March 27 (Bloomberg) -- The U.K. will need about 200 billion pounds ($319 billion) of investment in rental housing over the next five years as more Britons are shut out of home ownership, Savills Plc and Rightmove Plc said.
Private landlords, who currently account for almost all U.K. rental properties that aren’t owned by the government, probably will provide 25 percent of the homes needed, according to a report published today by the real-estate firms. That means most of the money will have to come from investment funds.
“We need to drive institutional investment because in five years’ time, we won’t have the stock to match demand,” Gavin Sung, head of home leasing at Savills, said at a briefing in London yesterday.
Institutional investors own about 5.5 million apartments in the U.S., CBRE Group Inc. estimates, compared with virtually none in the U.K. Unattractive returns on British rental property have kept larger funds out of the market. There are signs of improvement as rents increase and purchase prices decline, according to the report.
“Low yields have been the biggest barrier to much-needed long-term investment,” Lucian Cook, director of Savills research, said in the report. “But as yields move out, there are early signs of changing investor behavior.”
The U.K.’s housing slump boosted the number of renters as banks reined in lending and demanded a larger proportion of the purchase price up front. Tighter funding also contributed to price declines and reduced the number of so-called buy-to-let investors, who had fuelled a construction boom. Buy-to-let funding will probably supply only 50 billion pounds of the 200 billion pounds needed, the report said.
Savills forecast a 20 percent increase in U.K. rents over the next five years, including 3 percent this year. The country’s 4.8 million privately leased homes generated 48 billion pounds of rental income for private landlords last year, according to the report. That’s expected to climb to 70 billion pounds by 2016.
“We expect a 23 percent increase in the number of private rented households, which is about 1.1 million extra homes,” Cook said. “That’s an idea of the opportunity for institutional investment.”
U.K. homebuilders need to develop buildings that will attract institutional investors, which tend to shun existing stock, according to Cook. An investment fund may seek a 25 percent discount on bulk residential purchases, he said.
The U.K.’s largest private-rented project is the athletes’ village in London’s Olympic Park. In August, U.K. developer Delancey and a division of Qatari Diar Real Estate Investment Co. bought the 1,439 apartments for 557 million pounds and plan to convert them into homes, mostly for rental, after the Summer Games.
The site will be available to tenants about a year after the Games, which finish with the Paralympic Games on Sept. 9, according to Sung of Savills. He declined to say how much the apartments would be rented for.
The gap between rental demand and supply is at its highest level since April 2009, according to Miles Shipside, a director at Rightmove, operator of the U.K.’s largest property-search website. The average asking rent in London rose 7.2 percent in London, the most in the U.K., according to Rightmove.
Kensington and Chelsea has the U.K.’s highest average asking rent for a two-bedroom property at 48,230 pounds last year. The lowest is 4,560 pounds a year in the borough of Blaenau Gwent in south Wales, according to Rightmove and Savills.
London residents are spending around 53 percent of their income on rent on average for a two-bedroom property, according to Savills, Rightmove and Oxford Economics. That compares with 35 percent in England’s southeast, the second highest percentage.
“That would suggest that there are a lot of people sharing,” Cook said at a briefing. “It’s very common in London but we expect to see that appear elsewhere.”
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