Throughout 2015, the pace of rent rises in London has slowed, and weaker activity at the top tiers of the lettings market in particular have created a difficult climate for rent growth.
However Marsh & Parsons is predicting a rental resurgence in 2016, forecasting Prime London rents to rise 5% in the next 12 months. This would be a significant uplift from a 1.9% uplift in the past year. While rents at the highest tiers of the market – namely over £750-per-week – are unlikely to experience major pick up, rental prices below this benchmark have significant room to grow.
And much of this growth will fall at the very start of the year – with January typically the strongest month outside of the summer for lettings activity. Over the past three years, there has been on average a 34% monthly boost in lettings exchanges from December to January, as people use the New Year for fresh starts.
Divorces and separations after the Christmas holidays significantly boost demand for homes to let in January, and lettings activity will also be bolstered by the second biggest wave of corporate relocations during the year. These two seasonal factors see a strong surge of both families and single tenants on the market for London homes, and the heightened competition means lettings stock will be snapped up quickly in the opening month of 2016.
Patrick Littlemore, Director of Lettings at Marsh & Parsons comments: “Come January, households will be picking up where they left off on big life decisions – be this downsizing, starting a new job, relocating overseas or even separating and moving out of the marital home. All of these combine to give new impetus to the rental market at the very start of the year, and it’s a time when we experience some of our most zealous lettings activity. As tenant demand mushrooms in January, this initial activity will feed into stronger and more sustained rent growth throughout 2016 as a whole.
It is the lower price brackets of the private rented sector that have the biggest room to grow next year, especially in popular hot-spots such as Queens Park, lauded for retaining the style and atmosphere of Kensington with more affordable prices.”
Locking in for longer
The average length of a tenancy on a rental property in Prime London has grown 18% in the past year, from an average of 19 months in Q3 2014 to 23 months during Q3 2015.
Marsh & Parsons expects the popularity of two-year leases to continue growing in 2016. Tenants are increasingly entering into these longer tenancies in search of greater stability in the face of reduced rental properties available on the market, but it is the guarantee of housing they are securing, not rental prices over this period.
The stock of homes to let in London has decreased significantly in 2015. The total supply of available rental properties across 2015 was 9% lower than in 2014, while the levels of demand experienced throughout the last year has been 7% higher than during 2014.
As longer tenancies become more common in the lettings market, there has been less turnover of tenancies in 2015, and rental prices have remained more constant and seen much less movement in the last 12 months. But with a lot of tenancies coming up for renewal in the next year, price adjustments and new tenancy agreements will help the lettings market recover in 2016.
Patrick Littlemore comments: “Two-year tenancy agreements have picked up traction over the past year and this momentum will continue to build through 2016. But with around half of such fixed term agreements containing some sort of rent increase, it’s not savings that’s driving their popularity, it’s stability. At a time when housing stock is in serious short supply, tenants are seeking out two-year contracts to give them peace of mind, and to put off the stress of searching for a new rental property.”
One bedroom demand spills over into two-beds
One-bedroom homes are the most sought-after rental properties across the capital, but are also in very short supply on the London market. As a result of this competition, an oversupply of two-bedroom homes available to let has made them a viable alternative instead. With tenants predicted to compromise on a bigger property in 2016, rather than a high-end one-bedroom home, it is expected that this property type will see some of the fastest rent growth in the coming year.
Patrick Littlemore comments: “The two-bedroom tier is enjoying a helping hand in the popularity stakes as a dearth of one-bedroom homes encourages tenants to trade up in size rather than luxury.
One-bed properties have always been perennially popular, but are not always the easiest property type to find on the market. The current low supply of one-bedroom properties is pushing up prices, and when faced with £550-£650 weekly rental prices at the top end, London tenants are assessing their other options.
This will be welcome news for landlords owning two-bedroom buy-to-let properties, who have seen rents growth waver in recent years, and should spark much healthier rent growth in 2016.”
