INSTITUTIONAL investors buying up land to build flats for rental could be the defining characteristic of the Scottish housing market in the near-term, a leading property consultant has said.

Private rental sector (PRS) developments – such as Forbes Place in Aberdeen or Lochrin Basin in Edinburgh – are set to become as commonplace as student accommodation developments in Scottish cities as investors are attracted by strong underlying fundamentals.

The market for PRS – whereby large investors develop or acquire entire sites, usually of flats or apartments in urban areas – is currently concentrated in London, which has 50 per cent of the market compared to Scotland’s two per cent.

Research from property group Rettie & Co suggests that investors are attracted to higher yields north of the Border while inflated values in London transcend uncertainty over a second independence referendum.

Rettie’s latest Scottish Investment Review suggests that residential properties for rent in Scotland will provide investors with a three to four per cent return per year from 2019.

“We’re just at the beginning of this market cycle. Built for rent, if we can do it properly, has the potential to be the real big game changer for housing provision,” said John Boyle, director, research and strategy at Rettie & Co.

In Scottish cities, house prices, in real-terms, remain below the 2007 peak – as opposed to London, where they are 30 per cent higher in real terms. And private rental sector yields in Glasgow, Aberdeen and Dundee, which currently return 7.2 per cent, 5.6 per cent and 5.9 per cent respectively, are among the highest in the UK.

Yet the demand for private rental remains unmet in Scotland even as issues over affordability of house buying opens up a stream of opportunity for investors.

“There is the opportunity because of the strong demand for housing and because of the lack of supply,” said Mr Boyle. “We’ve just not been very good at building houses over the last 20 years and that creates a real opportunity at this moment in time, to get into this sector.”

Mr Boyle said political developments in Scotland are also playing into the hands of investors. “Although there are political concerns about Brexit and indyref2, we’re doing things in Scotland that aren’t being done elsewhere,” he said.

Much of the current investment into Scotland is from overseas, largely because of the post-Brexit vote collapse in the value of sterling. However Mr Boyle added that UK funds have been “a bit more hesitant about entering Scotland because of that additional element of political risk that Scotland is deemed to be carrying.”

To encourage investment in the built to rent sector, the Scottish Government is mulling a rental income guarantee scheme, which would reduce risk for investors. There is also relief on the three per cent additional dwellings supplement on the purchase of six units or more, and there is five year funding available for mid-market rent schemes – which fulfil a number of PRS deals.

In addition, Rettie predicted that average rents will grow by two to four per cent per year in Scotland.

Mr Boyle said: “What these investors do is buy the product for an income return over time, and because it’s housing stock in high demand areas they’re likely to get capital appreciation as well, so you’re not just making the income return from the rents but there is also capital appreciation.”

Such conditions have attracted investment from the likes of Legal & General Investment Management Real Assets, Prudential’s M&G Real Estate and La Salle Investment Management.

Predominantly investing in apartment blocks in urban areas, Mr Boyle compared the scale of the opportunity to that of student accommodation ten years ago.

“There is no reason why this couldn’t be as big as the student accommodation market is now,” he said. “If you put up the right units in the right places, it’s not going to be a problem to fill them.”

In one example of the demand for rental properties, at Harbour Point in Edinburgh, a mid-market rent development marketed by Rettie saw 3,500 applications for 96 units.

“It is beginning to get moving, it is slow, but the appetite is there, and I think investors can see the advantages of being in Scotland,” added Mr Boyle.