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London Prime Residential Lettings Report Spring 2016
Demand and supply trends: Steady improvement after a difficult
year-end – The first quarter of 2016 provided a welcome
improvement on the previous quarter: Property viewings were 30%
higher and the number of new applicants rose by nearly a third.
However, these numbers should be viewed within the context of the
last quarter typically being the least active of any year.
In fact while the first three months of this year were more
active, getting tenants to commit to new tenancies proved
challenging and the number of agreed lettings only rose by 10%. New
applicant numbers were 12% down on the corresponding quarter in
2015.
– Tenants, especially corporate tenants for whom relocation
budgets are tight, remained price conscious and also had a larger
selection of properties from which to choose, as the number of
available homes to rent rose by more than a third during the
quarter. In the core central parts of London, tenants are more
property-driven than location-driven than was the case in the
past, with an emphasis on finding best value for
money.
– The increase in the number of homes available to rent was largely
the result of landlords attempting to beat the 1st April 2016
deadline after which an effective 3% was introduced on all
additional property purchases, and fears of a retreat of
buy-to-
let (BTL) investors from the market have so far been unfounded.
There was a notable increase in activity from BTL investors and the
Council of Mortgage Lenders (CML) reported a 28% increase in BTL
mortgage loans in the first two months of the quarter.
– Estimates for March lending show a 60% increase on the February
figure, which preliminary analysis from the CML suggests was
predominantly down to buy-to-let house purchases. However, we need
to see how investor appetite for acquisitions fares from April
onwards in order to properly assess the full impact of the new
stamp duty surcharge.
– While many tenants value continuity, tenant renewals rose by just
5% compared to the previous quarter and by 6.5% compared to Q1
2015. This reflects the greater choice available to tenants as a
result of the significant increase in available rented homes and
means that landlords still need to be flexible to prevent lengthy
void periods.
– Viewings from relocation agents fell by 12% over the
quarter, which may reflect greater caution on the part of
multinational firms refraining from relocating their employees to
the UK in significant numbers while uncertainty persists in the
run-up to the EU referendum over the potential impact of
a vote to leave.
In the core central parts of London, tenants are more
property-driven than location-driven than was the case in the past,
with an emphasis on finding best value for money
3
0%
5%
10%
15%
20%
25%
30%
35%
33 .9 %
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
4
The investment market: Will stamp duty surcharge begin to bite? –
The rapid expansion of the private rented
sector in London over the past decade – from nearly 18% of all
households renting in April 2004 to just under 27% in April 2014 –
has attracted increasing numbers of developers and investors. This
has given rise to an increase in the number of homes being
marketed to rent off-plan, though there is insufficient
available data at present to analyse how successful these
schemes have been.
– Appetite for residential property remains strong from buy-to-let
landlords, despite recent actions from the Government that appear
designed to discourage them: From the planned phasing out of the
higher rate of mortgage interest relief from 2017 and the
introduction of the 3% surcharge on stamp duty rates from April
2016, to new regulatory requirements including compulsory
immigration or so-called “right to rent” checks, which came
into force on 1st February this year.
– The effect of these changes is that landlords face increased
operating costs and they are likely to respond by increasing rents.
Others may decide to sell or reduce their portfolios, resulting in
fewer homes to rent, which may also push rents up across the board.
Either outcome could be bad news for tenants, and the impact will
be most keenly felt in London, where rents are more than twice
those of the UK average.
– Interest from larger funds and institutions continues to grow,
with UK players also starting to invest. Invesco Real Estate has
launched the UK Private Rented Sector Fund, while Legal &
General has announced a £600m build-to-rent partnership with Dutch
pension fund manager PGGM, which is targeting an initial 3,000
homes.
– As there is a limited number of existing properties that match
institutional requirements, this segment of the market
is pioneering the large-scale build-to-rent concept that aims
to deliver large apartment blocks in well connected locations.
Professionally managed and benefiting from economies of scale,
they will trade on their recognised and trusted brands
and offer purpose-built, state-of-the-art accommodation. Rents
are likely to be competitive to attract tenants, at least
until they have established operations.
– The number of new-build homes completed in the private rented
sector (PRS) continues to rise. At the end of 2015 there were
14,186 PRS homes either completed, under construction or
planned across the capital, according to data from Molior. PRS
homes now account for 15% of all private house building in London,
though only a small proportion can be classified as
prime.
Rents and yields: Values in new contracts on the slide – The
increase in the number of homes to
rent and a budget-conscious approach from tenants
resulted in further downwards movement for rents in new contracts.
The Chestertons Prime London Residential
Rental Index recorded a 1% fall in rental values over the first
quarter and a 6% drop over the year to the end of March. In
contrast, rent increases on renewed contracts averaged 1.5% in
Q1 of 2016.
5
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%
Knightsbridge & Belgravia
Prime central London gross residential yields (at end March
2016)
– Prime gross yields edged further downwards in the first quarter
of this year, due to rental values falling at a faster rate than
capital values. The Chestertons’ basket recorded
a figure of 2.8% for yields in prime central London locations
and 3.1% for prime rentals elsewhere in the capital.
6
Outlook: New Mayor, Brexit jitters and restricted lending cloud
horizon – There are a number of factors that will
impact upon the performance of the prime London lettings market
over the rest of the year. The increase in BTL mortgage lending
prompted the Bank of England’s Prudential regulation Authority
(PRA) to issue a consultation paper at the end of March (closing on
29th June) on possible new powers to increase regulatory control of
lending to the sector. According to official data, lending to
landlords has increased on average by 5.9% since the financial
crisis, compared to only 0.3% growth in the owner- occupier
residential market, while losses on buy-to-let loans have been
about twice those incurred on lending to owner-occupiers.
– Among the proposed changes is an interest rate affordability
“stress test”, which would take account of a minimum increase of
2 percentage points in buy-to-let mortgage interest rates over
a five-year period. Even if the borrower’s projected interest rate
will be less than 5.5% during the first five years of a buy-to-let
mortgage contract, the lender should assume a minimum borrower
interest rate of 5.5%.
– If lenders take account of personal income as a means for the
borrower to support the monthly mortgage interest payments, their
assessment of affordability should not be based on the equity in
the property that is used as security under the buy-to-let mortgage
contract.
– The PRA says that the new restrictions on mortgage lending for
buy-to-let investors should ultimately see mortgage approvals fall
by between 10 and 20 per cent by 2019, but points out 75% of
mortgage providers already apply these criteria when making lending
decisions.
– Political events will also play a part in the fortunes of the
residential property market this year. Newly elected London Mayor
Sadiq Khan has already stated he wants to limit new homes sales to
overseas buyers. His manifesto also promises he will fight for
the Mayor’s office and London councils to have a greater say
in strengthening renters’ rights over tenancy lengths, rent rises
and the quality of their homes. He will also make the case to
government for London-wide landlord licensing.
– A Brexit could have a significant impact on the prime lettings
market if corporate headquarters and financial services operations
are relocated away from the UK. However, this scenario appears
unlikely given it would entail a lengthy and costly process and
there is no other city in Europe that offers the advantages London
does. Nonetheless, a UK outside the EU might be a less attractive
proposition for foreign investors, who are an important part of the
private rented sector. However, the likelihood of a retreat by
foreign investors is also slim, as a Brexit would not change the
market fundamentals. It should also be factored in that, if
sterling were to fall by up to a further 20%, as forecast by
Goldman Sachs and Citi, this would act as an incentive for overseas
buyers to invest as their entry costs would be proportionately
much lower.
– On balance, we expect prime rental growth will fall by 3% across
2016 before posting a modest recovery in 2017. Rental growth
in the wider market will be much stronger and driven by
population expansion and continuing affordability issues in the
sales market, which will only be exacerbated as and when
mortgage interest rates start to rise.
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total compound growth
Prime London -3% 2% 4% 4% 4% 11.3%
London private residential rental value forecast
Source: Chestertons Research
Newly elected mayor Sadiq Khan has already stated he wants to limit
new homes sales to overseas buyers. He will also make the case to
government for London-wide landlord licensing
8
Greenwich & Blackheath
650 3.8%
505 -1.2%
Average prime residential weekly rents and three-month growth as at
end March 2016
The Chestertons Prime London Residential Lettings Index tracks
quarterly changes in rental values in 26 locations across London.
It is a fixed-base index and is based on the quarterly repeat
valuation of a standard basket of properties (selected so as to be
representative of the typical cross-section of prime stock within
each location) to remove inconsistencies which can arise from using
a transaction based approach where the number and type of
properties may vary significantly between reporting periods. The
geographical coverage of our index is as follows:
Barnes, Battersea Park, Battersea & Clapham, Camden, Canary
Wharf, Chelsea & South Kensington, Chiswick, Covent Garden,
East Sheen, Fulham, Greenwich, Hampstead, Hyde Park, Islington,
Kensington, Kentish Town, Kew, Knightsbridge & Belgravia,
Little Venice, Mayfair, Notting Hill, Pimlico, Putney, St John’s
Wood, Tower Bridge, Wandsworth and Westminster.
Source: Chestertons Research
Battersea & Clapham – 020 7298 5630
[email protected]
Battersea Park – 020 3040 8700
[email protected]
Camden – 020 7267 3574
[email protected]
Canary Wharf – 020 7510 8310
[email protected]
Chelsea – 020 7594 4750
[email protected]
Chiswick – 020 8747 3133
[email protected]
Covent Garden – 020 3040 8400 lettings.covent
[email protected]
Earls Court – 020 7368 3071
[email protected]
East Sheen – 020 8104 0580
[email protected]
Fulham, Fulham Road – 020 7384 9899
[email protected]
Greenwich & Blackheath – 020 8104 7510
[email protected]
Hampstead – 020 7794 1125
[email protected]
Hyde Park – 020 7298 5950
[email protected]
Islington – 020 7226 4221
[email protected]
Kensington – 020 7937 7260
[email protected]
Kensington Church Street – 020 3040 8446
[email protected]
Kentish Town – 020 7267 1010
[email protected]
Kew – 020 8104 0340
[email protected]
Knightsbridge – 020 7235 3530
[email protected]
Little Venice – 020 7266 2369
[email protected]
Marylebone – 020 8104 7555
[email protected]
Mayfair – 020 7288 8301
[email protected]
Notting HilL – 020 3040 8588
[email protected]
North Barnes – 020 8748 7733
[email protected]
Parsons Green – 020 7348 7777
[email protected]
Putney – 020 8704 1000
[email protected]
Richmond – 020 3758 3333 lettings.richmond @chestertons.com
St John’s Wood – 020 3040 8622
[email protected]
Tower Bridge – 020 7357 6911
[email protected]
Wandsworth – 020 8104 7540
[email protected]
Westminster & Pimlico – 020 3040 8220
[email protected]
Contact Chestertons is the London and international residential
property specialist that knows its business and markets like
no one else and every year helps thousands of people buy, sell,
let, rent and manage their homes and investments. With over 30
offices across the capital, Chestertons has one of the largest
networks in London, as well as a strong international presence
around the globe.
Chestertons London Lettings:
Nicholas Barnes Head of Research T: 020 3040 8406 E:
[email protected]
Richard Davies Head of Residential T: 020 3040 8244 E:
[email protected]
The contents of this report are intended for the purpose of general
information and should not be relied upon as the basis for decision
taking on the part of the reader. Although every effort has been
made to ensure the accuracy of the information contained within
this report at the time of writing, no liability is accepted by
Chesterton Global for any loss or damage resulting from its use.
Reproduction of this report in whole or in part is not permitted
without the prior written approval of Chesterton Global. May
2016.
10
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without the prior written approval of Chestertons. May 2016.
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