and managed residential assets, and the income generated from them, all owing owners and agents to analyse and compare market performance.

Phil Tily, IPD’s UK and Ireland Managing Director, said: “There is little evidence to suggest the gap between London and the regions will close this year, as the demand factors driving London remain strong. While in London it has been possible to invest and achieve a level of capital appreciation, as you venture outside of the capital, residential has become more of an income play, increasingly reminiscent of wider commercial property performance.

“Investors are buying into the sector for an income stream, not a purely capital play. The fact that so many serious players are now focusing on residential investment can only be seen as highly positive for the sector and future UK housing supply.”

London’s dominance highlights the falling values outside of the M25. Notable value falls were recorded in the South East for the first time since 2008. However, rental value growth has remained positive outside of London, which has maintained yield levels at higher than 4%.

Tily continued: “Property performance will always mirror that of the wider economy, but in spite of poor regional growth, as a sector, residential investment continues to hold up well, driven by a soaring London market. The unique fiscal and demographic factors driving property growth in the capital look unlikely to change in the near term, and this continues to foster interest among investors in the build-to-rent sector.”


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