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London rents: Are values set to rocket?

Tuesday 13th November 2012

A new report suggests that rents in London will continue to increase sharply due to the housing shortage, but what do the experts think?

 

Professor Michael Ball of the University of Reading has produced a new independent research paper Renting in London: the coming boom, on behalf of Cluttons, projecting that rents will soar over the next 10 years on the back of the city’s expanding population. But do those working in the sector agree?

The report reflects on government forecasts of an increase in household numbers in London of between 34,000 and 38,000 annually up to 2028, however, based on development levels over the last ten years, an optimistic estimate of the number of homes which will actually be delivered each year is 21,000.

Professor Ball says that the growing supply-demand imbalance will result in a severe shortage of homes, with people either paying more, crowding into existing homes or being priced out of the city, until there is a rise in housing supply to meet demand.

Commenting on the research, Lynn Hilton, partner for Residential Lettings at Cluttons, said: “The private rented sector feels the strong pressures of a growing population and workforce, being both the first point of contact and the safety option for many people searching for housing.

“The pressure of demand from tenants wanting to live in the city will underpin rental growth at a level ahead of the historic long term trend.”

James Davis, CEO of online letting agent, Upad and landlord of 14 years, commented: “Rental values will soar. There is a lack of new housing stock being built and the average age of a first time buyer is 35 compared to 28 just 10 years ago; the average age will continue to rise up – you only have to look at the figures with 1/3 of wannabe first time buyers having issues raising a deposit.

“Tenants desire to live in smart areas and properties that are well fitted out. The general housing shortage and more competition means that tenants will have to pay more for a more prestigious flat.”

Julian Sonnessa, managing director of Invest Connect, remarked: “We agree with this view. The Cluttons report indicates future discrepancy and shortage in supply of property to the magnitude of 40% compared to demand. Considering the current laws regarding development, requirements to incorporate social housing element in all new developments and current difficulty in obtaining finance, it is obvious to see the lack of new developments/property supply and thus the rise in rental prices, even without incorporating the element of growing population!

“A large percentage of the population are simply priced out of the London market due to much larger deposit requirements, leaving them no other option then renting out, thus fuelling demand and increasing prices. If the rules for new developments are not relaxed or adjusted for the London market I cannot see that trend changing in the future.”

Julian Lilley, director of Fine & Country Mayfair, said: “There is an undeniable logic to Cluttons Report in that London will always be a desirable place to both live and invest which will result in a comparative shortage of available stock; consequently, in the long term, prices will always rise.

“However, property is a commodity and, like any other market, prices will rise and fall depending on confidence in local conditions together with supply and demand. The situation at present is that there are more properties coming on to the market than at any time since 2008 and stock levels of available properties both for rent and for sale are rising. This suggests we are coming to the end of the current bull market and consequently prices will fall.

“There is often hysteria at the mere mention of a fall in house prices, but like any other market, prices are bound to fluctuate. The important thing about property is that in the long term, as there is a finite supply of land, it will always appreciate and you can enjoy living in it whilst it is doing so.”

Stefan Elton, letting manager at Kay & Co, commented: “Average house prices in the UK fell 1% in the second quarter of 2012, but rose by 1% in London. With the UK being at the forefront of economic recovery in Europe more and more foreign investors are looking to invest in the central London market which will increase the sales prices and in turn push more and more first time and local buyers out of the market. This in turn has led to tenants staying longer in rented accommodation with the national average being 19 months. From 2001 to 2011 the price of the average home increased by 94%, while wages rose by just 29% according to the NHF. The demand for new housing far outstrips the number of new homes being built which has led to an a year on year increase on rental prices and there doesn't to be an end to this in sight.”

Caroline Kavanagh, managing director of Townends letting and management, said: “The rate at which rents rise, boils down to the balance of supply and demand and the external factors which control this. Admittedly, the rental market has gained momentum over the last five years as the lack of lending has prevented many ‘would be’ homeowners from making a purchase and subsequently pushed them into renting. However, any given year can see both a rise and fall in rents so it is important for landlords to understand this and not always cling on to what they achieved a year ago, or expect a natural uplift just because time has passed.

“Whilst the report is accurate in saying a lack of housing for those wishing to work in the city will be the catalyst for rising rents, it is important not to generalise London as a whole and recognise that there are many micro-markets within the city, all of which will perform differently, some undoubtedly seeing a natural uplift and others not. However, the chances are, that over the next decade a number of significant changes will occur which could for example, see a buoyant sales market once more, and this would see pressure ease from the rental market, which in turn could impact rents. With that said, ten years is a long period of time in which there will be numerous rise and falls in rent but generally one would expect to see an overall uplift through simple inflation.”

James Thornett, letting regional director at Kinleigh Folkard & Hayward, remarked: “I completely agree that over the next few years we will see rents in the private sector rise, however the rate at which they rise and whether it will be at a faster rate than house prices is hard to predict in my opinion. The restricted supply and increased demand already appears to be pushing prices higher and this seems unlikely to change any time soon. The rental sector is an extremely dynamic market which is largely unrestricted in terms of controls. Landlords do not need to register with any industry bodies and other than basic safety checks which are easy to arrange, there are no major obstacles to renting. In addition, there are few systems in place which might otherwise rein in landlords from maximising rents, and in a marked contrast to many of our European neighbours and the US, we do not have any price regulation system controlling the market. This seems unlikely to change, and as a result it seems likely that rents will increase year on year. It also appears likely that tenants will have to rent for longer periods, largely because tight mortgage lending precludes many renters from buying. This could mean that the higher end of the market receives a further boost as tenants with families will require larger properties with gardens.

“Conversely however, as rents increase, there will also be a large proportion of tenants who reach a tipping point where their salaries cannot pay for the ever-increasing rents, and are therefore forced to consider other areas and more distant suburbs. We will also see an increase in tenants clubbing together and renting larger properties which are proportionately cheaper to rent and although usually only seen among younger renters and students, we’re already seeing this with older professionals. These factors in my opinion could certainly mitigate some of the rises that the report predicts.”

SallyOhlson, director at Douglas & Gordon, said: “The sales market is still really short of stock and this is being exacerbated by vendors deciding to rent out their property to hold onto its value rather than selling up. As a result a higher number of rental properties may come to the market which would mean that rental values will only have a marginal increase over the coming years and predictions that they are going to ‘soar’ may be premature.

“The lettings market has become so seasonal that the rental price a property achieves can sometimes come down to when it becomes available. A property coming to market in the summer, at the height of the season, could achieve a good rental increase due to increased demand whereas in the winter months it may achieve the same price or in some cases slightly lower.

“Affordability is key and how much a tenant is willing to pay all depends on economic factors. Whilst the employment market remains stretched, redundancies are being made in the City and companies are not offering large relocation packages, it seems unlikely that tenants will be able to afford any large rental increases in the coming years.”

              

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