Tenant demand for private rented accommodation could reach one in five households by 2016, resulting in a requirement for an additional 1.1million rental homes, according to a new report from Savills and Rightmove. And some £200 billion of investment will be needed to provide the homes required, but only £50 billion of this is forecast to come from buy to let funding.

The report, Rental Britain, estimates that there are 4.8 million privately rented homes in Britain, up from just 2.5 million in 2002. In London, private renting already accounts for 27% of all homes (900,000), having overtaken social renting in 2010, which now accounts for just 24% of tenure (783,000 homes).

“Meeting the growing demand for private renting and the changing profile of tenant demand are perhaps the greatest challenges facing both the housing industry and policy makers,” says Lucian Cook, director of Savills residential research.

“The dynamics of supply and demand make a great case for investment in this sector, and rising rents and lower capital values have begun to attract private investors back into the market. Investment returns relative to other asset classes will dictate the pace of investor entry to this sector.”

Investors must balance income against capital growth expectations, borrowing and exit requirements and based on Savills forecasts for capital growth, the report considers total 10 year returns and also the proportion that will come from income versus capital growth to underline the most likely locations for total annual returns. Buying within a higher value, equity rich, owner occupier dominated location will almost inevitably suppress yields but boost capital growth and, ultimately, the liquidity of the asset.

The three locations forecast to generate the highest total 10 year returns will all rely on capital growth for over 55% of returns, says Savills, while private investors with more significant borrowing requirements will need to look for high yielding yet high demand locations to service their debt, which could lead to a focus on lower value markets.




Forecast 10 year Total Return

Less than 6.0%


6.0% - 6.5%


6.5% to 7.0%


7.0% to 7.5%


7.5% to 8.0%


Over 8.0%

Proportion of return made up by income yield


Less Than 50%














Brighton & Hove


Elmbridge

50% to 55%








Southend


Bournemouth Bristol Colchester


Oxford Southampton


Reading Woking

55% to 60%











Northampton


Portsmouth Medway


Milton Keynes

60% to 65%





Edinburgh Stockport Warrington


Cardiff


Leicester Nottingham







65% to 70%


Bradford


Newcastle Leeds Manchester Sheffield


Coventry Birmingham










Over 70%


Kirklees


Glasgow Liverpool















Source: Rightmove/Savills