london prime residential lettings report autumn 2014

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London Prime Residential Lettings Report Autumn 2014

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Key trends – New applicants and new instructions increased in third quarter

– Prime rents recorded further marginal rise of 0.4% in Q3

– Prime yields edged upwards to 3.1% at quarter end

– Forecast prime London rental growth of 3% for 2015

London Prime Residential Lettings Report Autumn 2014

Supply & DemandLondon’s prime residential lettings market continued to improve during the third quarter, albeit conditions remained testing. Tenant demand increased, reflecting continued employment growth and ongoing affordability issues preventing access to the sales market. Compared to the second quarter, new applicants

registered rose by 29% while agreed deals were an impressive one third higher. On an annual basis, growth was less robust but still healthy: in the year to end September, new applicants registered rose by 13.5% compared to the corresponding period in 2013 while agreed deals were 4.5% up.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Stock (end-quarter)

ValuationsInstructionsNew Applicants Registered

Agreed Lettings

-1.4

%

-4.7

%

33%

29%

-28%

Source: Chestertons Research

Figure 1: Key market indicators: Q3 2014 v. Q2 2014

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Employment has been growing fastest in central and inner London due to the fact that financial services and related business services tend to concentrate in these areas. Morgan McKinley estimates that new jobs in financial services rose by 1.4% in Q3 compared to Q2. Staff in these sectors are generally better paid which has benefited the prime lettings market. According to Morgan McKinley, the average salary increase for those securing new jobs in financial services in September was 19%, compared to 17% in August and 16% in September 2013. Nonetheless budgets remained constrained, including those employees on corporate packages, and tenants want and can obtain what they consider to be value for money – especially those wishing to save for a deposit on a house purchase. Relocation referrals tailed off during the quarter, highlighting the fact that companies continue to keep a tight rein on expenditure.

In contrast, the supply of available stock to rent continued to decline. Quarter end available stock was a sizeable 28% down on the previous quarter end figure and 22.4% lower than at the

end of September 2013. Availability tends to be higher for larger properties which carry higher rent tags while one and two bedroom flats are correspondingly easier to let. The reduction in stock was partly due to the pick-up in new lettings but additionally reflected a fall in new instructions (1.4% down on the previous quarter) as existing landlords continued to reduce their portfolios and fewer new landlords entered the market. Stock disposals reflected a combination of landlords realising capital gains on long held properties, low yields, more onerous borrowing requirements from lenders and a desire to reduce debt exposure.

Although tenants remain cost conscious, the reduction in stock means that competition has increased for properties, especially in the smaller apartment market, and tenants enjoy a less dominant position than previously. This may partly explain the increase in tenant renewals – which rose over the quarter by 25.9% compared to Q2 – while early terminations were 19.7% lower, although this also reflects continued flexibility on the part of landlords to retain “good” tenants.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

StockValuationsInstructionsAgreed LettingsNew Applicants Registered

4.5%

-3.2

%

-7.2

%

13.5

%

-22.

4%


Figure 2: Key market indicators: Q1–Q3 2014 v. Q1–Q3 2013

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Rental growthThe reduction in available stock combined with an increase in tenant demand resulted in upwards pressure on rental values in the third quarter, albeit the increase between end-September and end-June was marginal at just 0.4%. Stepping down to regional sub-market level, the core central areas recorded the strongest quarterly growth (+1.4%), while the North East (-0.4%) and South West (-0.3%) experienced modest decline.

The average weekly rent for the Chestertons Prime Rental Index stood at £915 at the end of September. The highest average weekly rental value was achieved in St John’s Wood (£1,889) which was 0.6% down on the previous quarter, closely followed by Knightsbridge/Belgravia (£1,847: 2.4% up on Q2) and Mayfair (£1,705: 0.3% up).

-2.0%

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Figure 3: Prime London quarterly rental growth

London’s private rented sector continues to expand, creating more opportunities for investors looking for alternative investments.

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London’s private rented sector (PRS) continues to expand, creating more opportunities for investors looking for alternative investments. The ratio of privately rented households across London has risen from 15% in 2001 to around 25% and appears set to continue to increase against a background of strong forecast growth in household numbers and affordability issues with regard to home ownership. Monthly mortgage payments as a proportion of household income have risen even within a low interest rate environment from 39.4% in Q1 to 44.2% in Q3 according to the Halifax.

This is still lower than the more than 50% of household income which average rents in many boroughs account for, however, accumulating funds for a deposit remains a key barrier: even a 95% LTV on the average house price in London (£460,521 in September according to Land Registry) equates to a deposit of just over £23,000 which is beyond the means of most first time buyers.

Another catalyst for the further expansion of the private rented sector may well come in the form of the nascent build-to-rent

market. This year has seen more examples of institutional involvement, along with large private equity funds and corporate players, who are funding the development of new purpose built apartment blocks in locations close to public transport or employment clusters, often in partnership with other investors. This represents a potentially far more attractive product for tenants on a longer term basis than a large proportion of the existing rented stock which is often old and poorly maintained.

In order for the institutional PRS market to take off, however, a critical mass in terms of investment grade stock needs to be achieved which delivers acceptable net operating income streams and a transparent secondary market with a clear exit. When this point has been reached, the more risk-averse investors should feel more confident about adding residential to their property portfolios. A new use-class order for build-to-let with incentives for investors would surely accelerate the process. In the meantime, the sector remains highly fragmented, dominated by small buy-to-let investors which consequently does not operate as efficiently as it could do.

Residential Investment Market

£0

£500

Ave rent pcm PRS stock as % of total stock

£1,000

£1,500

£2,000

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£3,000

£3,500

£4,000

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Newham

Westminster0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Source: GLA, Zoopla

Figure 4: Top 10 boroughs with highest ratio of PRS h/holds to total h/holds & average rent

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For the time being, the growth of PRS is more slow-drip than dynamic as large investors, mainly foreign, trickle into the sector. At the beginning of September, Aviva and Canada Life both said they were considering opening up internal funds managing in-house money to attract third-party investors to the sector. More recently, London & Quadrant announced their intention to create a £250m PRS fund targeting

London and the South East with the aim of growing it to £1bn within three years. Other new commitments include the London Pensions Fund Authority (LPFA), which is reportedly considering financing a number of private rent schemes in the Capital, and Hermes Real Estate who have launched a UK-wide PRS fund in collaboration with Countrywide.

Yields nudged upwards in Q3

Outlook

With prime capital values recording further decline and rents edging upwards, prime yields moved out fractionally in Q3. The Chestertons Prime London Residential Yield Monitor recorded average gross yields of 3.1%

at the end of September compared to 3.0% at the end of June. Gross yields for prime central London also rose slightly to 2.9% compared to 2.8% at the end of June.

There is growing uncertainty surrounding the shorter term direction of both the housing market and the broader economy. However, despite growing concern about buffeting from the Eurozone and a possible deflation threat, the consensus view suggests that UK GDP will

continue to expand at a comparatively healthy rate of 2.6% in 2015. The London economy is also projected to see slower growth next year, albeit remaining above the national growth rate at 3.4%.

0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

Mayfair

Knightsbridge & Belgravia

Kensington

Hyde Park

Prime central London ave.

Chelsea & S Kensington

Prime London average

Notting Hill

St. John's Wood 4.2%

3.5%

3.1%

3.0%

2.9%

2.9%

2.9%

2.5%

2.4%


Figure 5: Prime gross residential yields as at end-September 2014

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Employment growth in the capital is expected to slow next year and real wages for most people are likely to remain flat at best. Combined with a probable squeeze on mortgage lending in response to the additional burdens imposed by Westminster and Brussels, households are likely to feel less confident about their financial position and be more driven towards the rented sector. With London’s population growing at a rate of around 100,000 per annum according to the Mayor’s office this points to further increases in the demand for rented accommodation, especially when combined with continuing affordability issues with regard to the sales market.

The supply of available properties to rent is unlikely to increase in 2015 unless the

trend of buy-to-let landlords reducing their portfolios as reported by ARLA is reversed or unless the institutional market gathers greater momentum – which, if it happens, is more likely to be a longer term trend. The combination of increased demand and static or reduced supply will inevitably exert upwards pressure on rents although the degree of uplift will vary according submarkets and price bands. As before, the best prospects for growth lie in the decentralised areas offering good transport connections where average rents are lower than in the prime central locations and will offer tenants better value for money.

We forecast that prime London rental growth will accelerate in 2015 to reach 3.0% and remain broadly stable the following year.

0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

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20182017201620152014

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4.2%

3.4%

3.1%

2.6%

2.4%

2.4%

2.4%2.

6%

2.6%

2.6%

Source: HM Treasury Forecast Panel, GLA, CEBR

Figure 6: UK & London forecast economic growth: 2014–18

2014 2015 2016 2017 2018 2015–18 total growth

London 4.5% 5.0% 5.0% 5.0% 4.5% 19.5%

Prime London 2.0% 3.0% 3.0% 3.5% 4.0% 13.5%

Figure 7: London residential price growth forecasts


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BARNES – T: 020 8748 7733 E: [email protected]

BATTERSEA – T: 020 7298 5630 E: [email protected]

BATTERSEA PARK – T: 020 3040 8700 E: [email protected]

CAMDEN – T: 020 7267 3574 E: [email protected]

CANARY WHARF – T: 020 7510 8310 E: [email protected]

CHELSEA – T: 020 7594 4750 E: [email protected]

CHISWICK – T: 020 8747 3133 E: [email protected]

COVENT GARDEN – T: 020 3040 8400 E: lettings.covent [email protected]

EAST SHEEN – T: 020 8104 0580 E: [email protected]

FULHAM, FULHAM ROAD – T: 020 7384 9899 E: [email protected]

FULHAM, NEW KINGS ROAD – T: 020 7348 7777 E: [email protected]

HAMPSTEAD – T: 020 7794 1125 E: [email protected]

HYDE PARK – T: 020 7298 5950 E: [email protected]

ISLINGTON – T: 020 7226 4221 E: [email protected]

KENSINGTON – T: 020 7937 7260 E: [email protected]

KENSINGTON CHURCH STREET – T: 020 3040 8446 E: [email protected]

KENTISH TOWN – T: 020 7267 1010 E: [email protected]

KEW – T: 020 8104 0340 E: [email protected]

KNIGHTSBRIDGE – T: 020 7235 3530 E: [email protected]

LITTLE VENICE – T: 020 7266 2369 E: [email protected]

MAYFAIR – T: 020 7288 8301 E: [email protected]

NOTTING HILL – T: 020 3040 8588 E: [email protected]

NORTH BARNES – T: 020 8748 7733 E: [email protected]

PUTNEY – T: 020 8704 1000 E: [email protected]

ST JOHN’S WOOD – T: 020 3040 8622 E: [email protected]

TOWER BRIDGE – T: 020 7357 6911 E: [email protected]

WESTMINSTER & PIMLICO – T: 020 3040 8220 E: [email protected]

The contents of this report are intended for the purpose of general information and should not be relied upon as the basis for decision taking on the part of the reader. Although every effort has been made to ensure the accuracy of the information contained within this report at the time of writing, no liability is accepted by Chesterton Global for any loss or damage resulting from its use. Reproduction of this report in whole or in part is not permitted without the prior written approval of Chesterton Global. November 2014.

ContactChestertons is the London and international residential property specialist that knows its business and markets like no one else and every year helps thousands of people buy, sell, let, rent and manage their homes and investments. With 30 offices across the capital, Chestertons has one of the largest networks in London, as well as a strong international presence around the globe.

London Lettings Offices:

Nicholas BarnesHead of ResearchT: 020 3040 8406E: [email protected]

Richard DaviesHead of ResidentialT: 020 3040 8244E: [email protected]

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Reproduction of this document in whole or in part is not permitted without the prior written approval of Chestertons. November 2014.

Notting Hill

Chiswick

Barnes

Mayfair

Knightsbridge & Belgravia

Westminster & PimlicoChelsea

Kensington

Hyde Park

Little Venice

St. John’s Wood

Kentish Town Hampstead

Covent Garden

IslingtonCamden & Primrose Hill

Battersea

Battersea Park

PutneyEast Sheen

Kew

Tower Bridge Canary Wharf

Fulham

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london prime residential lettings report autumn 2014

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