Understanding rental dynamics should be an important agenda item for anyone working in the property industry, latest figures from the English Housing Survey showed that private renters now represent 30% of London households. This has risen dramatically over the last 10 years, up from 18%. The current comparable figure for England excluding London is 19% of households up from 10% ten years ago.
Whilst institutional investment in the private rented sector is growing, buy-to-let investors (often with only one rental property) make up the lion share of ownership of these privately rented households. Our rental statistics allow investors to understand more detail on their own local patch as well as the bigger picture, where rents and the investment market are heading.
To this end we have recently contributed rental analysis to The London Intelligence, a quarterly compendium of statistics published by think tank, Centre for London.
What do the rental numbers tell us?
After a few years of strong rental growth across London the upward trajectory has stalled recently and the average rent fell by -0.8% over the year to end 2017. The average rent across London in 2017 was £1,500 per month.
Besides the rapid rental growth of the last few years (London rents were up 8.9% over the 2 years to end 2016), a few other factors explain the recent slowdown; the surge in investment activity ahead of the March 2016 stamp duty increase brought a wave of extra buy-to-let properties onto the market at the same time, but also the recent uncertain economic environment is making it more difficult for landlords to increase rents.
But again the devil is in the detail, looking across property types from smaller 1 bedroom flats through to larger semi and detached properties rental trends vary. Rental growth for 1 bedroom flats across London was up 2.8% on last year’s levels, whilst rents for semis and detached homes were down 2.0%. The lack of consistency is likely a result of different supply of rental property types in different markets. This is a key reason why investors need the granularity of rental market data specific to their property type and area.
A period of slower rental growth will certainly help rental affordability for tenants. London is an expensive market and typically renters are spending 30% of their income on rent. Interestingly despite rising rents over the last few years, affordability has stayed remarkably constant varying from 30% to 32%. This suggests 30% may be an affordability threshold that tenants don’t want to breach. It could be that tenants are shifting to slightly less expensive areas, trading down on their property size or even sharing with more people. Certainly this agrees with the rule of thumb used by institutional investors that rent levels should be aimed at 30% of earnings and buy-to-let investors should be mindful to watch this threshold.
Whilst tenants might need to move to less expensive areas to compete against rising rental levels, the data tells us that ideally tenants prefer to stick with places we know. Over 40% of tenants across London move less than 2 miles between properties. A key insight for buy-to-let investors is that tenants are likely to already be on their doorstep. On the other hand, with Brexit dominating the press and the economic outlook it is also important to recognise that 7% of London’s tenants move from a prior overseas address of which a high portion are from the EU.
are many more insights to be gained from digging deeper into the rental
dynamics across England but with 30% of London households in the
private rental sector, London insights aren’t a bad place to start the
discussion. Whilst we often think of the London market as being
expensive and distinct from the rest of the UK, it is a valuable
benchmark for other UK cities - and London’s commuter belt too.