London residential lettings to remain firm

SINCE Britons voted to leave the European Union (EU) in the referendum on June 23, global markets have been reeling as the UK and the world come to terms with the implications. The “Brexit” vote has left local and foreign investors in a state of uncertainty, including those in the real estate market and residential letting in London.

Benham and Reeves Residential Lettings company believes the market will not be unduly affected. Established in 1956, the company provides rental accommodation and property management services across 15 prime locations in London.

"Across our London branches, we have not seen any decline in demand for rental accommodation but tenants are now likely to try and capitalise on the current instability caused by the referendum. The market has shown signs of volatility in the lead-up to the recent referendum with significantly less property sale transactions taking place in London, particularly in Zones 1 and 2 in the last few months,” managing director Anita Mehra tells City&Country.

“We are not predicting that rents will decrease in the near future but we are advising clients to allow some flexibility on rental while the pound sterling strengthens again and the property market corrects itself,” says Anita. "We believe that London rentals will continue to be in high demand, as it is a global financial centre with great lifestyle opportunities. Whether we are in the EU or not, it does not change our qualities and fundamentals. It is too early to assess, however, with the new regime in place. It may take some time for the market to adjust.”

Benham and Reeves has offices in the city centre, Canary Wharf, Colidale, Ealing, Fulham, Greenwich, Hammersmith, Hampstead, Hyde Park, Kensington, Knightsbridge, Kew, Highgate, Surrey Quays and Wapping. The agency recently expanded to East London.

Hot spots and trends

According to Benham and Reeves, as at June this year, central London continued to dominate the rental market. “There is increasing activity in Knightsbridge’s rental market, which continues to improve as we move into the summer months. The most sought-after homes are the high-quality 2-bedroom apartments in the £600 to £900 per week price range.

“We are also taking on a number of new instructions, from luxury 2-bedroom apartments to smart townhouses priced from £1,100 to £1,700 per week. We are letting most of these to corporate tenants and families looking for homes ahead of the September school term.

“These families tend to have larger budgets and are looking for homes with three to four bedrooms,” says Anita. “This [period] is also the start of the student market. Typically, their budgets are between £550 and £750 per week for a 2-bedroom apartment, or £300 to £350 per week for a studio.

“Our Kensington branch reports that the rental market is picking up, with enquiries in May doubling from the previous month. More applicants are looking for a brand new, ultra-modern apartment like those at 375 Kensington High Street or a traditional period property, where rental demand is the highest. Their budgets are from £600 to £1,500 per week. Rental demand also remains high around Hyde Park, with continuing demand for high-end, luxury properties priced between £1,000 and £2000 per week,” says Anita.

In the city centre, Canary Wharf and East London, rental demand remains bullish. “Tenancy renewals remain high at around 70%, as tenants look to save themselves the cost of moving. Many tenants are moving to Canary Wharf where there is a greater supply of homes at lower rents. A typical 1-bedroom apartment in the city is achieving £450 to £650 per week, whereas in Canary Wharf, a similar property is renting for £325 to £425 per week. Rental demand is also high in Marine Wharf at Surrey Quays and Wapping, where 1-bedroom properties rent for £325 to £395 per week. These are popular locations for professionals working in IT and the creative sector around Shoreditch,” says Anita.

“With most tenants prioritising value for money, we are seeing a noticeable rise in the popularity of studios and ‘Manhattan’ apartments — which have a separate sleeping area — across the locations covered by our five East London branches. Around 95% of these studios are situated in new developments, offering high specifications and good value for professionals keen to spend no more than necessary on rental accommodation,” reveals Anita.

In Northwest London, demand for studios and 1-bedroom apartments at Beaufort Park in Colindale is good. “We are letting properties as soon as they come onto the market. We have limited stocks at the new Carleton apartments, which were launched recently and have been very popular, with rents ranging from £240 per week for a studio and £320 to £330 per week for a 1-bedroom apartment,” says Anita. “In Hampstead and Hampstead Heath, properties with a garden or terrace are in particularly high demand. In Highgate, we are seeing a growing interest in larger properties as families relocate to the area to settle in before the September school term.”

London continues to attract steady yields. “For investors, the rental yields in central London would be around 2% to 2.5%, whereas yields outside of central London would easily be between 4.5% and 5%,” says Anita.

 Economic changes

 Vidhur Mehra, finance director at Benham and Reeves, says that although the overall rental market has been doing well, the “super prime” rental market has been struggling.

“It is important to note that the rental market in London is divided into a couple of sub-markets, namely the prime and sub-prime markets. The super-prime market is in London’s premium locations, mainly Zone 1, with prices above £1 million, whereas the sub-prime market is located in Zones 2 and 3, with prices between £350,000 and £850,000,” he says.

“Due to certain changes in the economy, we find that the super-prime market is struggling a bit in terms of attracting investors. This is especially true of the changes to the taxes and stamp duty, which have been focused quite heavily on high-value properties,” he says.

Effective April 1, the UK government has added an extra 3% to the stamp duty for those buying a second property. The current Stamp Duty Land Tax (SDLT) threshold is £125,000 for residential properties and £150,000 for non-residential land and properties. The aim of the tax is to reduce competition between buy-to-let landlords and first-time buyers in the starter home market.

“It is rather too soon to see the impact. But if we are looking at the bigger picture and how investment properties appreciated over a year, historically, we feel that not many investors would be put off by the 3%. London is a place where people can expect good returns and secure assets, as long as they are investing in assets for a reasonable period of time — at least five years,” says Vidhur.

According to the London Residential Market Outlook 2016 report by Cluttons, demand continues to slow down, but there was a sharp rise in the number of buy-to-let and second home transactions in the lead-up to the April stamp duty hike. This spike in activity is reflected in data published by the British Banker’s Association (BBA), which reported that gross mortgage lending reached £17.1 billion in March this year, a six-year high and almost two-thirds higher than March 2015.

Based on the report, the first quarter of this year saw house prices in London expand by a marginal 0.1%, cementing the period of stagnation that began about six months ago. With the exception of Central West, where values dipped 0.3%, all other prime central London regions recorded little or no change in residential values. On a year-to-date basis, average house prices are up 4.6%. According to Cluttons, the average prime central London rent now stands just shy of £1,096 per week.

Moving forward, Benham and Reeves believes the buy-to-let market in London will remain firm. “We predict that the values will remain high and property prices will continue to increase. With the city’s low interest rates of 5% to 7% and healthy rental yields, we believe that the city will continue to attract more local and foreign investments,” concludes Anita.

This article first appeared in City & Country, a pullout of The Edge Malaysia Weekly, on July 4, 2016. Subscribe here for your personal copy.