After a tough 2017 for many London landlords and agents, 2018 appears to have been a better year for those in the lettings game. The exception to this seems to have been the higher end of the market, which in many cases hasn’t seen the same gains as rentals set at lower price points.
As with so much in the property market, this slowdown probably has its roots in a series of developments over the past few years, and it’s ultimately a case of supply and demand.
Supply and demand in 2016/17
Many London landlords will tell you they had a poor time of it in 2016/17. A hefty stamp duty hike on buy-to-let and investment properties in 2016 saw the market flooded with new rental properties as everyone tried to get their purchases through before the increase was introduced. This was compounded by the result of the Brexit referendum in June 2016, which introduced a huge degree of uncertainty and caution to the sales market.
Throughout 2016 and 2017, the over-supply of rental properties in London continued, as a depressed sales market meant that lots of people chose to rent out properties rather than selling them. Trouble was, the demand simply wasn’t there for so many rentals. In particular, uncertainty over Britain’s future hit corporate relocations in a big way, carving a big chunk off the numbers of prospective tenants.
Rental market recovery in 2018
The big change in 2018 has been a decline in the number of rental properties available in London. The sales market has continued to perform poorly this year, but the phasing out of mortgage relief for higher-rate tax payers in 2017 left many landlords faced with no other option than to sell their properties anyway.
This reduction in supply has seen London rental values display decent growth this year, with several analysts suggesting that this could continue into 2019.
But how about the top end of the market?
For some reason, the top end of the market doesn’t seem to have kept pace with the rest of it. While numbers of agreed rentals in lower-priced properties surged by up to 60% in some areas of London, the more expensive rentals held fairly steady. And without the increase in demand, these properties haven’t seen the same strengthening in rental yields.
Again, part of the problem is likely to be the uncertainty that’s currently hanging over the country, and the effect it’s having on the wealthy corporate rental sector. Companies are still reluctant to relocate staff to London until they have a proper idea of what the effects of Brexit will be, and in the meantime, they’re watching their accommodation budgets – and favouring less expensive properties.
It may also be that the changes to mortgage relief haven’t hit landlords of high-end properties as hard as those further down the ladder. The very high values of London property mean that landlords in London are more likely to be higher-rate taxpayers, and those renting out cheaper properties (often small-scale or accidental landlords) may have been operating on slimmer margins that proved unsustainable without mortgage relief.
There’s also the knotty question of rent vs salaries. For years, increases in the amount it costs to live in London have been outstripping increases to people’s pay packets. Sooner or later, people simply won’t be able to keep pace with ballooning rental values, and inevitably it’s at the top of the market that you’ll start to see this slowdown first.
So what’s the outlook?
Though growth in rental yields for high-end London properties seems to be slowing down, the growth is still there. Looking forward into 2019, analysts are predicting that lower-priced properties will continue to show better yields as long as demand outstrips supply, but even then, they’re cautioning that rents can’t continue to rise at this rate indefinitely.
Ultimately, developments in the high-end London rental market (and the property market as a whole) are likely to rest on political developments over the coming year. If the government can reduce some of the uncertainty around the country’s future, then it’s likely to be a good thing for the sector.