PCL sees first rental increases in 18 months

  • Average rents in Prime Central London reached £573 per week in November for the mainstream market (two bedrooms or less, representing 87 per cent of the rental market).
  • This reflects year-on-year growth of 3 per cent, compared with November 2016.
  • This is the second month of positive growth, indicating the first signs of a turn around in the market
  • It follows sustained rental falls every month since the introduction of the Additional Rate Stamp Duty (ARSD) in April 2016 as stock levels in the market increased post-ARSD.
  • This trend appears to be reversing with falling numbers of available property to let, down 23.6 per cent in the last quarter compared with last year.
  • Small properties continue to see the highest level of demand, with studios achieving rental growth of 7 per cent compared with November 2016.
  • Newly renovated properties also remain the most sought-after, seeing rental increases of 6.4 per cent
  • Despite properties achieving higher rents overall, discounts to asking rent are still being seen on almost 50 per cent of properties as landlords set higher prices to recoup the cost of increased taxation.

The rental market in Prime Central London has shown signs of recovery at the end of 2017, according to a new analysis by London Central Portfolio. Following 18 months of negative rental growth, the mainstream rental market has now seen two consecutive months of positive increases with rents in November up 3 per cent year-on-year. Weekly rents in the mainstream market now average £573.

The increase in November has brought rents back to the level they were at in March 2016 before the introduction of the Additional Rate Stamp Duty (ARSD). This tax had a marked effect on the market as owners, struggling to sell, chose to rent their properties, resulting in significantly increased levels of rental stock.

The latest statistics indicate that this trend is now reversing. According to the data, there has been a 23.6 per cent fall in the number of units available to rent over the last three months, compared with the same period in 2016. This has stabilised the balance of supply and demand in the sector, underpinning the rental increases seen towards the end of this year.

Heaton explains:

“We saw big increases in the number of available rental properties post the introduction of ARSD. 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.”

“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. PCL annual sales volumes to Q3 2017 reached 5,542, representing a 15 per cent increase on Q3 2016.”

Whilst all sectors of PCL saw rental increases, demand continues to be strongest for the smallest properties. These attract both corporate executives and student tenants, who represent 58 per cent and 42 per cent 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, 7 per cent higher than in November 2016.

Naomi Heaton, CEO of LCP, comments:

“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 Prime Central London’s small units. Whilst larger 3+ 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.”

Tenants’ preference for turn-key, newly renovated properties has continued. Within LCP’s portfolio, ‘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 per cent

Despite the increase in rents now being seen, there continues to be a mismatch between landlord and tenant expectation. Over the last three months, 44.2 per cent of rental properties have been reduced in price with units achieving a rent of 5.7 per cent below asking price on average.

Heaton comments:

“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.”