Britain may soon not have enough rental properties available to satisfy demand, a recent survey has suggested, in further evidence of a growing crisis in the housing sector. With a record number of new tenancies signed last year, the private rental sector (PRS) was "nearing capacity", the Association of Residential Letting Agents (Arla) said.

In a survey of some 6,000 members of Arla – the regulatory body for letting agents in the UK – 74 per cent of respondents said demand outstripped supply in the private rental sector, the highest level since records began. The increase was most acute in London and the South-east, the survey said, adding that some tenants were now staying in properties for 19 months – a record – as they were wary of finding a new property in a highly competitive market.

The company forecasts that private renting will account for one in five households by 2016 and it is unlikely that supply will keep pace with demand at least in the next five years. Competition among renters will drive rents higher, with growth in mainstream rents forecast to rise by 20.5% by the end of 2016. This growth significantly outpaces house price growth which is expected to total just 6% over the same five years. 
 
This differential in capital value growth and rental value growth will push out yields and, according to Yolande Barnes, director of Savills residential research, is likely to be the catalyst for renewed investment activity in the sector by corporates and institutions looking for income rather than individuals looking for capital growth.

Rental growth of the scale forecast by Savills would see the headline average gross yield on residential stock (IPD) rise from 5.4% to 6.1% across the five year period. In areas of low owner occupier demand, and associated suppressed capital values, yields are already high and could see an even greater shift, perhaps averaging nearer 9% by the end of 2016.

In prime London, rental growth of 20.5% is forecast for the next five years, though the forecast of 22.7% capital growth will suppress yields. For prime central locations then, capital growth will continue to be the major draw for investors. Prime locations outside the centre will see some outward yield movements though.
  
‘We have long been advocates of residential property investment in the private rented sector. Until recently this has primarily been predicated on the expectation of increased capital value, but there is now a strong case on the basis of income,’ said Barnes.

And although rents have risen sharply this year, the inbuilt supply shortage means that we see nothing overheated about this market. The biggest challenge now is how to deliver much needed supply into the private rentals market