Rents in prime London markets bottoming out and set to rise by over 11% in next five years

Brexit has had a negative impact on rents in London’s prime residential markets which are now showing early signs of bottoming out, with the annual rate of decline now at its slowest since the June 2016 referendum.

Rents have fallen by an average of 9.6% across the capital’s prime markets since the referendum, but falls slowed to just 0.8% in 2018, according to the latest Savills prime London rentals index.

But it points out that continued economic and political uncertainty will put a recovery on pause for the next year to 18 months, while rising supply and shrinking corporate budgets will constrain rental growth thereafter.

The index report includes the firm’s five year rental forecasts which predicts that rents will rise by an average of 11.5% over the next five years, and by 12.6% across the prime commuter zone.

In London, falls have been concentrated in the high value prime central postcodes where rents have fallen by 16.5% since the referendum, falling a further 3.2% in the past year. Rents in lower value outer prime London markets are down an average of 6.4% in total in the same period, but stabilised overall in 2018 with a rise of 0.2%.

The report reveals that rental 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% compared to a fall of 19.5% for those over £3,000 per week.

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

Savills said that 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 ten 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,’ said 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. 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,’ Cook pointed out.

Overall steady growth in rents is forecast over the next five years. The report points to evidence of previous downturns, notably post 9/11 and post the global financial crisis, 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. 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,’ Cook added.