RENTAL SECTOR GROWING STEADILY
Brand new build apartments would, in a normal market, command a rental premium over their second-hand equivalents, as tenants fall for the appeal of being the first occupants. However, when the majority of apartments have been sold to investors, the completion of a new block can mean a glut of identical rental flats competing with each other and suppressing achievable rents.
Renting a place to live in London is not a new phenomenon. London has a long-standing and mature rental market that has met the needs of generations of young professionals in their early-career years, as well as life-long rental households. The defining factor of today’s rental market in London is that it is expanding, that young professionals are renting for longer, in better quality accommodation and that there is a growing array of facilities, amenities and conveniences on offer, for those with big enough budgets. There is also a gradual acceptance that renting has shifted from being predominantly a ‘phase’ before owning, to become a ‘lifestyle choice’ for those who wish, or need, to use capital and income in other ways.
There is an on-going debate as to whether it is out of choice or necessity that young professionals are renting for more years. The incentives announced in the Autumn Statement to boost homeownership (discussed in the sales section) will undoubtedly enable more people to get a foot on the property ladder outside of central London, while the disincentives to investors (SDLT surcharge) will discourage some potential investors from buying to let.
In our view however none of these measures will turn the tide of demand for living in the centre of the city. More and more people are willing to pay premium rents to live in modern blocks with a high standard of amenity and convenience. As much as 75% of all new homes completed in central London may be sold to investors and find their way into the rental market. Investors are a significant force in the suburban markets too ensuring a continual flow of new stock.
Of course, affordability is a factor in the choice to rent. A recent report from Centre for London found that a household with the average income for London would need to save their entire pre-tax earnings for two and a half years in order to raise the average first time buyer deposit. While London Help to Buy will shift this equation for some, the hurdle remains high to become a property owner in the capital.
As we explained earlier in this report, it is not only first time buyers who are making the choice to rent. Well paid workers on short term postings may also find it more cost effective to rent. Until now, most of the growth in supply has come from individual or relatively small scale private landlords but if the large professional landlords become established, the offer for renters will become ever more persuasive. The Chancellor is clearly keen to encourage this market as indicated by the exemption from the SDLT surcharge for landlords with a portfolio of more than 15 properties.
Over the past decade, private rental has overtaken social rental as the second most popular form of tenure in London, rising from 14% of all households in 2003/4 to 30% a decade later. Given the combination of high sale prices in London and the flow of new rental property to the market, we expect this proportion to continue rising. As discussed earlier, many prospective buyers are effectively excluded from the sale market by the hurdle of saving for a deposit, irrespective of borrowing power, which fuels demand for rental while, at the same time, investors take the opportunity to buy up the new stock and meet that growing demand with new stock.
The clear evidence of strong demand has encouraged institutional private rental investors many of whom who are now keen to establish portfolios in London and, in the absence of standing investments to buy, are seeking out opportunities to build new rental stock – a phenomenon known as Build to Rent. Institutional and branded private rental providers with experience in the US and Europe can bring expertise to the UK and once they identify opportunities, we could see our markets changing very fast.
The relationship will be a different one. Despite the perception in some quarters that private landlords are ruthless predators exploiting powerless tenants, our experience is of a positive symbiotic relationship between supplier and consumer. Most landlords would welcome longer tenancies and are less keen to extract rental increases than to maintain an uninterrupted income stream to cover the costs of maintenance, finance and service charges. A reliable and conscientious tenant will be valued and respected.
Rents rose in 2015, for the first time since 2011. They grew by an average of 3% which fell short of our prediction of 5%. Neither did it apply across all of the market – it did not extend to properties at the upper end, nor to new developments where multiple units were released to the letting market in parallel. Indeed, the number of enquiries for larger properties, with asking rents of more than £1,000 per week, fell. An increase in rents across our mainstream market however, was welcome news for landlords who had accepted no growth for four years (see figure 3).
Interestingly, two bed apartments gained more value more than one beds in both City and Docklands, whereas in Midtown, where base prices are higher, growth in the rents for one bed apartments was stronger (see table 4).
The income return that an investor can expect to earn from a residential investment has been adversely affected by a mix of new regulations and the changes to taxation introduced in mid 2015. For instance, there are new obligations to fit smoke detectors and to test for legionella, as well as more stringent requirements to check prospective tenants’ passports and visas to establish that they are entitled to rent. The changes to tax relief on buy to let mortgages and loss of the ‘wear and tear’ allowance, chip away at the net yield.
Telephone: 020 7250 1012
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