However, while more transactions have taken place, rental values have fallen every month for the last year and annual growth declined to -4.9% in October. This is as a result of markedly higher stock levels. The number of new lettings properties coming onto the market rose 29% over the same three-month period and there was a 27% year-on-year increase between January and September.
Demand has not been rising at the same pace, which underlines the extent to which prime central London is a tenants' market. Higher stock levels are the result of uncertainty over the short-term prospects for price growth in the sales market, which has led more vendors to let their properties. However, the flow of stock from the sales to the lettings market is not entirely one-way.
As rental values decline and ahead of cuts to tax relief next year, a small number of landlords have begun to explore a sale. It is an early indication of how the lettings market may self-correct, supporting rental values as stock levels reduce. Higher stock has had another effect. With more properties on the lettings market that were originally destined for sale, landlords have to increasingly ensure their properties are refurbished to a high standard to prevent void periods.
Demand in the super-prime market (£5,000- plus per week) remained strong in October due to higher levels of stamp duty in the sales market. Similarly, demand below about £1,500 per week also remained robust
The performance of middle segment, which is typically driven by senior executives, remains patchier. It is where the steepest rental value declines have been registered. In areas including Chelsea it has had the effect of boosting activity, while demand remains slow in other areas. The trend has also increased demand in markets like Mayfair, where rental values have started to look relatively better value.
The foreign exchange market after the referendum
Sterling has weakened by more than 15% versus the US dollar since the EU referendum, boosting the interest of buyers denominated in overseas currencies.
The decline has had a more modest impact on the number of transactions for two reasons. First, part of the demand is opportunistic in nature, based on an erroneous belief that the decision to leave the EU has triggered sudden price declines across prime central London. This has caused some buyers to seek doubledigit price reductions on top of a favourable double-digit currency swing, to which vendors are resistant.
Higher rates of stamp duty are the biggest influence on pricing and demand and the referendum result should be seen in that context. The second reason that the decline in Sterling has not had a more marked impact is that some buyers are anticipating further currency weakness. The current high levels of volatility in the Sterling/Dollar exchange rate, which now moves following interventions by key politicians, underline the risks of this strategy.
Savvas Savouri, chief economist at asset manager Toscafund believes buyers should think longer-term: “For anyone planning to be cute on currency with a property purchase, I would suggest there is no way on earth the pound will be as low as it is today in two years' time,”
Furthermore, Savouri believes London will remain a significant financial services centre after Brexit. “Nobody is suggesting there won't be satellite offices opening in the EU but I would argue that entirely new firms will more than fill whatever space is vacated, for the most part these will arrive from far outside the EU. They will have ambitions to operate from London not as some Trojan Horse to enter continental Europe, but as a secondary-hub to complement their operations in their domestic markets, from Singapore and Sydney to Sao Paolo and Shanghai. They will, in short, not give a hoot about passporting rights.
As rental values decline and ahead of cuts to tax relief next year, a small number of landlords have begun to explore a sale. It is an early indication of how the lettings market may self-correct, supporting rental values as stock levels reduce”
