RENTS UNCHANGED OVER 5 YEARS
The average cost of renting a one bed apartment across our markets at the end of 2016, is £420 per week – the same today as it was in 2011. That is in stark contrast to the sales market. Only Midtown bucked the trend – here, rental values continued to edge upwards during 2016 but it was the exception.
For a 2 bed apartment, the average rent has not yet returned to its 2011 peak. This truth runs counter to popular belief while soaring rents tend to be the ‘story’ that grab headlines. The supply of property to rent has expanded enormously in recent years and it is this that gives tenants more choice and keeps rental growth in check. A combination of factors has made investment in London residential property particularly attractive in recent years – capital value growth being only one amongst them.
Rents and capital values seem to be caught in some kind of feedback loop. Rising prices encouraged investment which suppressed rental growth and, in turn, made long term rental seem more viable, or at least less vulnerable. That means there is a larger pool of renters which underwrites investment even without the prospect of capital growth. If investment is valued as an income return rather than capital appreciation, then the market has reached a balance, at least for the time being. Becoming an owner is made less attractive for first time buyers by the up front costs of acquisition (stamp duty, amount needed for a deposit) and, in most London apartments, there is also the responsibility for service charges – which fall to the landlord for rented properties.
New rental properties have been added to the stock from three sources: owners – who have chosen to rent rather than sell; investors – who bought properties before the additional 3% stamp duty on second homes kicked in and developers completing new schemes with large numbers of units pre-sold to investors during the previous two or three years.
A sharp spike in sales volumes in March 2016, added to the already burgeoning supply of rental property. The spike was caused by investors rushing to complete purchases before the additional 3% stamp duty levy that became payable on second homes in April 2016. That ‘rush to invest’ was one of three factors that has boosted rental stock, the other two were: owners who have been unable to sell at the price they hoped for and therefore decided to rent rather than sell and developers who completed schemes that had been pre-sold to investors.
The number of renters has risen too over the past decade. London’s population has increased and the proportion living in the private rental sector has risen.
Rental uptake is always strongest in the summer months but in the second half of this year we have noted fewer corporate enquiries as businesses rein in budgets in an uncertain economic climate and people are more reluctant to relocate. The corporate rental market has also been affected by the rise of other options such as Airbnb. The reduced demand is reflected in weekly rents – which have declined by 21% for penthouses in the City.
The weakening of corporate tenant demand has been particularly noticeable in the City – primarily because there has been so much addition to the stock through new developments sold to investors on the City fringe around City Road, Aldgate and South Bank. It is also inevitable that more larger properties have come to the rental market because sales uptake has been poor.
In another response to uncertainty, more tenants have asked for flexible break clauses or periodic tenancies as they become concerned about their employment status. It is also interesting that 2 bed properties in East London have been able to maintain their rental levels as they represent better value for money for sharers. Even the 3 bed apartments in this part of town have been more resilient for the same reason.
The differential in £ per sq ft is marked. In East London, sharers occupying a 3 bed apartment could secure property for £23.40 per sq ft, less than half the rate in Midtown and a substantial discount to the 1 or 2 bed equivalents.
Rental value growth has not come close to mirroring the steep rises recorded for capital values of property in our markets. Indeed in the 9 years since the global financial crisis the increases have averaged only 1% per annum.
Rental values have risen by around 30% since the year 2000, while sale prices rose by 150 -200% over the same period. This is contrary to popular perception and reflects the expansion of supply as investment has increased and new development has continued. While we do not have the hard evidence to prove it, we have little doubt that the quality of the average rental property has greatly improved over this period too – at least for the tenants who come through our doors.
Holiday Lets come under Scrutiny
In early December Airbnb publicly stated that it would introduce new measures to help police the number of nights in a year that a homeowner can rent out a property using its website. Airbnb and other short term rental sites compete with the hospitality sector. What began as a way for homeowners to share their homes from time to time, is used by some as a platform on which to base a significant business in the holiday sector.
This announcement followed a court ruling in September confirming that flat owners whose leases state that their property can be used ‘as a private residence only’ and must have ‘a degree of permanence’ would be in breach of their covenants if they rent out their home on sites such as Airbnb.
Both of these actions are part of a wider trend to address the unforeseen consequences of disruptive technology businesses on conventional business models and to introduce regulation that could offer some protection to existing models. The black-cab backlash against Uber has a parallel.
After the court ruling, an Airbnb spokesperson said: “We advise all our hosts to check and follow local rules before they list their space”. The announcement that they would ….. came some 6 weeks later and means that Westminster’s restriction on short-term letting for under 90 days will be easier to enforce.
In December Airbnb announced that they will now be enforcing the 90 day restriction under the Deregulation Act from 2017 and once a property has been let via their platform for 90 days it will not be shown as available until the following year.