Prime residential rents

Market overview

Prime London rents have continued to fall slowly during the past year, marking a seventh consecutive quarter of marginal falls. Rents were softening ahead of the EU referendum, but the Brexit vote has changed the shape of the market, creating a series of interesting micro trends that are concealed by average figures.

Average prime London rents fell by 0.6% in the second quarter of 2017, with an annual decrease of 5.4%. This leaves rents an average of 1.6% down on their pre-credit crunch level.

The most pronounced falls have been in the highest value, core prime central London locations, where rents are down 8.3% year on year, having fallen by 1.4% over the past three months.

Landlords in these markets have absorbed an average decrease of 9.5% since the credit crunch. This has been offset by the 20% capital growth over this period, a figure that would have been much higher were it not for the 14.4% fall in capital values since September 2014.

Across the outer prime London market, falls are smaller, averaging 0.3% over the quarter and 4.1% annually. Despite these figures, rental growth remains positive, with an average rise of 3.4% over the 10 years post credit crunch.

^{Source: Savills Research}

Corporate demand

As financial institutions and the diplomatic community relocate senior personnel to London, the market is seeing greater demand for family homes close to top schools in some locations

Despite falling rents, the Savills Corporate Services team reports that the average corporate relocation budget has risen by 13% year on year. This is largely driven by higher financial-sector budgets. In the first half of 2017, these were 59% higher than the same period last year, adding more than £2,000 to the average monthly budget.

This time last year, companies were relocating fewer senior executives to London, focusing more on mid-ranking staff moving alone or as a couple.

By contrast, banks and financial institutions are now relocating higher level staff, some accompanied by their families, to steer decision making through the Brexit period.

According to Savills data, the same is also happening in the diplomatic community. Demand would not normally be registered until the third quarter, but embassies are already signalling their intentions. This means greater demand for family homes close to top schools, such as the German school in Ham and the American school in St John’s Wood.

At the same time, existing tenants are downsizing, concerned about job security and political and economic uncertainty. This is particularly the case in prime south west and west London where the typical five-bedroom house costs between £5,000 and £10,000 per month. An average three or four-bedroom house would represent a saving of between 15 and 25%.

Lifestyle influences growth

Over the past five years, prime rental markets in London’s suburbs have performed better than the capital. Even here, though, lifestyle choices can have a significant impact on demand

In prime rental markets within an hour of London there was marginal rental growth of 0.2% during the second quarter of 2017. Although annual growth remains negative, over the past five years rents have increased 6.5% on average across the commuter belt, outperforming prime London. The strongest markets are in affluent suburbs such as Esher, Northwood and Cobham where rents have increased by more than 8%.

However, these figures mask a variation of performance between the sizes of property, as demand has remained more robust for smaller properties. This reflects a wider division in the market between needs-based renters looking for small or medium sized housing in an urban environment and ‘big-budget tenants’ looking for trophy properties.

Across all properties, the market is dominated by people relocating for work or lifestyle reasons and those who are working on a ‘try before they buy’ basis. Properties in a city or town with good schools, easy access to amenities and transport remain popular. By contrast, demand continues to be weaker for both village and rural locations.

^{Source: Savills Research}

Buy-to-let sector review

Landlords have had to contend with regulation and legislation changes that have curtailed investment into the residential sector. The restriction of income tax relief on mortgage interest payments and the introduction of greater mortgage regulation by the Bank of England has had a big impact on the buy-to-let sector. While this is likely to limit supply coming on to the market at a national level, investment will be underpinned by low mortgage interest rates supporting borrowing alongside the dominance of investors who are buying with cash.

Outlook

As a global city, rental demand in London remains strong. However, increased choice means that tenants are focused on finding value and best-in-class properties

Prime rental markets continue to face challenges. The current supply imbalance is likely to suppress rental growth in the mid-term. As such, we are forecasting small rental falls with marginal price growth in the coming years.

While we expect strong continued demand from young, affluent households facing a significant deposit hurdle to buy their first home, the strength of rental demand from other tenant groups will be more dependent on London retaining its position as a global financial centre.

With this in mind, landlords will need to be realistic and flexible in their price expectations while offering stock of the best quality to ensure the property meets prospective tenants’ requirements.

In the commuter zone, we expect the preference for prime family housing in the suburbs and key commuter towns to continue, particularly as we see more meaningful increases in those following the traditional relocation routes out of London.

^{NB: These forecasts apply to average rents in the second hand market. New build values may not move at the same rate.}

^{Source: Savills Research}