There was no change in rental values in the first half of 2015 in any of our markets as supply continued to outpace demand. Rents have changed very little for the last three years in Midtown and Docklands, while in the City, they are still lower than they were in 2012.
This runs counter to the common perception of London rents as an ever more burdensome living cost. There were small uplifts for some landlords on renewal where the tenant is often willing to shoulder a modest increase to avoid the disruption of moving home and this is further evidence of the myths that persevere in the landlord-tenant arena. It is simply not the case that landlords or tenants want leases to churn every year. Both parties benefit from a stable relationship and the average tenancy across our rental portfolio is now approaching three years. The most common reason for tenants to end a tenancy is their employment circumstances and the most common reason given by our landlords for terminating a tenancy is when they decide to sell their interest.
While existing landlords are satisfied with securing a rent increase of between 1% and 3% on renewal, we still experience resistance amongst new landlords who expect rents to have risen in line with capital values.
For the first time we include a table showing indicative rents per sq ft for a typical one and two bed apartment in Midtown, City and Docklands. It is interesting to compare residential rents with commercial offices. Strong demand has pushed office rents steeply upwards in the past two years and the premium for residential over office space, which fuelled an enormous round of change of uses from commercial to residential property, has been eroded.
Our figures show that residential rents range between £30 and £50 per sq ft in Midtown and City – which is comparable to mid range commercial rents. While we recognise that these figures are not entirely comparable because they do not take account of different gross to net ratios, they demonstrate that, given that the cost of refurbishing and fitting out an office space is often substantially lower than residential, the viability calculation has shifted in favour of commercial space in many cases and residential is no longer the obvious land use in Central London (table 4).
Gross yields are now below 4% for the first time on our time series and, after typical costs are factored in, the net return is below 2% (figure 4 and table 5)
Longer contracts, of 18 to 24 months have become more common, tenants have requested longer contracts to achieve a longer fixed rent and landlords seek greater income security. The motivation of tenants to fix rent is based on a misconceived perception that rents would rise steeply without the longer lease, rather than reality of the market over the past few years in which rents have not changed.
There has been a notable rise in the number of short term tenancies. In March the government announced that it would make it easier for tenants to sub let a room by legislating to “prevent the use of clauses in private fixed-term residential tenancy agreements that expressly rule out subletting.” The intention is to make better use of under-used homes but many fear that it will make it too easy for unscrupulous tenants to re-rent homes at a profit, or encourage overcrowding or unsuitable occupiers who have not been vetted by the landlord or landlord’s agent. The Association of Residential Letting Agents (ARLA) and Residential Landlords Association have both expressed concerns about the proposal.
BLOOMSBURY SQUARE WC1 – 7 REFURBISHED APARTMENTS, LET MAY 2015 FROM £425 PER WEEK
The Association of Residential Managing Agents (ARMA) has welcomed the CMA report on block management (see box below) though still has concerns about the large number of agents that do not operate under ARMA and it will continue to lobby for greater regulation of the sector.
Telephone: 020 7250 1012
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