london prime residential lettings report spring 2015
TRANSCRIPT
2
Key trends – Improvement in key indicators in Q1 but tenants remained cautious
– Prime rents rose by 1.3% during first quarter
– Prime yields edged upwards again to 3.14% at quarter end
– Investors breathe a sigh of relief following Election result
– Forecast prime London rental growth of 2.5% in 2015
London Prime Residential Lettings Report Spring 2015
Supply & Demand The signs of recovery apparent in Q4 last year gained traction in the first quarter of 2015 with all of the key indicators showing healthy uplift. On the demand side, agreed lettings rose by 30% compared to the previous quarter and over one third more new applicants were registered. The data also point to increased interest from
investors, with instructions rising by 25%. Nonetheless, the market remained testing for landlords. In spite of the more buoyant activity, new supply outpaced tenant demand and available stock increased by one fifth over the quarter.
Stock (end-quarter)
Figure 1: Key market indicators: Q1 2015 v. Q4 2014
3
There was a notable increase in valuations requested by non-resident landlords for Capital Gains Tax purposes in the latter part of the quarter. Whether this is the pre-cursor to a flurry of sales remains to be seen. Only a small
number of non-residents have so far indicated they would like to dispose of their properties although some may be waiting for existing tenancies to expire or to reach the two month notice point.
-12%
-8%
-4%
12%
0%
4%
8%
Figure 2: Key market indicators: Q1 2015 v. Q1 2014
The increase in stock levels meant that there was more competition for applicants and the emphasis for landlords switched to increasing the quality of their properties to attract and retain tenants. New tenants and those looking to move remained cost conscious and were generally reluctant to commit to properties which they perceived as not offering value for money. For their part, landlords remained keen to retain good tenants, which was reflected in renewals data: the percentage of contracts which were renewed rose from 56.4% in Q4 to 66.3% in Q1, while the total number of renewals was 22.8% higher and the number of terminations was 5% lower than in the previous quarter.
A number of factors impacted positively on tenant demand. The London economy remained buoyant and the employment market picked up during the quarter. The Morgan McKinley Employment Monitor revealed that the number of financial services jobs new to the market in Q1 rose by 34.6% compared to Q4 last year. London is the fastest growing regional economy and is being driven by a fast-growing IT & communications sector and professional & business services, with a depth of expertise that few other cities around the world can come close to rivalling. Unemployment in the capital remains at its lowest rate (6.2%) for many years and the GLA is projecting overall jobs growth of 0.7% per annum over the next five years.
4
Figure 3: Financial services jobs new to the market
Despite the increase in available stock, rental growth was only slightly lower than in the previous quarter. The Chestertons Prime London Residential Rental Index recorded growth of 1.3% in Q1. Rental increases on renewed tenancies were similarly slightly lower than the Q4 figure at 1.7% over the quarter.
At submarket level, the highest quarterly rental growth was recorded in East Sheen (+5.7%) and in Chelsea (+3.9%). 20 out of the 23 submarkets
which are covered in the index reported rental growth and only three submarkets experienced a fall in rental values with Camden (-4.9%) seeing the steepest decline.
The average weekly rent in the Chestertons Prime Rental Index moved up to £934 at the end of March. St John’s Wood (£1,895/week) remained the most expensive submarket, while the gap between second placed Knightsbridge/Belgravia (£1,828/week) narrowed during the quarter.
Q1 2015
Q4 2014
Q3 2014
Q2 2014
Q1 2014
Q4 2013
Q3 2013
Q2 2013
Q1 2013
Q4 2012
Q3 2012
Q2 2012
5
London’s population is rising at its fastest ever rate and the private rented sector (PRS) is also expanding - 29.6% of London households now rent. This is triggering growing investor activity in the sector, both from buy-to-let (BTL) landlords and institutional investors.
Gross BTL mortgage lending (for house purchase and remortgaging) in the first two months of 2015 was 11.4% higher than in the corresponding period last year. The favourable interest rate environment and a more expansive product offer from lenders is making property investment even more attractive for BTL landlords. According to a study by Moneyfacts, there were 476 BTL mortgage products on offer two years which has now risen to 745. Two years ago, there were just five two-year fixed rate BTL deals priced below 3%, but today this figure has jumped to 83. With regard to five-year BTL deals priced below 5%, two years ago there were 37 such mortgages available, but currently there are 143 on the market.
The institutions continue to show interest in the sector, albeit it remains a trickle rather than a flood. Among recent deals, M&G’s UK Residential Property Fund is understood to have agreed to its third PRS deal, a £50m (€70m) investment in west London. The 205 units, part of Inland Homes’ Drayton Garden Village scheme, take the open-ended fund’s overall PRS portfolio to 850 units.
Mobile phones billionaire John Caudwell has unveiled grandiose plans for what has been described as Britain’s first £2 billion apartment block in the heart of Mayfair. The founder of the Phones4U high street chain wants to build 30 “super prime” flats and townhouses in a bid to eclipse One Hyde Park in Knightsbridge as London’s most exclusive new address. A planning application for the 200,000 sq ft “neo-classical” scheme on the site of a Sixties multi-storey car park has been lodged with Westminster Council.
Residential Investment Market
The acceleration in the growth of the private rented sector since the global recession has led to increasing calls for tighter regulatory control. Some of the measures are logical and will benefit the sector (e.g. restricting the power of local authorities to selectively license landlords) while others (e.g. proposals to make it easier for tenants to sublet) may serve to deter investors. The Election result has, for the time being at least, ruled out the prospect of rent control – much to the relief of investors.
However, more action is needed to increase the stock of PRS accommodation. Rents are increasing because demand is rising faster than
supply. The previous Government looked at ways to encourage greater institutional investment in the sector, but did little by way of following up recommendations made. Their Build-to- Rent fund was a step in the right direction as is the commitment from their new Government to deliver 10,000 new homes to rent at below market rent – but this is nowhere near enough to resolve the problem. What the government should be doing is encouraging more investors, especially institutions, to enter the sector and provide more stock and thus make rents more affordable via increased market competition.
Growing calls for tighter regulatory control of the PRS
Although capital values rose marginally, rental value growth was stronger resulting in a further slight softening of yields during the first quarter of 2015. The Chestertons Prime London
Residential Yield Monitor recorded average gross yields of 3.14% at the end of March, while in prime central London yields also rose slightly to 2.97% from 2.95% at the end of Q4.
Yields nudged upwards again in Q1
6
Outlook The Election result was very important for the residential investment market. Landlords were facing the prospect of the double whammy of Mansion Tax and rent controls, and this on top of the Capital Gains Tax already introduced in April this year on the disposal of residential property by non-resident owners. With the removal of these potential hand grenades, investors can now focus on which assets to buy rather than deciding whether or not to exit the sector altogether.
Of course, there remains the possibility of other events which could upset the market. A Greek exit from the Eurozone appears more likely as time passes while the possible exit of the UK
from the EU following a promised referendum on EU membership could create financial shockwaves which would be damaging in particular for the London economy with its large financial services sector.
However, the UK would likely benefit from further instability within the Eurozone, whilst it is far from certain that a referendum on EU membership would result in Brexit. In the meantime, the shorter term economic outlook remains positive: the HM Treasury panel of independent forecasters has raised its projection for GDP growth in 2015 to 2.7% from 2.6% in the previous month, although growth is expected to moderate to 2.3% in 2016.
St Jo hn's W
Figure 5: Prime gross residential yields as at end-March 2015
7
compound growth
Prime London 2.5% 3.0% 3.0% 3.5% 4.0% 17.1%
Figure 6: London private residential rental value forecast
Source: Chestertons Research
The Conservative’s austerity programme will continue which will slow economic growth below potential and inflation remains low, which should sustain the low interest rate environment. Investors should continue to benefit from the plethora of cheap buy-to-let mortgage deals for some time to come.
Tenant demand going forward will continue to rise. The proportion of privately rented households in London has already risen by 10.2 percentage points over the past decade and ongoing affordability issues in the owner-
occupier market in London mean that this ratio is likely to increase over the next decade.
On balance, we expect rental growth in the wider London market will slow to around 6.0% this year. Within the prime sector we forecast rental growth will reach 2.5% in 2015 and accelerate slightly to 3% the following year. As before, the lower value locations offering better value for money and good access to the main employment districts are most likely to see the strongest rental growth.
Investors should continue to benefit from the plethora of cheap buy-to-let mortgage deals for some time to come.
8
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. May 2015.
Contact Chestertons 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 Barnes Head of Research T: 020 3040 8406 E: [email protected]
Richard Davies Head of Residential T: 020 3040 8244 E: [email protected]
10
Reproduction of this document in whole or in part is not permitted without the prior written approval of Chestertons.
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Key trends – Improvement in key indicators in Q1 but tenants remained cautious
– Prime rents rose by 1.3% during first quarter
– Prime yields edged upwards again to 3.14% at quarter end
– Investors breathe a sigh of relief following Election result
– Forecast prime London rental growth of 2.5% in 2015
London Prime Residential Lettings Report Spring 2015
Supply & Demand The signs of recovery apparent in Q4 last year gained traction in the first quarter of 2015 with all of the key indicators showing healthy uplift. On the demand side, agreed lettings rose by 30% compared to the previous quarter and over one third more new applicants were registered. The data also point to increased interest from
investors, with instructions rising by 25%. Nonetheless, the market remained testing for landlords. In spite of the more buoyant activity, new supply outpaced tenant demand and available stock increased by one fifth over the quarter.
Stock (end-quarter)
Figure 1: Key market indicators: Q1 2015 v. Q4 2014
3
There was a notable increase in valuations requested by non-resident landlords for Capital Gains Tax purposes in the latter part of the quarter. Whether this is the pre-cursor to a flurry of sales remains to be seen. Only a small
number of non-residents have so far indicated they would like to dispose of their properties although some may be waiting for existing tenancies to expire or to reach the two month notice point.
-12%
-8%
-4%
12%
0%
4%
8%
Figure 2: Key market indicators: Q1 2015 v. Q1 2014
The increase in stock levels meant that there was more competition for applicants and the emphasis for landlords switched to increasing the quality of their properties to attract and retain tenants. New tenants and those looking to move remained cost conscious and were generally reluctant to commit to properties which they perceived as not offering value for money. For their part, landlords remained keen to retain good tenants, which was reflected in renewals data: the percentage of contracts which were renewed rose from 56.4% in Q4 to 66.3% in Q1, while the total number of renewals was 22.8% higher and the number of terminations was 5% lower than in the previous quarter.
A number of factors impacted positively on tenant demand. The London economy remained buoyant and the employment market picked up during the quarter. The Morgan McKinley Employment Monitor revealed that the number of financial services jobs new to the market in Q1 rose by 34.6% compared to Q4 last year. London is the fastest growing regional economy and is being driven by a fast-growing IT & communications sector and professional & business services, with a depth of expertise that few other cities around the world can come close to rivalling. Unemployment in the capital remains at its lowest rate (6.2%) for many years and the GLA is projecting overall jobs growth of 0.7% per annum over the next five years.
4
Figure 3: Financial services jobs new to the market
Despite the increase in available stock, rental growth was only slightly lower than in the previous quarter. The Chestertons Prime London Residential Rental Index recorded growth of 1.3% in Q1. Rental increases on renewed tenancies were similarly slightly lower than the Q4 figure at 1.7% over the quarter.
At submarket level, the highest quarterly rental growth was recorded in East Sheen (+5.7%) and in Chelsea (+3.9%). 20 out of the 23 submarkets
which are covered in the index reported rental growth and only three submarkets experienced a fall in rental values with Camden (-4.9%) seeing the steepest decline.
The average weekly rent in the Chestertons Prime Rental Index moved up to £934 at the end of March. St John’s Wood (£1,895/week) remained the most expensive submarket, while the gap between second placed Knightsbridge/Belgravia (£1,828/week) narrowed during the quarter.
Q1 2015
Q4 2014
Q3 2014
Q2 2014
Q1 2014
Q4 2013
Q3 2013
Q2 2013
Q1 2013
Q4 2012
Q3 2012
Q2 2012
5
London’s population is rising at its fastest ever rate and the private rented sector (PRS) is also expanding - 29.6% of London households now rent. This is triggering growing investor activity in the sector, both from buy-to-let (BTL) landlords and institutional investors.
Gross BTL mortgage lending (for house purchase and remortgaging) in the first two months of 2015 was 11.4% higher than in the corresponding period last year. The favourable interest rate environment and a more expansive product offer from lenders is making property investment even more attractive for BTL landlords. According to a study by Moneyfacts, there were 476 BTL mortgage products on offer two years which has now risen to 745. Two years ago, there were just five two-year fixed rate BTL deals priced below 3%, but today this figure has jumped to 83. With regard to five-year BTL deals priced below 5%, two years ago there were 37 such mortgages available, but currently there are 143 on the market.
The institutions continue to show interest in the sector, albeit it remains a trickle rather than a flood. Among recent deals, M&G’s UK Residential Property Fund is understood to have agreed to its third PRS deal, a £50m (€70m) investment in west London. The 205 units, part of Inland Homes’ Drayton Garden Village scheme, take the open-ended fund’s overall PRS portfolio to 850 units.
Mobile phones billionaire John Caudwell has unveiled grandiose plans for what has been described as Britain’s first £2 billion apartment block in the heart of Mayfair. The founder of the Phones4U high street chain wants to build 30 “super prime” flats and townhouses in a bid to eclipse One Hyde Park in Knightsbridge as London’s most exclusive new address. A planning application for the 200,000 sq ft “neo-classical” scheme on the site of a Sixties multi-storey car park has been lodged with Westminster Council.
Residential Investment Market
The acceleration in the growth of the private rented sector since the global recession has led to increasing calls for tighter regulatory control. Some of the measures are logical and will benefit the sector (e.g. restricting the power of local authorities to selectively license landlords) while others (e.g. proposals to make it easier for tenants to sublet) may serve to deter investors. The Election result has, for the time being at least, ruled out the prospect of rent control – much to the relief of investors.
However, more action is needed to increase the stock of PRS accommodation. Rents are increasing because demand is rising faster than
supply. The previous Government looked at ways to encourage greater institutional investment in the sector, but did little by way of following up recommendations made. Their Build-to- Rent fund was a step in the right direction as is the commitment from their new Government to deliver 10,000 new homes to rent at below market rent – but this is nowhere near enough to resolve the problem. What the government should be doing is encouraging more investors, especially institutions, to enter the sector and provide more stock and thus make rents more affordable via increased market competition.
Growing calls for tighter regulatory control of the PRS
Although capital values rose marginally, rental value growth was stronger resulting in a further slight softening of yields during the first quarter of 2015. The Chestertons Prime London
Residential Yield Monitor recorded average gross yields of 3.14% at the end of March, while in prime central London yields also rose slightly to 2.97% from 2.95% at the end of Q4.
Yields nudged upwards again in Q1
6
Outlook The Election result was very important for the residential investment market. Landlords were facing the prospect of the double whammy of Mansion Tax and rent controls, and this on top of the Capital Gains Tax already introduced in April this year on the disposal of residential property by non-resident owners. With the removal of these potential hand grenades, investors can now focus on which assets to buy rather than deciding whether or not to exit the sector altogether.
Of course, there remains the possibility of other events which could upset the market. A Greek exit from the Eurozone appears more likely as time passes while the possible exit of the UK
from the EU following a promised referendum on EU membership could create financial shockwaves which would be damaging in particular for the London economy with its large financial services sector.
However, the UK would likely benefit from further instability within the Eurozone, whilst it is far from certain that a referendum on EU membership would result in Brexit. In the meantime, the shorter term economic outlook remains positive: the HM Treasury panel of independent forecasters has raised its projection for GDP growth in 2015 to 2.7% from 2.6% in the previous month, although growth is expected to moderate to 2.3% in 2016.
St Jo hn's W
Figure 5: Prime gross residential yields as at end-March 2015
7
compound growth
Prime London 2.5% 3.0% 3.0% 3.5% 4.0% 17.1%
Figure 6: London private residential rental value forecast
Source: Chestertons Research
The Conservative’s austerity programme will continue which will slow economic growth below potential and inflation remains low, which should sustain the low interest rate environment. Investors should continue to benefit from the plethora of cheap buy-to-let mortgage deals for some time to come.
Tenant demand going forward will continue to rise. The proportion of privately rented households in London has already risen by 10.2 percentage points over the past decade and ongoing affordability issues in the owner-
occupier market in London mean that this ratio is likely to increase over the next decade.
On balance, we expect rental growth in the wider London market will slow to around 6.0% this year. Within the prime sector we forecast rental growth will reach 2.5% in 2015 and accelerate slightly to 3% the following year. As before, the lower value locations offering better value for money and good access to the main employment districts are most likely to see the strongest rental growth.
Investors should continue to benefit from the plethora of cheap buy-to-let mortgage deals for some time to come.
8
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. May 2015.
Contact Chestertons 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 Barnes Head of Research T: 020 3040 8406 E: [email protected]
Richard Davies Head of Residential T: 020 3040 8244 E: [email protected]
10
Reproduction of this document in whole or in part is not permitted without the prior written approval of Chestertons.
Notting Hill
Dubai France Gibraltar Italy Malta
Russia Singapore South Africa Spain