Rents Rise 20%
As is so often the case, our report tells the story of contrasting markets for sales and rentals. The rental market lurched towards the year-end in a frenzy, while the sales market remained stable and calm.
Renters returned to the City en masse over the summer of 2021, switching the market from oversupply to undersupply in a few short months. By the autumn, rents had risen above their pre-pandemic highs and prospective renters, many of whom imagined they still held all the cards, found themselves starved of choice and competing to secure the dwindling stock of homes on the market.
The supply of rental homes in City, Midtown and East London lies at an all-time low, against strong demand from the professional and student sectors. It was a very welcome reversal of fortune for landlords who had endured a tough period of lost demand so soon after being hit by tax rises, Local Authority licencing fees and the tenant fee ban.
We have often made the point that rental markets tend to react swiftly to any change in the supply/demand balance because turnover is high and landlords will generally accept a lower rent in the knowledge that they can correct it within 12 months if the market is stronger by then. That is in stark contrast to the sales market where a low sale price cannot be later corrected and owners can wait until prices increase before selling.
When our markets were awash with properties to rent in 2020 and the first half of 2021, it created an opportunity for people to move in to Central London, taking advantage of rents at historic lows. Many of those leases were renewed in the early months of 2021 when landlords were still grateful to maintain income. This is contributing to the current shortage of rental stock and helping to drive up open market rents. The situation has been exacerbated by the return of corporate and holiday lets. Businesses modelled on short term rental premiums will gradually take stock out of the mainstream market as it becomes available. We expect rents to continue to rise through 2022.
Demand for sales remained low throughout the year in the core market for one and two bed apartments. The exception has been for larger homes, especially those with outside space, which are in demand and where prices have risen. Our offices sold a record number of homes at over £1.5 million in 2021.
But the bulk of housing stock in our markets is one and two bedroom apartments where the low demand has been counter-balanced by low supply, meaning prices have remained stable. The fire safety problem continues to dog this part of the market as UK banks refuse to lend on blocks without fire safety certificates – even where they are not required. If remedial works are needed, the uncertainty around cost and liability makes these properties unsaleable until the work has been completed. Blocks that do not require an EWS1 certificate have good levels of demand.
In general though, sale prices are stuck at 2014 levels and the market is approaching an unprecedented decade of zero growth. The main culprit remains the new stamp duty levies introduced in 2014 although Brexit and the exodus during the pandemic have played their part too.
In our view, the demand for one and two bedroom apartments will recover in 2022 as people return to offices, even for part of the week. Many of those who relocated during the pandemic have given themselves long commutes and the prospect of acquiring a pied-a-terre in central London at 2014 prices must look appealing, especially when prices on the south coast have risen so steeply.
The combination of flat prices and rising rents makes investment yields more attractive too, although taxes on buy to let investors remain a major deterrent. We expect UK buyers to find themselves competing with overseas buyers who sense an opportunity to secure a piece of central London – and if rents continue to rise, investors may return. Exhibitions to promote new homes in London have restarted in Hong Kong, as buyers from China and the Far East look for channels for their capital. The additional 2% surcharge for overseas buyers which came into effect in April, on top of the existing 3% additional homes charge, has hardly registered in the consciousness against the backdrop of Covid.
Some commentators have reported a wave of buy-to-let investors selling up and reinvesting their capital elsewhere because of the successive changes to taxation and costs. We are not seeing many new investor buyers but neither are we seeing a wave of sellers.
There is a natural lifecycle to owning a second home in London especially when it was a pension investment and there is no doubt that the pandemic accelerated decisions for some owners to realise capital and retreat from the City, often with early retirement prompting people to combine value from two or more properties. That is a trend we recognise – not motivated by the question of return on investment, but rather lifestyle or ‘stage of life’ decisions.