Rental Values Central Housing Group

Rental Values In London On Pause

Rental values in prime London show early signs of bottoming out, says Savills, with the annual rate of falls now at its slowest since the June 2016 Brexit vote.

However, the agency warns that continued economic and political uncertainty will put a price recovery on pause for the next year to 18 months, while rising supply and shrinking corporate budgets will constrain rental growth thereafter, said Savills, which published its five year rental forecasts today.

The agency says rents have fallen by an average 9.6 per cent across the capital’s prime markets since the referendum, but the falls slowed to just 0.8 per cent in 2018.

Savills forecasts that rents will rise by an average of 11.5 per cent over the next five years, and by 12.6 per cent across the prime commuter zone.

It says that in inner London falls have been concentrated in the high value prime central postcodes where rents have fallen by 16.5 per cent since the referendum, slipping a further 3.2 per cent in the past year.

Rents in what the agency calls “lower value outer prime London markets” are down an average 6.4 per cent in the same period, but actually rose a modest 0.2 per cent in 2018.

It says price sensitivity in the market is a major factor, with cheaper properties significantly outperforming more expensive ones.

Properties renting for up to £500 per week have seen five-year price growth of 6.6 per cent, compared to falls of 19.5 per cent for those over £3,000 per week.

The prime rental markets of London’s commuter belt have seen robust demand for smaller properties.

Here, says Savills, rents for one or two bedroom properties have recorded double digit growth over the past five years while those with six-plus bedrooms are down by almost a fifth.

Uncertainty in the financial services sector and constraints on corporate budgets continue to impact demand, both in London and its commuter belt, where seven in 10 tenants are employed in London, but Savills points to broader underlying trends.

“We are seeing footloose, cost-conscious tenants drawn to prime areas that offer greater value, rather than confining their search to premium addresses, and there’s a deeper seam of demand for smaller properties driven by needs-based younger tenants” says Lucian Cook, Savills’ head of residential research.

Stock levels will also dictate the outlook for rents, particularly in London, Savills said.  Accidental landlords could withdraw from the market as the sales market improves, as could buy to let landlords with debt as restricted tax relief on interest payments bites into their returns.

“But that doesn’t mean we can anticipate falling rental supply,” said Cook.  “Instead, we expect cash investors to become increasingly dominant, especially in central London, while history suggests international investors will become more active as uncertainty clears, particularly if they can play the currency card.  Stock levels also look set to rise as the number of new build homes completing increases.”

These factors will combine to moderate future rental growth, even once the Brexit uncertainty has cleared, Savills forecasts.

The firm points to evidence of previous downturns – for example, post 9/11 – when rents have recovered to previous highs over periods of between two and five years after the market bottomed out, but struggled to rise above that level.

“The ability to deliver such recovery in rental values over the next five years depends partly on what Brexit ultimately means for London’s high value employment markets” says Cook.

“But, given the pipeline of prime new build homes that could come to the rentals market, we expect that supply will remain as important a determinant of rental values as Brexit. The next five years should see the post Brexit falls in rents reversed.”

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