Average rents in the prime central London market reached £573 per week in November for homes with two bedrooms or less, representing 87% of the lettings market, a new analysis shows.
Year on year rents were up 3%, the second month of growth, indicating the first signs of a turnaround in the sector, according to the report from London Central Portfolio.
It follows sustained rental falls every month since the introduction of a 3% stamp duty surcharge on additional homes introduced in April 2016 as stock levels in the market increased as a result of the tax change.
But LCP says that this trend appears to be reversing with falling numbers of available property to let, down 23.6% in the last quarter of 2017 compared with last year.
Small properties continue to see the highest level of demand, with studios achieving rental growth of 7% compared with November 2016 and newly renovated properties also remain among the most sought after, seeing rental increases of 6.4%.
Despite properties achieving higher rents overall, discounts to asking rent are still being seen on almost 50% of properties as landlords set higher prices to recoup the cost of increased taxation.
The increase in November has brought rents back to the level they were at in March 2016 and overall the balance of supply and demand in the sector has stabilised, underpinning the rental increases seen towards the end of this year. Sales to the end of the third quarter of 2017 are up 15% compared to the same period last year.
‘As tax changes and Brexit uncertainty caused instability, many owners opted to rent, rather than sell, in a weak market. With more choice available, tenants were able to negotiate harder on rents, resulting in the downward pressure seen in 2016,’ said Naomi Heaton, chief executive of LCP.
‘However, it now appears that this trend has begun to reverse. Not only have we seen falling numbers of available rental units, but we have seen increases in transactions in the sales market,’ she pointed out.
Smaller properties attract both corporate executives and student tenants, who represent 58% and 42% of all lets respectively in LCP’s audited portfolio. Over the last year, studios have performed best with weekly rents now averaging £350 per week, some 7% higher than in November 2016.
‘It is becoming increasingly clear that tenants are looking for smaller and smaller properties as they seek central locations offering an easy commute to work or university at affordable prices. This is driving demand for small units. Whilst larger three plus bedroom flats have also seen growth, this is compensating for a prolonged period of falls with rents still below where they were in May 2011,’ Heaton explained.
The analysis also shows that tenants’ preference for turn-key, newly renovated properties has continued. New lets have seen a 6.4% increase in rents over the last 12 months. This compares with renewals from existing tenants where rents are up just 1.2%
Despite the increase in rents now being seen, there continues to be a mismatch between landlord and tenant expectation, it also points out. Over the last three months 44.2% of rental properties have been reduced in price with units achieving a rent of 5.7% below asking price on average.
‘Landlords are pushing for higher rents as they seek to recoup the punitive entry and running costs due to ARSD and the reductions in mortgage interest relief. However, tenants are still winning out and able to negotiate down current asking levels. If stock levels continue to decrease into 2018, we may well see this gap closing in the landlord’s favour as tenants’ bargaining power diminishes,’ Heaton concluded.
