When offices closed, teaching switched online and international travel ceased, London’s rental market suffered, especially in the centre of the city. Rents fell dramatically in 2020 and levelled out in early 2021, leaving them at their most affordable level for a decade. We expect a slow and steady return to pre-pandemic rent levels by the Autumn of 2022.
It has taken the whole of the last year for our markets to absorb the stock from the corporate rental sector which became surplus when business travel was stopped. It has been the biggest single cause of price falls in our rental markets and we fully expect a recovery as business travel and overseas students return.
Rents dipped in Q1 2021 and stabilised in Q2, so that overall there were gentle falls of between 3% and 6% in Midtown and City and no change in East London. East London fared best but we expect all our markets to stabilise as office workers and overseas students return to central London.
Rents are still below their pre-pandemic levels with the steepest falls in Midtown and City where the influx of supply from corporate lets was most acutely felt. In East London, the total falls ranged between 6% and 9% over the 15 month period to mid 2021. It means that the gap has narrowed between the cost of renting in East London and our other markets and it demonstrates why we have seen renters move to more central locations.
Rental values tend to adjust quickly to changes in market conditions. Landlords are generally keen to secure income and avoid long letting voids so when demand is weak, most will accept a lower rent rather than hold out for a higher figure. A low rent agreed on a standard AST can be renegotiated in 12 months’ time if the market has strengthened. This makes the negotiation quite unlike the sales market where accepting a low price is irreversible once the transaction has been signed.
As rents fell, the prospect of renting an apartment in Central London came within reach of a much wider segment of the population. While many Londoners opted to relocate to leafy suburbs for the lockdown period, there was also an influx of renters from the suburbs who saw an opportunity to experience living in the heart of the capital during this unique period. The desire to avoid public transport has added to the appeal of central locations.
As agents, we experienced this as a change in the type of renter we encountered and their expectations. Renters expected to bring their own furniture which is highly unusual in our markets where furnished apartments are very much the norm. Others had acquired pets during lockdown and hoped to be able to accommodate their dogs, cats and even rabbits – and an uncharacteristically large number of potential tenants failed referencing due to restricted incomes during furlough. While these were unfamiliar challenges in our markets, these in-movers also shored up demand in central areas.
By the end of June availability levels across central London had returned to close to their long term trends resulting from an increase in new letting being agreed. This is likely to continue in Q3 which is traditionally the busiest quarter of the year with the added impetus of more office workers returning to London post 19th July ending of most lockdown restrictions.
The ‘new normal’ once the pandemic is over, is not yet clear but it seems inevitable that there will be a more permanent shift to work from home for at least part of the week and this has implications for our markets. Major employers, such as Deloittes, have announced a ‘Work From Home First’ policy and hybrid working is widely expected to endure with the five day commute for a minority while most people balance 2, 3 or 4 days in the office with a set up that allows them to spend part of the working week at home.
That said, there are many commentators speaking out about the benefits of human contact for businesses. Gillian Tett, an anthropologist who writes for the FT, talks of ‘incidental information exchange’ and ‘sense making’ which can only occur when people are physically present in the workplace together. These are often characterised as the ‘water-cooler moments’ when ideas are born from chance meetings and colleagues learn from each other’s overheard conversations. Business relationships are built and strengthened in face to face meetings.
The implications for housing markets in our areas is that rents are poised to rise once the working and student population return to the city. The focus on improving the public realm and transport infrastructure will underwrite the appeal of the city as a place to live.
While lower rents have attracted a new type of resident during the pandemic, we expect a return of our traditional renter population and recovery to pre-pandemic rents by the end of 2022. Already, in the summer of 2021 and despite disappointing Covid statistics, the city is reawakening and our offices are receiving enquiries from renters who had moved away for most of the past 12 months. In Q2 the oversupply was eroded and stock levels returned to more normal levels.
We have been monitoring rental markets in our areas for over two decades. It is a period during which London has flourished as a global capital and yet rental growth has been moderate and sustainable. The quality of London’s rental stock has improved and opportunities have opened up across the city but, in our areas, rents today are 17% above where they were at the turn of the millennium – not the unsustainable growth that press reports suggest.
The gross initial yield available from an investment property in our areas averages at 4.25%, an attractive return against most alternatives and with the additional cachet of owning a piece of Central London.
The government which has been determined to suppress buy to let investment for several years and particularly amongst overseas investors, dealt an additional blow with the stamp duty surcharge for overseas buyers with effect from April. The prospect of capital gains tax has less impact except for owners who have owned for a long period experiencing significant capital growth. In our experience, most owners like to retain their piece of central London for the long term.
Yields have fallen in 2021 for all apartment types but one bed apartments continue to produce the highest yields for investors at 4.25%, compared with 3.5% on a two bed and 2.8% for a three bedroom apartment.