chesterton humberts research brief_winter_2011-12

London Residential Lettings Market Snapshot

CHESTERTON HUMBERTS RESEARCH BRIEF – WINTER 2011/12

“Why, Sir, you find no man, at all intellectual, who is willing to leave London. No, Sir, when a man is tired of London, he is tired of life; for there is in London all that life can afford.”

Dr. Samuel Johnson

CHESTERTON HUMBERTS RESEARCH BRIEF 3

After a very active third quarter, the prime London lettings market quietened in the final few months of last year and rental levels softened by 1.9%. Taken as whole 2011 was nonetheless a strong year for the market and average rents in the locations covered by Chesterton Humberts’ offices increased by 7.25% to reach £860 per week by year end.

The most expensive locations are Knightsbridge and Belgravia with average weekly rents ranging from £525 for a 1-bedroom apartment to £3,000 for a 4-bedroom single family house.

Rents were buoyed by a combination of steady tenant demand and a shortage of stock for most of the year although in the final quarter stock levels increased due to existing landlords bringing more properties onto the market and new landlords entering the market. Consequently, the average agreed-to-asking rent ratio on Chesterton Humberts deals reduced marginally to 95.9%

In spite of concern about job losses in the higher earning sectors, notably in financial services, tenant demand remains buoyant, especially for 1&2 bedroom flats in good locations which typically let quickly. This continued strength of demand is illustrated by the fact that we have witnessed a number of incidents of “rental gazumping”.

The Olympics factor is already making itself felt and we are seeing some premium rents being paid on larger properties for use during the Games. Moreover, we have received a number of enquiries in recent months

regarding off-market valuations to test the water with a view to possible Olympics’ related lets. This has come not only from investors but also from homeowners who are either considering renting out their London pied-à-terres or from London based owners who may wish to leave the capital and let their property during the games.

Rents are likely to rise at a lower rate in 2012 but should still see growth of between 4%-6%. There will also be a strong short term spike driven by the Olympics and the Queen’s Diamond Jubilee which are expected to push up tourist arrivals to around 30 million according to Visit Britain.

The investment market continues to attract interest, driven by a rapidly expanding private rented sector which now accounts for 25.8% of the total dwelling stock in London according to recent central Government estimates and which equates to over 3.3 million dwellings.

The value and volume of BTL mortgage loans remained stable in the final quarter of last year after the previous quarter in which it reached its highest level since q4 2008. Mortgage lending to the sector remains some way below pre-recession peak levels but picked up in 2011 and further momentum is expected this year.

More corporate investors are coming to the party as it appears increasingly likely that the shift in tenure in favour of renting may represent a longer term structural adjustment, in part due to affordability issues in the sales market but also as a result of changes in lifestyle expectations.

London Residential Lettings Market Snapshot: Winter 2011/12

Despite softening slightly in the final quarter, 2011 was nonetheless a strong year for the private rented sector with prime rents rising on average by 7.25%.

CHESTERTON HUMBERTS RESEARCH BRIEF4

Residential also represents an opportunity for portfolio diversification and has exhibited strong performance and low volatility over time. Recent newcomers include Ivanhoé Cambridge, the residential arm of one of Canada’s largest institutional fund managers - the Caisse de Dépôt et Placement du Québec - which has acquired 207 units in central London.

Physical accessibility is a key factor for remote owners of property. London is well-serviced by regular international flights, with a choice of four airports, and there is an extensive underground network linking the prime residential areas with the prime business, shopping and entertainment areas of the capital. A number of infrastructure improvements, most notably the Crossrail project, will further facilitate travel within the capital and are likely to enhance property values in adjacent locations.

Rail access between London and key cities in the Midlands and north of England will also be

improved with HS2, the recently approved high speed network which will link London with Birmingham, Leeds, Manchester, Sheffield and the East Midlands.

The increasing internationalisation of trade, investment and tourism has brought in its wake a corresponding trend in residential property investment, with London being a major beneficiary of capital inflows. This trend has been supplemented in times of financial or geo-political stress, as seen most recently in the wake of the Arab Spring uprisings and the Eurozone sovereign debt crisis, where flight capital has sought the safe haven status offered by prime London residential property.

As befits a city with such multi-national diversity, overseas buyers originate from a wide range of countries. This mix of buyer nationality has varied over the years reflecting changes in their domestic countries rather than any obvious changes in the London market.


ISLI

NGT

ON

MAY

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& S

T JA

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KN

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PAR

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BAT

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FULH

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CHEL

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UTH

KEN

SIN

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CHIS

WIC

K£3

25

£310

£240

EAST

SH

EEN

£320

£325

£400

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£475

£500

£453

£600

£400

£420

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CAN

ARY

WH

ARF

& D

OCK

LAN

DS

£325

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-10

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1 %

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21 %

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0 to

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For investors, rental and capital growth potential are both good as there is a long standing structural undersupply of property in London and no shortage of occupier demand.

Prospects for the private rented sector are upbeat as accessibility to the sales market will remain restricted until the economy begins to experience reasonable growth again and bank lending becomes more widespread. For investors, rental and capital growth potential are both good as there is a long standing structural undersupply of property in London and no shortage of occupier demand.

If, as seems likely, corporate activity continues to expand, the BTL sector may find itself under pressure with regard to competing for tenants. The larger corporates may well also be able to offer

more competitive rents and a more tailored management service thanks to operating economies of scale. Following last year’s announcement by Grainger to establish a major build-to-let programme a number of corporates are now considering this route to counter stock shortages and achieve quick critical mass in terms of portfolio size.

Gross yields in the prime central locations softened marginally during the last quarter as the slight drop in rents was accompanied by a higher upwards movement in capital values. Average prime central London gross yields ended the year at 3.40%.

-5.00% 0.00% 5.00% 10.00% 15.00%

11.30%

7.80%

4.30%

-3.50%

Inflation

Equities

Commercial Property

Residential Property

Source: Investment Property Databank

Figure 1: 12 month annualised nominal total returns (ungeared) as at end December 2011

LONDON RESIDENTIAL LETTINGS MARKET SNAPSHOT: WINTER 2011/12


Despite the fact that yields in the prime central London locations are low, there is still a positive yield gap compared to benchmark 10 year gilts of 107 basis points (bps). Moving further away from the central areas but still comparing prime properties, the yield gap becomes even more attractive. For example,

in Canary Wharf the figure rises to 317 bps. Bearing in mind that these are yields based on single units typically bought without regard for targeted investment returns, it is likely that corporate landlords could achieve significantly higher yields on residential blocks based on investment valuations.

0.00%

Canary Wharf

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

Knightsbridge/Belgravia

S Kensington/Chelsea

Prime Central London

KensingtonMayfair

5.50%

3.60% 3.60% 3.40% 3.30% 3.10%

Figure 2: prime residential gross yields as at December 2011

Note: These yields are based on single unit transactions and reflect a basic income over purchase price assessment with zero gearing. They do not reflect full investment valuations. Prime central London is defined as the area covering Knightsbridge/Belgravia, South Kensington & Chelsea, Kensington and Mayfair.


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. February 2012.

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

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

Amy SmithResidential Area Director London South WestT: 020 8104 0580E: [email protected]

Anshul RajaResidential Area Director London CentralT: 020 7235 3530E: [email protected]

CONTACT

Chesterton Humberts is a multi-disciplinary property business covering Residential Sales & Lettings, International, Rural and Commercial with 70 offices nationally and international offices in Australia, Barbados, France, Gibraltar, Italy, Russia, Singapore, South Africa, United Arab Emirates. Should you have any questions regarding this report or wish for any other information concerning the London residential lettings market please do not hesitate to contact any of the names listed below.

London Lettings Offices:

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

BATTERSEA – T: 020 7298 5630 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 ROAD – T: 020 7384 9899 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]

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: 0207 288 8301 E: [email protected]

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

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

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

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

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chesterton humberts research brief_winter_2011-12

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