EUROPE - UK house prices will not return to their pre-crisis peak until after 2020 - but there is a "compelling case" for investors to target the private rented sector, according to a report from PwC.

In its outlook for the UK, PwC forecasts that the housing market will remain relatively flat until 2017, when restored confidence, easier credit conditions for first-time buyers and undersupply will drive a recovery.

With house prices being likely to remain high relative to earnings in the long term, the report said policy initiatives to encourage investment in the private rented sector would be "desirable".

However, the report acknowledged barriers to the development of a private rented market, including the prevalence of private landlords with little incentive to expand or upgrade assets.

"A highly fragmented amateur rental market also renders regulating quality and sharing information with potential renters more difficult," it said.

Attracting pension funds and insurers would require de-risking of the income stream based on the student accommodation model, where universities take on some of the income risk to developers.

The report also recommended the creation of a separate rental-only property class through the planning system to remove the impact of high prices in the owner-occupied market.

Finally, it said policymakers should take on large regeneration schemes to create economies of scale.

John Forbes, real estate investment management partner at PwC, said: "The next few years represent a significant opportunity for residential rental property to emerge as an institutional investment asset."

The five-year flattening of house prices - despite an 18% fall since 2007 - meant investors' focus would be on income rather than gains.

"Because this is attractive as a long-term income-generation opportunity, the short-term timing is less of an issue," he said.

Research recently conducted by PwC for the Financial Services Authority forecast a prolonged period of anaemic investment returns.

"The emergence of an untapped institutional asset class generating a healthy income stream presents a compelling case," said Forbes.

"The challenge now is establishing the vehicles to match the capital to the opportunity."

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