Rents in London’s prime property market fell by 3.1% over the course of 2017 but the rate of decline has slowed and the market has remained active, according to the latest lettings report.
It is the lower and super prime ends of the market that are fuelling demand, particularly from needs based tenants at the lower end of the market seeking smaller properties and affluent students, says the prime residential rents report from Savills.
It also reveals that rents in the prime markets outside London have also fallen by 1.5% over the last year, but their longer term growth has remained stronger than the capital. Properties that remain popular are those of the highest condition in the most convenient locations.
Schools also remain an important source of appeal for larger family properties and the report explains that international tenants are choosing homes located close to the best international schools.
While Americans favour St John’s Wood for the American School in London, Eastern Europeans prefer central markets for the International School of London. Western Europeans look to Chiswick, Fulham and Richmond, as well as prime markets in Surrey, for international schools located there.
‘As our exit from the European Union unfolds, we expect to see more demand from relocators within the diplomatic community moving with their families. Completing stock from the new build pipeline is likely to suppress rental growth in the capital in the mid-term. We expect confidence to return to the market once we have a better understanding of our future relationship with the EU,’ the report explains.
It points out that a high level of supply has continued to hold back rents, with tenants remaining cost conscious in the current economic climate but while rents are sliding, they are doing so at a slower pace and this suggests that the imbalance between supply and demand has eased a little.
It means that the high levels of stock brought to the market in the immediate aftermath of the stamp duty surcharge of April 2016 appear to have worked through the market. However, increased new build volumes and, to a lesser extent property brought to the rental market by those struggling to sell, provide tenants with significant choice, the report adds.
Over the longer term, prime country rental markets have remained stronger than London, with five year growth of 3.7% compared with falls of 5.7% in prime London and across the market, activity levels vary by location.
For example, while there has been an increase in corporate demand for top end family houses in Esher from the recovering oil and gas industry, most other locations are seeing more activity at the lower end of the market from cost conscious tenants.
Supply at the top end of country rentals has remained high in most markets, especially with an increase in accidental landlords renting out their property in an uncertain sales market. Indeed, the report reveals an increase in void periods. In Beaconsfield, for example, the average time between tenancies has increased from just under one month in 2016 to just over two in 2017.
High supply in the London market is allowing tenants to get more for their money, and they have become increasingly footloose in their choice of location. However, the country market still holds significant value compared with London markets. A move from Wandsworth to Weybridge, for example, would save 40% in renting the same sized prime property.
Looking ahead the report suggests that in terms of demand there will be continued uncertainty surrounding Brexit which could also impact the corporate relocation market and could also lead to longer term accidental tenants who choose to wait out the sales market.
‘Given current market stock levels, we expect rental falls to continue in the short term, with a fall, over 2018 of 3% in London and 1% in the commuter belt. But, by 2019, we should have a better understanding of where we stand with the EU, bringing a degree of confidence to the market, though stock levels from the new build pipeline will result in a slow recovery of prime rental values,’ the report says.
‘Markets outside the capital have far less new build stock in the pipeline and have experienced smaller falls, with a view that they will recover slightly more strongly over the next five years,’ it adds.
‘We believe capital values are likely to increase at a stronger pace than rental values over the next five years, with a forecast of 20.3% growth in prime central London, 10.2% in outer prime London, and 14.2% in the commuter zone by 2022. Landlords will need to take a mid-term view to see the forthcoming years as an opportunity for asset wealth generation,’ it concludes.
