The private rented sector (PRS) has grown by 1.1m households in the past decade and is now worth £500bn dwarfing the value of the entire UK commercial property sector, new research from CB Richard Ellis has revealed. Over 66% of all households created in 2008/09 were in the PRS, and it now accounts for 14.2% of all households in England.

The growth of the PRS can be attributed to the declining affordability of homeownership in today's credit constrained environment, changing household composition, an increase in UK immigration, rising student numbers and student debt and the growth of buy to let investment. The quality of stock has improved and PRS currently accounts for 20% of new build stock nationally and up to 60% in London.

Institutional investors could play a critical role in the housing market by providing an alternative source of funding for residential development that will drive new housing supply. In the longer term, the diversification of funding options would not only reduce the residential property industry's dependence on debt but ensure the housing market becomes more resilient to future market shocks.

The current economic climate has created an opportunity for investors, including institutions, to enter the residential market via the PRS as a combination of stable rents and lower capital values have pushed yields out. UK residential property has a lower level of risk compared to other asset classes and a five year average total return of 6.8 per cent, well ahead of commercial property (1.8%).

Jennet Siebrits, head of residential research, CB Richard Ellis, commented: "The Englishman's home may still be his castle, but increasingly he rents it rather than owns it. The UK populations is expected to grow by 16% over the next 25 years and this coupled with the declining affordability of homeownership means that demand for rental property is likely to remain strong.

"Current market conditions have created breathing space in the market to allow institutions to gain a foothold. A strong private rented sector will provide professionally managed rental housing, a flexible housing market and a new source of money to drive housing supply.

"There are a significant number of institutional investors actively considering the private rented sector and there have also been a number of private equity funds that have shown an interest. We are confident that this level of interest will feed through to actual transactions."