What Does the Future Hold for the London Rental Market?

With the majority of new buyers continuing to struggle with house prices, the rental market in London and the south-east should remain strong in the future, with house prices in the capital and surrounding area rising more quickly than inflation...

With the majority of new buyers continuing to struggle with house prices, the rental market in London and the south-east should remain strong in the future, with house prices in the capital and surrounding area rising more quickly than inflation. At the other end of the spectrum, rents are currently subdued in the capital's prime central market, but these properties still represent a golden investment opportunity for landlords in the long-term.

FTBs consider moving away to secure property

More than half of all aspiring homeowners who feel like the first rung of the property ladder is beyond their financial means (53 per cent) would consider relocating out of London and the south east in order to secure their first home, according to a new report from Cluttons. The survey shows the extent to which buying remains a pipe dream for most, which means landlords can look forward to continuously strong levels of demand for rental accommodation. In fact, the survey suggests that the market for buyers could become even more strained in the future, with anxious buyers believing that further rises in house prices across the region will push the majority of properties outside of the grasp.

However, there could be a silver lining for tenants in the fact that a potential exodus out of the capital – if it were to occur – would relieve pressure on supply and act as a cap on rental inflation. This is something that can actually be seen in another segment of the market and one that is not often compared to that of first-time buyers: London's prime central market.

What's the picture at other end of the market?

London's prime central market is another area that has seen strong price rises in recent times, with prices more than doubling in the past eight years alone and outpacing the Retail Price Index by two-thirds. But while these properties are alluring as long-term investments, rental income has actually been rather subdued lately, with growth underperforming in many parts of the capital.

This is a result of lower employee budgets and continued uncertainty in the financial and business services sector, according to Savills. In fact, the property expert estimates that the three months to the end of September saw a 0.5 per cent reduction in prime central property rents. Falls here and in north-west London have been particularly affected by rising stock levels, as well as fewer corporate relocations – with high levels of investor activity resulting in more prime central new-build stock coming online.

However, rental growth has been seen in some of the smaller and less expensive outer prime locations. In the prime east-of-city markets, rents are now 4.1 per cent higher than they were during the 2007 peak, while south-west London has also witnessed a 2.6 per cent rise. To put this growth in perspective, prime central rents in the capital are actually down 4.5 per cent on 2007.

In Wapping and Canary Wharf, for example, rents have risen by 1.7 per cent in the past three months alone, the investment specialist reveals. Sophie Chick, residential research analyst for Savills, says: "This pattern of outperformance by prime outer London locations is expected to continue over the mid-term, as more central locations absorb new stock and adapt to lower levels of demand from their financial sector."

Looking ahead

Looking at the rest of the year, rents are expected to grow outside of the prime central market, but perhaps not as quickly as one might expect, considering so few people are in a position to exit the rental market and purchase a property of their own. According to Hamptons, rents in Greater London and the south-east will grow by two per cent as a whole this year, compared to zero per cent for the rest of the UK.

This is in-line with what it expects to see in the housing market as well, where prices are expected to rise by two per cent in the south-east and the UK, but by zero per cent in London's markets. On the whole, it predicts: "The balance of rental supply in some locations will temper growth in rents, creating localised movements in average rents." At the same time, rents across the rest of the UK are expected to remain broadly flat.

Looking ahead to next year, Cluttons expects that rents in London will be primarily influenced by the same factors as the housing markets, with the diminished rate of earnings growth likely to continue restraining rental growth. However, it does anticipate that rents will grow more quickly than house prices, rising at approximately five per cent yearly with even larger increases in the next few years.

- Tuesday 29 October 2013

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