c1796 prime residential lettings report spring 2016 web

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London Prime Residential Lettings Report Spring 2016

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London Prime Residential Lettings Report Spring 2016

Demand and supply trends: Steady improvement after a difficult year-end – The first quarter of 2016 provided a welcome

improvement on the previous quarter: Property viewings were 30% higher and the number of new applicants rose by nearly a third. However, these numbers should be viewed within the context of the last quarter typically being the least active of any year. In fact while the first three months of this year were more active, getting tenants to commit to new tenancies proved challenging and the number of agreed lettings only rose by 10%. New applicant numbers were 12% down on the corresponding quarter in 2015.

– Tenants, especially corporate tenants for whom relocation budgets are tight, remained price conscious and also had a larger selection of properties from which to choose, as the number of available homes to rent rose by more than a third during the quarter. In the core central parts of London, tenants are more property-driven than location-driven than was the case in the past, with an emphasis on finding best value for money.

– The increase in the number of homes available to rent was largely the result of landlords attempting to beat the 1st April 2016 deadline after which an effective 3% was introduced on all additional property purchases, and fears of a retreat of buy-to-

let (BTL) investors from the market have so far been unfounded. There was a notable increase in activity from BTL investors and the Council of Mortgage Lenders (CML) reported a 28% increase in BTL mortgage loans in the first two months of the quarter.

– Estimates for March lending show a 60% increase on the February figure, which preliminary analysis from the CML suggests was predominantly down to buy-to-let house purchases. However, we need to see how investor appetite for acquisitions fares from April onwards in order to properly assess the full impact of the new stamp duty surcharge.

– While many tenants value continuity, tenant renewals rose by just 5% compared to the previous quarter and by 6.5% compared to Q1 2015. This reflects the greater choice available to tenants as a result of the significant increase in available rented homes and means that landlords still need to be flexible to prevent lengthy void periods.

– Viewings from relocation agents fell by 12% over the quarter, which may reflect greater caution on the part of multinational firms refraining from relocating their employees to the UK in significant numbers while uncertainty persists in the run-up to the EU referendum over the potential impact of a vote to leave.

In the core central parts of London, tenants are more property-driven than location-driven than was the case in the past, with an emphasis on finding best value for money

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0%

5%

10%

15%

20%

25%

30%

35%

Agreed lettings

Viewings (properties viewed)

New applicantsregistered

Homes to rent(end-quarter)

InstructionsValuations

9.6%

26.2% 29.6%32.5%

33.9%

32%

Source: Chestertons Research

Key market indicators: Q1 2016 v Q4 2015

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Agreed lettings

Viewings (properties viewed)

New applicantsregistered

Homes to rent(end-quarter)

InstructionsValuations

6.7%

9.9%

7.9%

15.9%

33.5%

-11.6%


Key market indicators: Q1 2016 v Q1 2015

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The investment market: Will stamp duty surcharge begin to bite? – The rapid expansion of the private rented

sector in London over the past decade – from nearly 18% of all households renting in April 2004 to just under 27% in April 2014 – has attracted increasing numbers of developers and investors. This has given rise to an increase in the number of homes being marketed to rent off-plan, though there is insufficient available data at present to analyse how successful these schemes have been.

– Appetite for residential property remains strong from buy-to-let landlords, despite recent actions from the Government that appear designed to discourage them: From the planned phasing out of the higher rate of mortgage interest relief from 2017 and the introduction of the 3% surcharge on stamp duty rates from April 2016, to new regulatory requirements including compulsory immigration or so-called “right to rent” checks, which came into force on 1st February this year.

– The effect of these changes is that landlords face increased operating costs and they are likely to respond by increasing rents. Others may decide to sell or reduce their portfolios, resulting in fewer homes to rent, which may also push rents up across the board. Either outcome could be bad news for tenants, and the impact will be most keenly felt in London, where rents are more than twice those of the UK average.

– Interest from larger funds and institutions continues to grow, with UK players also starting to invest. Invesco Real Estate has launched the UK Private Rented Sector Fund, while Legal & General has announced a £600m build-to-rent partnership with Dutch pension fund manager PGGM, which is targeting an initial 3,000 homes.

– As there is a limited number of existing properties that match institutional requirements, this segment of the market is pioneering the large-scale build-to-rent concept that aims to deliver large apartment blocks in well connected locations. Professionally managed and benefiting from economies of scale, they will trade on their recognised and trusted brands and offer purpose-built, state-of-the-art accommodation. Rents are likely to be competitive to attract tenants, at least until they have established operations.

– The number of new-build homes completed in the private rented sector (PRS) continues to rise. At the end of 2015 there were 14,186 PRS homes either completed, under construction or planned across the capital, according to data from Molior. PRS homes now account for 15% of all private house building in London, though only a small proportion can be classified as prime.

Rents and yields: Values in new contracts on the slide – The increase in the number of homes to

rent and a budget-conscious approach from tenants resulted in further downwards movement for rents in new contracts. The Chestertons Prime London Residential

Rental Index recorded a 1% fall in rental values over the first quarter and a 6% drop over the year to the end of March. In contrast, rent increases on renewed contracts averaged 1.5% in Q1 of 2016.

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-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

Q12016

Q42015

Q32015

Q22015

Q12015

Q42014

Q32014

Q22014

Q12014

Q42013

Q32013

Q22013

Q12013

Q42012

Q32012

Q22012

-0.9%

-0.9%

-1.0%

-1.7% -1.3%

0.8%

1.6%

1.4%

-2.2%

-2.0%

-0.8%

-0.8%

0.2% 0.4% 0.5% 0.6%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

Knightsbridge & Belgravia

Mayfair

Hyde Park

PCL average

Kensington

Chelsea & S Kensington

Prime London average

Notting Hill

St John's Wood

2.3%

2.3%

2.5%

2.8%

2.8%

3.0%

3.1%

3.9%

4.2%



Prime London quarterly rental growth

Prime central London gross residential yields (at end March 2016)

– Prime gross yields edged further downwards in the first quarter of this year, due to rental values falling at a faster rate than capital values. The Chestertons’ basket recorded

a figure of 2.8% for yields in prime central London locations and 3.1% for prime rentals elsewhere in the capital.

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Outlook: New Mayor, Brexit jitters and restricted lending cloud horizon – There are a number of factors that will

impact upon the performance of the prime London lettings market over the rest of the year. The increase in BTL mortgage lending prompted the Bank of England’s Prudential regulation Authority (PRA) to issue a consultation paper at the end of March (closing on 29th June) on possible new powers to increase regulatory control of lending to the sector. According to official data, lending to landlords has increased on average by 5.9% since the financial crisis, compared to only 0.3% growth in the owner-occupier residential market, while losses on buy-to-let loans have been about twice those incurred on lending to owner-occupiers.

– Among the proposed changes is an interest rate affordability “stress test”, which would take account of a minimum increase of 2 percentage points in buy-to-let mortgage interest rates over a five-year period. Even if the borrower’s projected interest rate will be less than 5.5% during the first five years of a buy-to-let mortgage contract, the lender should assume a minimum borrower interest rate of 5.5%.

– If lenders take account of personal income as a means for the borrower to support the monthly mortgage interest payments, their assessment of affordability should not be based on the equity in the property that is used as security under the buy-to-let mortgage contract.

– The PRA says that the new restrictions on mortgage lending for buy-to-let investors should ultimately see mortgage approvals fall by between 10 and 20 per cent by 2019, but points out 75% of mortgage providers already apply these criteria when making lending decisions.

– Political events will also play a part in the fortunes of the residential property market this year. Newly elected London Mayor Sadiq Khan has already stated he wants to limit new homes sales to overseas buyers. His manifesto also promises he will fight for the Mayor’s office and London councils to have a greater say in strengthening renters’ rights over tenancy lengths, rent rises and the quality of their homes. He will also make the case to government for London-wide landlord licensing.

– A Brexit could have a significant impact on the prime lettings market if corporate headquarters and financial services operations are relocated away from the UK. However, this scenario appears unlikely given it would entail a lengthy and costly process and there is no other city in Europe that offers the advantages London does. Nonetheless, a UK outside the EU might be a less attractive proposition for foreign investors, who are an important part of the private rented sector. However, the likelihood of a retreat by foreign investors is also slim, as a Brexit would not change the market fundamentals. It should also be factored in that, if sterling were to fall by up to a further 20%, as forecast by Goldman Sachs and Citi, this would act as an incentive for overseas buyers to invest as their entry costs would be proportionately much lower.

– On balance, we expect prime rental growth will fall by 3% across 2016 before posting a modest recovery in 2017. Rental growth in the wider market will be much stronger and driven by population expansion and continuing affordability issues in the sales market, which will only be exacerbated as and when mortgage interest rates start to rise.

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2016 2017 2018 2019 20202016 – 20

total compound growth

London 7.5% 6% 6% 7% 7% 38.3%

Prime London -3% 2% 4% 4% 4% 11.3%

London private residential rental value forecast


Newly elected mayor Sadiq Khan has already stated he wants to limit new homes sales to overseas buyers. He will also make the case to government for London-wide landlord licensing

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4951.1%

TowerBridge

Hampstead885

-6.3%Kentish Town

7100.8%

1,815-0.8%

Covent Garden

Mayfair

Knightsbridge& Belgravia

Camden

Kensington

Little Venice

Fulham

Putney

Chelsea &South Kensington

Chiswick715

-2.2%

6702.4%

Wandsworth4651.4%

700-1.6% East Sheen

765-1.0%

1,360-3.7%

890-1.4%

To Canary Wharf

7650.0% Kew 925

1.7% Barnes

695-2.1%

St John’s Wood

630-4.0%

Battersea& Clapham

BatterseaPark

6652.1%

Islington805

-0.7%

Westminster& Pimlico

HydePark

885-11.9% 1,740-2.4%

1,705-0.2%1,190-2.5%

6854.4%

Notting Hill8650.5%

1,2850.9%

-

Canary Wharf& Docklands

Greenwich &Blackheath

6503.8%

505-1.2%

Average prime residential weekly rents and three-month growth as at end March 2016

The Chestertons Prime London Residential Lettings Index tracks quarterly changes in rental values in 26 locations across London. It is a fixed-base index and is based on the quarterly repeat valuation of a standard basket of properties (selected so as to be representative of the typical cross-section of prime stock within each location) to remove inconsistencies which can arise from using a transaction based approach where the number and type of properties may vary significantly between reporting periods. The geographical coverage of our index is as follows:

Barnes, Battersea Park, Battersea & Clapham, Camden, Canary Wharf, Chelsea & South Kensington, Chiswick, Covent Garden, East Sheen, Fulham, Greenwich, Hampstead, Hyde Park, Islington, Kensington, Kentish Town, Kew, Knightsbridge & Belgravia, Little Venice, Mayfair, Notting Hill, Pimlico, Putney, St John’s Wood, Tower Bridge, Wandsworth and Westminster.


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Barnes – 020 8748 7733 [email protected]

Battersea & Clapham – 020 7298 5630 [email protected]

Battersea Park – 020 3040 8700 [email protected]

Camden – 020 7267 3574 [email protected]

Canary Wharf – 020 7510 8310 [email protected]

Chelsea – 020 7594 4750 [email protected]

Chiswick – 020 8747 3133 [email protected]

Covent Garden – 020 3040 8400 lettings.covent [email protected]

Earls Court – 020 7368 3071 [email protected]

East Sheen – 020 8104 0580 [email protected]

Fulham, Fulham Road – 020 7384 9899 [email protected]

Greenwich & Blackheath – 020 8104 7510 [email protected]

Hampstead – 020 7794 1125 [email protected]

Hyde Park – 020 7298 5950 [email protected]

Islington – 020 7226 4221 [email protected]

Kensington – 020 7937 7260 [email protected]

Kensington Church Street – 020 3040 8446 [email protected]

Kentish Town – 020 7267 1010 [email protected]

Kew – 020 8104 0340 [email protected]

Knightsbridge – 020 7235 3530 [email protected]

Little Venice – 020 7266 2369 [email protected]

Marylebone – 020 8104 7555 [email protected]

Mayfair – 020 7288 8301 [email protected]

Notting HilL – 020 3040 8588 [email protected]

North Barnes – 020 8748 7733 [email protected]

Parsons Green – 020 7348 7777 [email protected]

Putney – 020 8704 1000 [email protected]

Richmond – 020 3758 3333 lettings.richmond @chestertons.com

St John’s Wood – 020 3040 8622 [email protected]

Tower Bridge – 020 7357 6911 [email protected]

Wandsworth – 020 8104 7540 [email protected]

Westminster & Pimlico – 020 3040 8220 [email protected]

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 over 30 offices across the capital, Chestertons has one of the largest networks in London, as well as a strong international presence around the globe.

Chestertons London Lettings:

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

Richard DaviesHead of ResidentialT: 020 3040 8244E: [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. May 2016.

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Reproduction of this document in whole or in part is not permitted without the prior written approval of Chestertons. May 2016.

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