Increased supply of rental properties in prime central London gives tenants the upper hand in rent negotiations
Shrinking corporate relocation budgets and squeezed household finances have driven tenants away from prime central locations in search for better value
Prime rents see slight decline in Q4
Modest rental growth of 2%-4% forecast for 2013
This shift of power has taken place gradually over the past year as buy-to-let landlords have been encouraged back into the market by the strong growth of the private rented sector and an increase in buy-to-let mortgage lending, which rose by nearly 19% in 2012. On the demand side, corporate tenants, who make up a large proportion of the prime central London lettings market, have seen their relocation packages cut and are now looking for better value for money, while private tenants are also looking for cheaper accommodation.
The combination of increased supply and more cost conscious tenants has resulted in rents coming down slightly (by 1.7%) in last quarter of 2012. Chesterton Humberts expects rents to remain subdued in first half of this year with modest growth of 2%-4% forecast in the second half of 2013.
Nick Barnes, Chesterton Humberts' head of Research, comments:
"Many landlords are now being more flexible when it comes to rent reviews with existing tenants, on the basis that it is better to retain a good tenant who pays their rent and looks after the property than deal with the hassle and expense of filling a void with a new and unknown tenant. Many tenants are now operating on reduced budgets and are looking for better value, even if it means moving away from their preferred central locations. Nonetheless, investors have still benefited from healthy capital growth and, provided they are realistic about setting rental levels, there is still plenty of tenant demand."
Investor interest in prime central areas continues to grow, mainly from small landlords but also increasingly from corporate investors and institutions. For example, Islington Council is about to become the first London borough council to invest some of its pension fund capital in residential property.
The increased investor appetite during the year as a whole was reflected in a number of key indicators: lettings valuations carried out by Chesterton Humberts in 2012 rose by 15.1% compared to 2011, while instructions were 10.9% higher.
Chiswick saw the strongest rental growth (7.2%) followed by Hyde Park (4.3%) and Islington (3.6%).
Other key highlights from the report include:
Chesterton Humberts Prime London Residential Yield Monitor shows that yields in prime London compressed in 2012 to 4.1% and to 3.3% for prime central London.
There have been renewed calls for a tightening of the regulatory system as it applies to the PRS in order to clamp down on rogue landlords and managing/lettings agents.
Tenant demand is set to remain robust: applying the current ratio of privately rented housing stock to the projected growth in household numbers over the next decade, London can expect to see 9,288 new households entering the private rented sector each year, in addition to existing households which move into the sector.
