By Rents have fallen by an average 9.6 per cent across the capital’s prime markets since the 2016 Brexit referendum but falls decreased to 0.8 per cent last year, according to recent data from Savills.
The price for renting will rise by an average of 11.5 per cent over the next five years, and by 12.6 per cent across the prime commuter zone, according to Savills.
So far, London falls have been concentrated in the higher value prime central postcodes with rents dropping by 16.5 per cent since 2016 and 3.2 per cent in the past year. Rents in lower value outer prime London markets, however, have fallen by an average 6.4 per cent in total in the same period. This then stabilised in 2018 with an increase of 0.2 per cent according to Savills.
Lucian Cook, head of residential research at Savills said: “We are seeing footloose, cost-conscious tenants drawn to prime areas that offer greater value, rather than confining their search to premium addresses, and there’s a deeper seam of demand for smaller properties driven by needs-based younger tenants.
“But that doesn’t mean we can anticipate falling rental supply. Instead, we expect cash investors to become increasingly dominant, especially in central London, while history suggests international investors will become more active as uncertainty clears, particularly if they can play the currency card. Stock levels also look set to rise as the number of new build homes completing increases.”
Cook also believes that the ability to deliver recovery in rental values over the next five years depends partly on what Brexit ultimately means for London’s high-value employment markets.
He also pointed out that, given the pipeline of prime new build homes that could come to the rentals market, Savills expect that supply will remain as important a determinant of rental values as Brexit. He added, “The next five years should see the post Brexit falls in rents reversed.”
How does the market look going forward?
Demand has undoubtedly been affected by uncertainty in the financial services sector and constraints on corporate budgets, according to the analysis published alongside Savills’ recently released lettings index. It also states that a more diverse range of needs-based tenants has partly offset this, especially outside of central locations in the capital.
The high cost of stamp duty has also been attributed to making renting look comparatively more attractive in more expensive parts of the market. This has ultimately supported rental demand, in addition to fundamentals, even if tenants have been more cost-conscious, according to Savills.
The ability to deliver recovery similar to what London has experienced in the past, over the next five years, depends partly on what Brexit will mean for London’s high-value employment markets. However, based on the existing development pipeline, it is expected that the supply will remain an equally important factor, according to Savills.
Capital expenditure
London’s earnings remain a significant driver of rents in the commuter zone and the resilience of the London economy is fundamental to the strength of demand across the prime rental markets, according to Savills.
The 71 per cent of prime tenants across the commuter zone work in London and inner London effectively exports £65.4 billion of employee earnings to other parts of the UK each year, according to Savills’s analysis of official earnings data.
Meanwhile, outer London benefits from £24.3 billion of imported earnings, while more is imported into the rest of the country, primarily the South East and the East of England.
Exported earnings have a significant effect on rental affordability at a local level in prime areas such as Richmond, where the average full-time salary of a resident is £70,700, some £31,100 more than the average earnings of someone working in the borough.
Also, in Elmbridge, which is Surrey’s most affluent area, resident earnings of £61,500 are £17,500 above workplace earnings. Therefore, the status of London as a global commercial centre is key to rental prospects, according to Savills.
The feared exodus of financial firms to other European cities has taken place and in November 2018, Britain and the EU agreed to a deal to give London’s financial centre the same basic access to EU markets as already offered to the US, Japan and Singapore, according to Savills.
Though not all financial services are covered by this agreement, this reduces the risks to London’s position as one of the three most powerful global financial centres, alongside New York and Hong Kong.
This also means London is likely to retain a competitive advantage over other European centres such as Zurich, Frankfurt and Paris, all of which have much lower rankings in the latest Global Financial Centres Index published by Z/Yen. Ultimately, this will underpin future rental demand according to Savills.
Comments