High supply, small growth

26 April 2017 - Kirsty Bennison

London's prime rental market remains active, but supply imbalance and uncertainty in corporate rentals means that the most robust demand is for smaller properties.

 

Over the past year, the prime London lettings market has felt the impact of growing stock levels and weaker corporate demand against the backdrop of Brexit uncertainty. This is translating into lower rents and greater choice for tenants.

At the same time, rental growth across the capital’s extended commuter belt and wider south of England has been suppressed by weaker sentiment.

For landlords already facing changes to the taxation of investment properties, this means further pressure on net yields, and will require properties to be very well maintained to ensure they remain fully let.

So, what has this meant for rents across the prime lettings markets of London and its commuter belt? 

FIGURE 1

 

 
Prime rental markets: Historic and forecast

In the 12 months to March 2017, average rents across prime London fell 5.4%. Further marginal softening (-0.4%) in the first quarter of this year suggests they are still finding a level. The most significant falls were seen in the highest-value prime central London markets, which were down 8% in the year.

Newly completed homes coming to the rental market, investors rushing to beat the introduction  of the 3% stamp duty surcharge for investment properties in March 2016, and weakening demand from corporate tenants have combined to inflate  the amount of stock being added to the market.

However, despite being price sensitive, the prime rental market has remained relatively active. London still retains its reputation as a global city, so demand remains strong. However, increased choice means tenants are focused on finding value and ‘best-in-class’ properties. Tenants are favouring new and newly refurbished stock over tired stock, so landlords need  to invest to prevent voids.

The outlook for the London market sees a series of challenges. While we expect strong continued demand from young, affluent households facing a significant deposit hurdle to buy their first home, the strength of rental demand from other tenant groups will be more dependent on the outcome of EU negotiations and London’s ability to remain a global financial centre.

In addition, the current supply imbalance is likely to suppress rental growth in the mid-term. As such, we are forecasting small rental falls in prime London in 2017, with marginal price growth in the following two years. With this in mind, landlords will need to  remain realistic in their price expectations, while offering stock of the best quality to capture demand.

FIGURE 2

 

 
Prime London rental growth

Size is key for commuters

The prime rental markets within an hour of London include some of the most desirable areas for families and young professionals  to set up home.

Within this market,  a trend during the past  few years has been for properties in cities to see stronger rental growth  than those in rural locations. This has been particularly driven by demand from young professionals looking for smaller properties with easy access to transport and local amenities.

 During the past year,  rents for one- and two-bedroom flats have risen 2.1%, compared to falls  of 4.1% for properties with six or more bedrooms.

Weaker demand from corporate tenants has  been a significant factor  in the price falls for these larger properties.

We expect demand for prime rental properties in the capital’s key commuter locations to continue, driven by increasing numbers of people following the traditional relocation routes out  of London.

However, accidental landlords – owners who  are unable to sell their homes – adding rental stock, as well as weak demand from corporate tenants, is likely to curtail rental growth over the  next five years.

 

Other articles from Spotlight: Prime London & Country 2017

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