Record Recovery Completed
The revival of the rental market in summer 2021 was extraordinary. After almost 18 months in which supply proliferated and demand waned, the tables were turned, and it happened very fast. In fact, such was the pace and scale of demand in July and August that rents were quickly restored to their pre-pandemic levels and the stock of properties available to let was cleared. By late summer rents had risen above their 2019 levels.
This remarkable turnaround was driven by the mass return of the City’s office workers and overseas students. International students flocked back in September with what felt like two years of university intake in a single month. As a consequence the number of new tenancies from mid-July through to October reached record levels pushing rents to 25% above their mid-year levels.
Pressure on supply was exacerbated by the fact that a new demographic had moved into our markets during their absence. People who would normally rent homes in zones 2 and 3 had found they were able to afford to rent in central markets and had seized the opportunity to relocate while values were depressed in the second half of 2020.
Those leases have some months to run and the new residents are in no hurry to leave, so it will take some time for passing rents to catch up with market values and for the balance of supply and demand to be restored.
Another dramatic reversal over the summer months occurred in the demand for short term rentals. Corporate travel resumed, albeit slowly and tourists began to visit the City again, creating demand for short lets. The market for short term rentals, had collapsed during Covid, and it will take time to rebuild because so much of the stock was pumped into the mainstream letting market, offered on 12 months ASTs during the pandemic. Those leases, often agreed at substantially discounted rents, will need to play out before the properties can be returned to the short term market.
Rents on short let apartments in London are now well above pre-pandemic rates as the number of overseas visitors rises and UK consumers have learned to value flexible lease commitments while so much uncertainty remains. Airbnb has called for the Government to introduce a landlords’ register to help stave off criticism that landlords abuse the maximum 90 day rule in London.
So, the City experienced a surge of demand in the summer and early autumn. That is the normal seasonal peak in the rental market coinciding with the new academic year and graduates entry recruitment. What made 2021 different was that the incomers who became renters in our markets during the pandemic are not leaving, so the natural balance between supply and demand was affected. That explains why we have seen rents restored to their pre-pandemic levels and even pushed beyond that.
In the City and Midtown, rents are 20% or 30% above the levels achieved a year ago, although most of this growth is simply restoring pre-pandemic norms and if we compare to rents at the end of 2019, the increases look less dramatic (Table 6). Growth in the City and Midtown has been stronger than East London but these areas also suffered the steeper falls during the pandemic.
The two categories with strongest growth over two years are: a one bedroom apartment in Midtown and a two bed apartment in City. We had anticipated a renewed interest in the pied-a-terre as workers return to their offices and that probably explains the strength of the Midtown one bed. Data from London Transport, and office investment companies such as Land Securities and Helical have reported a significant upturn in the number of people working in London offices.
Overall, the rent for a London apartment has risen more in the past 12 months than in the whole period since 2014, according to our long-run data. This data series is averaged over all our markets and East London has been less volatile but it is an important reminder that London rents have not spiralled in the past decade or more, as is often suggested in the press.
Domestic buy to let investors have, to a large extent, retreated from our markets . However, overseas investors, who had been absent during the pandemic travel restrictions, returned in the autumn. Yields on central London properties are very attractive because capital values have remained low while rents have exceeded their pre-pandemic levels.
The gross initial yield on a residential investment in our markets is now over 5% for the first time in a decade. The increase has been more marked for one bedroom properties than larger ones but even three bed apartments can produce a yield of 3.25% today.