London and the South East are still open for rental business.
You would be forgiven, reading recent stories in UK media, for thinking that the buy-to-let (BTL) market in the South East’s more prosperous postcodes was in terminal decline. Dramatic falls in both rental and capital values have been reported.
But that doesn’t mean opportunities don’t still exist. Indeed, if you look beyond the headlines it seems that reports of the death of the prime BTL market have been greatly exaggerated. So what is the real state of play?
Reforms introduced by former chancellor George Osborne, including a 3% stamp duty surcharge on second homes and changes to tax relief on rental properties, have had the intended impact and taken the heat out of the market. Average corporate relocation budget has risen by 13%, and the London market is seeing greater demand for family homes close to top schools.
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“The sales market above £1m is subject to higher levels of stamp duty, so we’ve seen higher levels of stock being put onto the rental market as would-be sellers think about sitting out the market for a year or so,” says Tom Bill, head of London residential research at estate agency Knight Frank. “The high levels of stock in the rental market in central London has pushed rental values down.”
However, Bill urges there are reasons to be cautiously optimistic, with both rental and capital values looking less precarious than they have for some time. “The situation is starting to change now as the sales market adapts more to stamp duty and [as a result] we’re not seeing that same high level of stock coming onto the market,” he says.
The fall in capital values in top-rank London properties has been widely and often dramatically reported, and this is undoubtedly a concern. After all, investors want to see capital appreciation as well as strong and growing rental income. However, a study published earlier this month revealed that the situation is rather more nuanced than might have been assumed.
The report from London Central Portfolio, which specialises in prime residential real estate, is based on Land Registry data and breaks down house prices into deciles. The top decile – the highest 10% of prices, ranging from £3.6m to £24.2m – has seen values fall by an average of 8% since Q3 2014, which represents the market’s high point before changes to stamp duty kicked in. But the next five deciles, where prices range from £0.9m to £3.6m, show an average increase of 4.6%. In contrast, the lower four deciles, where prices range from £388,688 to £936,000, have grown by 10.8% on average.
November’s recent interest rate rise has created further potential uncertainty around the future of the prime residential property market. However, according to Investec’s Chief Economist, Phil Shaw, this should not be an area for concern. “In terms of borrowers with large mortgages of course they will feel the pinch a little bit more than other people. But looking at the residential property market as a whole there are a number of factors which are affecting different property in different regions. These will include the state of the economy, the uncertainty around Brexit, and of course, the changes in taxation that we’ve seen over the last couple of years, including residential stamp duty. So I’m not convinced that prime or near prime residential property will be hugely impacted by the recent increase in interest rates.”
Another issue that many have conjectured would have a negative impact on the BTL market in central London and the Home Counties is Brexit. Much of the demand for high-end apartments and family homes comes from well-paid financial services workers, particularly those from overseas whose relocation costs are picked up by their employers. As a result, if the banks and other institutions move jobs overseas as Britain prepares to leave the EU, as has been threatened, demand for those types of properties will diminish.
That’s the theory, but according to Knight Frank’s Bill the evidence isn’t there to support it. “I think it’s fair to say that we don’t yet know what the impact will be, but to date I don’t think it’s been what some initially feared,” he says.
“In terms of how financial services have driven demand in that particular market, I think you’re seeing examples of banks that are committing to London in the long term. If you look at the macro picture to date there is this narrative of an exodus but you don’t see the evidence of that.” Tom Bill, Knight Frank
In fact, the evidence seems to indicate that the fallout from the Brexit vote has provided a boost to certain high-end rental markets in the capital. Hannah McDougall, UK lettings manager at Sotheby’s International Realty, says that the current weakness of the pound has led to a spike in demand from affluent foreign visitors.
“A greater number of tenants from the Middle East have been booking large apartments close to luxury retail hotspots such as Harrods,” she says. “There are a large number of tenants visiting from the UAE who are having to look further afield than Knightsbridge.”
A July report from the estate agent Savills on the upper end of the BTL market also highlights opportunities that Brexit provides. In an otherwise sober study, the company is keen to point out that the average corporate relocation budget has risen by 13% year on year, adding that “as financial institutions and the diplomatic community relocate senior personnel to London, the market is seeing greater demand for family homes close to top schools”.
What’s more, it noted, “affluent suburbs such as Esher, Northwood and Cobham” have outperformed prime London, with rental increases over the last five years of 8%. Again, access to the best schools is a factor, with the international financial and diplomatic elite underpinning the market.
So while there can be little doubt that the BTL market in London and its surrounds isn’t providing the stellar returns on investment available 18 months to two years ago, there are still opportunities to be had. In a more subdued market, the key to success is careful analysis of specifics.
Adam Branson writes about the UK and international property market, and is the former Contributing Editor of Property Week.
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