RENTS RISE AFTER TENANT FEE BAN
The rental market outperformed expectations in 2019, achieving steady growth in the number of new lettings, more lease renewals (tenants staying longer in the same property) and rising rental values. Rental values tend not to move dramatically in the way of the sales market but the increase in 2019 is the highest since 2011 and this kind of steady change results in a significant improvement to yields for investors.
We stated in our half year report that we expected rental values to continue on the path of moderate uplift as landlords sought to recover the costs of the tenant fee ban that took effect in June.
The value of one bed apartments in the City rose by 9% in 2019 to an average of £490 per week, meaning they are now virtually the same value as Midtown one bed apartments. There was no discernible difference between City and Midtown for two beds (6% and 7%) while East London also grew at a slower pace.
The exception is for larger 3 and 4 bed family homes where supply has been boosted by accidental landlords renting rather than selling in the hope that prices will improve. Rents have not risen for properties of this type.
The same is not true for larger properties let to groups of sharers. The number of larger homes offered to sharers is likely to decline as landlords are deterred by the additional cost of HMO licencing and the additional compliance requirements by many Inner London boroughs – which mean that third (or fourth) bedrooms often fall below the size threshold and properties previously let to three adults are no longer compliant. There is less pressure driving rental growth in East London because supply remains plentiful, and there is still a significant development pipeline.
The supply of properties for rent is no longer regularly replenished by the influx of buy to let investments, or new build completions, making it easier for landlords to secure rent increases, even on renewal.
Across our markets as a whole, we expect continuous decline in the supply of property to rent as development activity slows down and investors lose enthusiasm for the market. Four years on from HRAD (higher Stamp Duty rates for additional dwellings), the full impact of the drop in new supply is only just beginning to have an effect. Build to rent will not fill the gap unless the quality of purpose built schemes can persuade renters to move further along the tube lines into zones 2 and 3.
East London could be the exception. Institutional investors have been able to secure sites for purpose built rental around Stratford and Canary Wharf and will bring forward high value stock with amenities that could represent an attractive alternative to more central locations.
RENTERS’ REFORM BILL
The Queen’s Speech on 18th December confirmed that the Government will bring forward “new measures to protect tenants”. While the speech itself did not go into any details, the ensuing small print confirms that a new Renters Reform Bill will be introduced to protect tenants, and this will remove Section 21 from the Housing Act while “strengthening the rights of landlords who need to gain possession of their property when they have a valid reason to do so”.
This may result in the phasing out of the AST (Assured Shorthold Tenancy) agreement that has been a mainstay of the rental market for 30 years. Landlords face the prospect of applying to the courts for possession orders under section 8 of the 1988 Housing Act incurring additional costs, delays and uncertainty.
The vast majority of the UK’s 4.5 million private rented tenants in England occupy under an AST (Assured Shorthold Tenancy). In most cases, tenancies in the UK are ended by the tenant choosing to leave but a landlord does have the legal right to terminate an agreement by giving 2 months’ notice through serving a Section 21 Notice.
The Government has consulted on whether there should be a minimum period for any fixed-term tenancy and has indicated a preference for longer 3 year terms. There are consequences for landlord and tenant. For instance, new rules will be needed to protect tenants to ensure the provision of Gas Safety Certificates and the protection of the tenant’s deposit.
While grounds for possession are likely to continue to include a situation where a landlord or a family member wish to take back the property for their own use, there may also be a protected period of two years to ensure that the tenant has some certainty which in turn would encourage the grant of longer fixed term tenancies.
We understand that it is not intended that these changes will be retrospective. Landlords will therefore be able to use section 21 notices in relation to existing tenancies and at least six months’ notice will be given before new legislation is implemented. A renewal of an existing tenancy may be considered as a new tenancy so care must be taken with existing tenancies.
If and when Section 21 is scrapped, Section 8 must be reformed and a new specialist housing tribunal created. Without this, supply of rental properties will almost certainly fall which will have the consequential effect of raising rents and will further discourage new landlords from investing in the sector.
Our Tenancy Package includes an unlimited number of references, so no matter how many Tenants we have to reference, and no matter how many Tenants you choose to reject because of poor or failed references, there is no extra cost to you.
RIGHT TO RENT CHECKS
Under the Immigration Act 2016 it became a criminal offence to let your property to a person who does not have the right to reside in the UK. To protect Landlords who choose our Tenancy Package, we will check the ID, immigration status and visa of each and every Tenant. Where a Tenant has a time limited right to remain, we will, though-out the lifetime of the Tenancy, conduct follow up checks upon visa expiry dates.
Upon Instruction we will provide you with a specimen Assured Shorthold Tenancy Agreement for you to review and make any changes. The Tenant will need to be supplied with this Agreement before the Holding Deposit is taken.
We will mediate between Landlord and Tenant, incorporating any further changes or compromises to the Agreement before supplying a final draft to all parties for Agreement. The final Tenancy Agreement will be sent digitally for all parties to e-sign.
Should the Landlord require any changes to the Tenancy Agreement, at any point during the Tenancy, we will negotiate with the Tenant and make necessary changes or addendums to the Agreement.
TENANCY DEPOSIT REGISTRATION
As part of our package we include the registration of the Tenancy Deposit with a government approved scheme for the initial term. One of our Lettings Accountants will register the Deposit and produce the Deposit Certificate to be provided to your Tenant with the Scheme Leaflet and Prescribed Information to ensure compliance with current legislation. We are also part of Propertymark’s Client Money Protection Scheme (CMP) that provides an additional level of insurance and protection against fraud, misuse or bankruptcy.
TENANT PROFILES 2019
The two most dominant occupations amongst tenants taking new leases in 2019 in our markets were Banking/Finance and Student. Each accounted for around a quarter of all lettings. Comparing the last year to the previous 4 year period, the proportion of students has fallen slightly from 25% to 23% while the proportion of banking finance has increased from 25% to 27%.
Much bigger differences are evident between our office locations. Looking over the five year period from 2015 to 2019, students account for 54% of lettings in the area we define as ‘West End’ which covers the university areas of Bloomsbury, Fitzrovia and Holborn where UCL, Kings College, LSE and the university hospitals all have global reputations and attract affluent overseas students. The other major category in this area of London is ‘service industry’ which covers hospitality and leisure. 32% of renters in the West End worked in these sectors.
In the period 2015-2019, 18% of lettings were to tech workers in Islington and Shoreditch – significantly more than any other area. The tech sector is surprisingly low overall, given its importance to the London economy and its presence around Shoreditch and Clerkenwell.
The vast majority of renters in our markets in 2019 were aged under 40 (89%) and two thirds are in the age band 25-40 years old. This is consistent with the distribution over the past 4 years too. The renter population in the West End is significantly younger than other markets with 51% of rentals 2015-2019, to tenants aged under 25 and correlates to the student demographic. The other area with a young population is Aldgate (39% under 25) whereas other areas were predominantly aged 25-40 years old.
The household type is fairly evenly spread between singles, couples and sharers in our markets and there are very few families. The most significant change when we compare 2019 with the previous four years, is a reduction in singles and rise in the proportion of couples. Nevertheless, singles remain 27% of all rentals in 2019, making them a key group in our markets.
The most significant difference between areas is that sharers are the biggest group in the West End (41% of all leases 2015-2019) where universities are a so important. It is also our most expensive area and sharing helps to defray the cost of renting a home. Singles are the dominant household type in the City and Aldgate, while couples make up the biggest share of the market in East London.
In our markets, over the past five years, more rental homes have been leased by EU citizens than by Britons and in 2019, the gap opened wider, with 38% of all new leases granted to Europeans. The only other nationality to account for more than 10% of lettings was the Far East with a 14% share.
We analysed the breakdown by nationality across our offices for the five year period 2015-2019. In East London, half (48%) of renters were British, 36% EU, making it the least cosmopolitan of our markets. Renters from the Far East were most prominent in the West End market, where they accounted for 24% of rentals, followed by Aldgate (17%). Americans made up only 5% overall but 12% in Islington and Shoreditch.