Lettings Market – Half Year 2022

By on Sunday, July 17th, 2022 in Lettings, Market Trends, Research.

Supply Shortage

The extraordinary performance of the rental market, which began in summer 2021, has continued into 2022. Normally, the rental market picks up mid-year as the new intake of students and graduates arrive but this year there has been no slow period and we expect rents to continue rising through the summer months.   

There is a simple economic equation at work: demand exceeds supply and that stimulates price growth. The supply of homes available to rent is lower than usual and the demand is higher than usual. 

Lettings Market – Half Year 2022

Low supply can be explained by two factors: more leases are being renewed so rental stock does not return to the market and more landlords are selling with limited numbers of Buy To Let (BTL) investors entering the market, reducing the total stock. On the demand side, not only have office workers continued to return to London but also rental households need more space per renter to enable hybrid working (perhaps taking an extra bedroom as a study) – putting more pressure on the stock. 

There is a parallel with an earlier period of social change in London. In 1939 London had accommodated a population of 8 million, the population shrunk dramatically during World War II and yet when the population grew back to the same size in the late twentieth century, we had a housing shortage. The explanation lies in household size. 

In the pre-war period, large families crammed into smaller homes and bedroom sharing was commonplace for children. In the second half of the twentieth century household size shrunk and lifestyles changed – more young adults moved out of home to live with friends before marriage; more couples divorced and formed separate households plus more people chose to live as single-person households. These social trends meant we needed more homes to house the same size of population. 

Something similar is underway today. Working from home is not comfortable or viable in cramped houses and young renters are breaking into smaller households or, if they have the means, paying to set aside a spare bedroom. There is also a category of affluent renter who moved out from the capital but would like a base for the 2 to 3 days a week that they are in the office and prefer to rent rather than buy. Many social commentators anticipated a post-pandemic boom in socialising and enjoying the attractions of city life – we are just seeing the beginning of that and renting is a flexible way to experience city living. 

Another theme boosting the demand for rental homes is the rising incidence of people renting in order to break the chain in the buying and selling process and become a cash buyer. Whilst not a dramatic increase, it is another factor accounting for the surge in demand. 

Rental uplift in the first six months of 2022 averaged 4% but reached 6% or 7% for 2 bed apartments. Across the board, rents are up in our areas by around 12% on their pre-pandemic levels of 2019. 

 Rental growth since lockdown is startling. The sharp post-pandemic recovery creates spectacular headlines with rises of 30% or more in City and Midtown (where the falls were also sharpest) in little over 12 months. It is this rate of increase that is persuading so many renters to renew leases rather than venturing out into the open market, knowing they are unlikely to find an equivalent property at a similar rent. Higher rents and reduced supply are compelling reasons to renew a lease with a landlord who is likely to look favourably on existing tenants. 

The continuing presence of these out of area renters puts additional pressure on supply. They will probably move away once their discounts disappear, and we expect that to happen gradually over the next year or two. It will be one trend that will help to relieve pressure on stock eventually. 

Lettings Market – Half Year 2022

Lettings Market – Half Year 2022

London’s thriving tech sector has continued to create demand for rental homes in our markets and, indeed across other areas of London. The volume of demand we have experienced strongly suggests that they are using their offices at least some of the time and choosing to live nearby. We have found homes for employees of Facebook, Amazon, Google and LinkedIn, in recent months all of whom have offices in the local area. TikTok and We Chat have signed new office leases in Farringdon and we would expect an influx of prospective renters to follow. 

By now, the long list of policies designed to disincentivise buy-to-let investment is familiar, beginning with the stamp duty for Additional Homes which came into force in April 2016; phased loss of tax relief on buy to let mortgages, dating back to April 2017; the Tenants’ Fees Act introduced in 2019 and the gradual spread of local licencing fees across London boroughs. We have dubbed this the ‘anti-landlord agenda’ and it has had the intended consequence of reducing the number of homes owned as buy to let investments as well as the (presumably) unintended consequence of driving up rents. 

The Levelling Up white paper, published in February, sets out plans for further reforms to the private rental sector. First, will be the ending of section 21 evictions, meaning landlords have fewer possibilities to regain possession of their properties. Housing Secretary, Michael Gove, says this will ‘end the unfair situation where renters can be kicked out of their homes for no reason.’ It also announced a new minimum standard for rental homes known as the ‘Decent Homes Standard’. 

A third proposal, the National Landlord Register, is designed to address the problem of rogue landlords and sub-standard conditions, by issuing fines and bans to repeat offenders. While the sentiment seems fair and just, the reality is that it will further discourage the majority of reasonable landlords from taking on the risk of being a landlord, particularly as there is no equivalent proposal to crackdown on rogue tenants. This proposal for a National Landlord Register is currently out for consultation. If it is adopted, the balance will tip further in favour of selling up for Buy to Let investors. 

On top of the proposals from central government, the Mayor of London has asked for the power to freeze private rents in the capital for two years. However, this will be more difficult to argue since the government announced in May that it does not support rent controls, acknowledging that: historical evidence suggests that it would discourage investment in the sector and would not help landlords or tenants. 

Large investing institutions and corporates are filling some of the gaps left by the retreating army of small investors – but the stock owned by these ‘Build to Rent’ investors, tends to be in zone 2 and beyond where there are higher yields, lower land values and larger development opportunities. There is still very little in our markets of City, Midtown and the most central areas of East London. The closest to our borders are probably in Canary Wharf and Stratford. 

There were some positives for landlords in the White Paper. A new ombudsman for private rented landlords will ensure disputes can be more easily resolved without going to court.

In terms of headline rental growth, investors have been through a very rosy period, experiencing growth of 25%+ in the past 18 months – but of course that is measured from the very low base reached during Covid. The reality is that 25% was the growth recorded for the whole 15 year period since 2007. Looking at long term rental growth over a range of time periods, the contrast between 2007 (pre-Global Financial Crisis) and 2008 (Global Financial Crisis), clearly illustrates the significance of the base year. 

Lettings Market – Half Year 2022

Gross initial yields are now firmly above 5% for one bed apartments – a level last achieved in 2012, although the costs associated with income from rental investments have risen significantly in the intervening period, as discussed earlier in relation to the ‘anti-landlord agenda’.

For larger properties, the gross returns range between 3% and just over 4% and many of the associated costs are more punitive too. Investors are now, of course, starting to see their borrowing rates rise with interest rates.

Lettings Market – Half Year 2022

The average annual rent for a one bed apartment is around £25,000 per annum. A single occupier, would need an income of £75,000 to cover the rent and comply with normal referencing criteria of 30% gross income cover. Couples sharing a single bedroom apartment are in a much stronger position but renters in these markets are often affluent overseas students who pay six months up-front and treat the cost as a capital investment in their education. 

Lettings Market – Half Year 2022

Lettings Market – Half Year 2022

Lettings Market – Half Year 2022
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