BUILDING BOOM INCREASES SUPPLY
Rental values fell in the City and Docklands in the first half of 2013, as the number of flats available to rent increased. An expansion of London’s rental stock looks set to be a long-term trend and that means that stable or falling rental values are inevitable as the choice increases. Much of this additional rental stock is entering the market via the new homes pipeline and supported by the continuing popularity of buy to let investment. We expect to see further additions to stock in the second half of 2013, as development projects, which had been prepurchased
in 2011 and 2012, are completed.
We do not expect any significant institutional investment in the Private Rented Sector in our markets in the foreseeable future, as yields are less attractive than suburban locations across London.
The falls in rental value in 1st Half 2013 were steepest for two bedroom flats in the City. Here, the rental value of a typical two bedroom flat dropped by 11%, from £630 to £560 per week. The premium a renter will pay for a second bedroom has declined, narrowing the differential between one and two beds in the City to 32%, compared with 44% in 2011. In Docklands the premium was already smaller but it too has declined, from 29% in 2011 to 21% today.
In our experience, renters are prepared to compromise on the size of their apartment in favour of a more central location and, since two bedroom properties are less affordable than those with one bedroom, we have found that renters prefer to settle for a one bedroom property rather than settle for a less central area.
The Midtown market has behaved differently. The extra bedroom still commands a rent 44% higher than a one bedroom flat and rents continued to rise in 2013. By the summer, the rent for a two bedroom flat in Midtown was £650 a week, 5% up on the beginning of the year and the rent for a one bedroom rose by 6% to £450 per week. Perhaps surprisingly, this is the first time that Midtown rents have overtaken the City and at the half year, the weekly cost of a two bedroom flat in Midtown is £90 more than the City.
Long term increases in rental values are actually far more modest than newspaper headlines might suggest. In the 15 years since our data series began in 1998, the average rent for two bedroom flat in London has risen by around 32% and for a one bedroom flat, the increase has been around 23%. This compares with capital value rises of closer to 200% over the same period.
In 2012, we reported a reduction in the average length of time that a tenant stays in the same property and that has continued in the first half of 2013. It has fallen dramatically from an average of 2.5 years, to 1.5 years over the past 12 months. In our experience, it is more usual for tenants to agree lease renewals when the rental market is strong, rather than expose themselves to rising rents and websites provide tenants with the rental information to make informed decisions. As rents fall, tenants take the opportunity to move to new accommodation to reduce monthly outgoings or swap to a better flat. However, we have noted in the first half of 2013, that tenants in Docklands and east London are staying for longer terms than in City and Midtown.
The reasons why tenancies can end early are complex. Some tenants decide to buy in order to protect themselves from increases in capital values as part of their long term ambition to be home owners but perhaps this trend can be equally explained by redundancies, contract terminations and the return home of overseas workers. The rental market will always be less predictable simply because of the flexibility it gives the occupiers. Tenants are intrinsically mobile.
The majority of tenants signing leases through Hurford Salvi Carr offices in 1st Half 2013 were aged between 25 and 40 and 61% were from overseas. (See buyer profiles)
By far the most common occupation amongst the renters that passed through Hurford Salvi Carr offices was financial sector, including banks and accountants. This is perhaps inevitable given our focus on markets to the east of Central London but it is interesting that Technology, Media and Telecoms (TMT) accounted for more (8%) than legal (4%) and that is without taking account of art and design which are often included within the definition of TMT as media businesses. Together TMT and art and design accounted for 12% of all renters.
In Midtown City and Docklands, an expanding stock of well-designed new apartments to rent in convenient locations is containing rental growth but greatly increasing the choices for renters. We expect that to continue. This is not the same situation in West or North London, which have more stable stock levels, although the recently granted Permitted Development Rights will create new opportunities for office to residential conversion in the less central parts of north and west London.
Notwithstanding long term trends in supply, there will always be a seasonal pattern. The demand for properties to rent generally increases in Q3 and it is quite normal for higher rents to be achieved in summer months. The summer is by far the most common time to enter a tenancy agreement as graduates arrive in London to start new jobs, relocation companies search on behalf of more senior executives and students secure homes in advance of the forthcoming academic year.
Check out tenant profiles in tomorrows post!
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David oversees the Company residential agency departments and specialises in bespoke marketing and PR campaigns for new developments and individual properties. He is an authority on the London Property Market, regularly quoted by the national press. He heads the research side of the agency which provides detailed analysis of current market trends, sub market activity and the planning pipeline as well as trend markets.