Market in Minutes:
Prime London Rental Markets

Prime London Rental Markets
Prime London Rental Markets

13 October 2016, words by Lucian Cook

Negative annual rental growth hides variances in size and value

Two successive changes to stamp duty and uncertainty surrounding Britain’s exit from the EU has created a more subdued prime sales market in the capital.

This has had a knock on effect on both the demand for and supply of rental property, although the balance between the two differs in different sectors of the market.

With so much choice, the key driver for tenants is no longer location but value and product.

 

Recent trends

The third quarter of 2016 saw average prime London rents fall -1.7%. This resulted in year on year falls of -3.5%, the largest annual fall since 2009.

The central London rental market has experienced the largest price falls of all the London regions, with average quarterly values down -3.0%. This leaves the market -6.0% below its September 2014 peak before the stamp duty changes were introduced in December of that year.

However, this average fall hides variation in value and size. Prime properties across London worth less than £500 per week are still seeing marginally positive annual growth and strong five-year growth of 11.2%. Likewise, smaller properties of 1 and 2 bedrooms have performed better than larger properties on both a quarterly and annual basis.

This reflects the strong demand from needs-based tenants who are more prevalent in the lower priced market. These renters are far more motivated by value than location and are prepared to move further afield to get the best price and best product. As such, fringe markets in outer prime London have fared slightly better than the more expensive central locations.

FIGURE 1

Prime Rental Movements to Q3 2016

 
Figure 1

Source: Savills Research

The effects of tax

The fall in rental values seen this year is primarily due to the high levels of investment activity which has brought significant stock to the prime rental market.

The introduction of the 3% stamp duty surcharge for additional homes caused a rush to complete before the April 1st deadline. This has brought high levels of supply to the market, giving tenants more choice to find properties of the best value and best condition.

We have seen a slight increase in accidental landlords in markets most affected by stamp duty, namely at the top end, as well as an increase in accidental tenants who are putting the money they would have spent on stamp duty into rent instead.

Corporate relocators still going strong

The corporate relocation market has seen significant change recently, both in budgeting and the profile of tenant moving.

More predominant now are the younger relocators – moving without families and on tighter budgets. These relocators are again more driven by price rather than location and are more willing to try fringe markets such as Shoreditch or move further afield to established prime markets such as Richmond.

Economic uncertainty following Britain’s decision to leave the EU and the potential effect on the finance industry will remain unresolved for some time to come. However, enquiries and transactions from financial employees are still positive.

FIGURE 2

Price-Banded Prime Rental Movements to Q3 2016*

 
Figure 2

Source: Savills Research (* Rent per week)

OUTLOOK

Our thoughts going forward

Looking ahead, it's clear that pricing has become more important than ever. With more stock coming to the market, landlords need to be realistic to maintain demand for their property. The value of a good address alone will no longer cut it, with tenants widening their searches more and more to find the best value.

With so much to choose from, landlords will likewise need to make sure their property is presented in the best possible condition to secure tenants and prevent a long void period.

 
 

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Key contacts

Lucian Cook

Lucian Cook

Director
Residential Research

Savills Margaret Street

+44 (0) 20 7016 3837

 

Katy Warrick

Katy Warrick

Director
Residential Research

Savills Margaret Street

+44 (0) 207 016 3884

 

Gaby Day

Gaby Day

Research Analyst
Residential Research

Savills Margaret Street

+44 (0) 207 299 3003