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Spotlight Prime Rental Markets January 2013

Savills World Research UK Residential

SUMMARYTenant demand is becoming increasingly varied depending on property type and location

■ Average prime London rents fell by -1.9% during the fourth quarter of 2012 leaving annual growth at 0.5%, however, this figure masks variations.

■ According to the census, across England and Wales the number of private rented households increased from 2.6 million to 4.2 million between 2001 and 2011.

■ In London private renting is more prominent than the rest of the country, accounting for 26% of all households and ranging from 11% in Havering to 43% in the City of Westminster.

TABLE 1

Rental value movements

Source: Savills Research

Prime Central London

Prime North West London

Prime South West London Prime North Prime East

of CityPrime South

East of England

Q on Q -0.7% -3.7% -1.8% 0.7% -0.9% -2.7%

Y on Y -0.5% -3.6% 2.3% -1.5% 0.4% 1.6%

Since

Peak -2.9% -5.3% -0.2% 5.8% 3.1% -20.3%

£ per sq ft £62 £45 £29 £34 £32 n/a

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Spotlight | Prime Rental Markets

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London’s prime rental markets are beginning to segment as tenant demand is becoming increasingly varied depending on property type and location. The overall trend is one of small rental falls, but hidden within this is a divergence of performance.

Average prime London rents fell by -1.9% during the fourth quarter of 2012 leaving annual growth at 0.5%. However, this figure masks some variations both in terms of location and the type of property; in central London values fell by -0.7% but rose by 0.7% in the prime rental markets of Islington.

Continued economic uncertainty and threats to employment in the financial sector are affecting corporate relocation budgets, with single executives relocating rather than families. This is hitting the family house markets in many prime London locations.

Conversely, strong demand for one or two bedroom flats is being seen from young professionals and wealthy students. Over the last quarter, rents for one beds have out performed the rest of the market as rental prices stayed flat compared to a fall of -1.9% for all properties.

Central LondonIn central London (Chelsea, Kensington Mayfair, Knightsbridge and Belgravia), where the average rent at £62 per sq ft is highest, flats continue to outperform houses year-on-year recording 0.2% growth against a -1.7% fall.

The Prime Markets: London and beyond

Demand for well finished flats in a portered block has been driven by international students from wealthy families and professionals in the early stages of their career.

Domestic London Values in South West London fell by -1.8% over the quarter as the demand for family housing slowed and the stock available outweighed demand. In this market 28% of landlords are letting for reasons other than investment some 13% higher than the average across the whole prime London market. This reflects a reluctance among those moving to the country to sell their London home in the current market.

However, growth earlier in the year by corporate tenants looking for value beyond the central London market means that annual growth remains positive at 2.3%.

The seasonal nature of the market in North West London (mostly around Hampstead and St John’s Wood) resulted in the greatest falls over the quarter with rents falling -3.7%.

Due to its dependence on the family market, values have been affected

by properties which were not let before the start of the school term. In the prime North West the average length of tenancy has increased from 354 days in 2009 to 454 days in 2012, as landlords have sought to mitigate against the volatility of the market by securing tenants for longer terms.

Lower corporate budgets have affected high end rents in the East of City as prices fell by -0.9% over the quarter. However, activity for one and two bedroom flats from the corporate sector remains strong which in turn continues to attract overseas investors to the area.

Outside the capitalIn the South East, rental levels fell back slightly during the fourth quarter (-2.7%), partly due to a seasonal fall in applicant levels. However, rents have increased by 1.6% over the year given demand from people renting before committing to a house purchase in the commuter zone.

These improved rental values have encouraged some ‘accidental landlords’ to continue letting their properties for longer than they had intended. Here the mid market rental stock continues to perform most strongly given a sustained increase in demand from young professionals, who pre-credit crunch may have been homeowners, but whose aspirations are hindered by the need for sizeable deposits.

Over the last four years, levels of international tenants have remained consistent at around 25%. However, in contrast to central London, there has been a significant increase in those employed in the financial sector, rising from 53% of international tenants in 2009 to 62% in 2012 suggesting they are increasingly prepared to consider rental stock in commuter locations. ■Source: Savills Research

Qu

arte

rly

Gro

wth

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

-10%

-12%

-14%

-16%

-18%

GRAPH 1

Quarterly prime rental movements■ All Prime London All Prime South East

Dec 0

7

Mar

08

Jun 0

8

Sep 0

8

Dec 0

8

Mar

09

Mar

10

Mar

11

Mar

12

Jun 0

9

Jun 1

0

Jun 1

1

Jun 1

2

Sep 0

9

Sep 1

0

Sep 1

1

Sep 1

2

Dec 0

9

Dec 1

0

Dec 1

1

Dec 1

2

“Strong demand for one or two bedroom flats is being seen from young professionals and wealthy students” Lucian Cook, Savills Research

savills.co.uk/research 03

January 2013

Results from the 2011 census not only give an indication of the extent to which the private rented sector has grown over the past 10 years, but also the depth of the rental market at a local level. They paint a picture of a rental market that is increasingly stratified with different drivers and constraints on rental growth.

Across England and Wales the number of private rented households grew by just under two thirds from 2.6 million households to 4.2 million between 2001 and 2011, as younger households have faced increasing financial barriers to home ownership, the provision of social housing has been squeezed and the stigma around renting in higher income groups has been lost.

Though the census data suggests the private rented sector accounts for 18% of all households across England and Wales as a whole, levels tend to be concentrated in urban areas.

Large urban marketsFor example, across the five metropolitan boroughs of Birmingham, Leeds, Manchester, Liverpool and Bristol the number of private rented sector households has risen by 77% in 10 years such that they account for 23% of all households in these areas.In these areas, the profile of rental housing is dominated by one and two bedroom properties, that together account for 63% of advertised rental stock; reflecting the dominance of young need-based renters.

In the past two years, asking rents of two bedroom properties in these five markets have risen by an average of 2.5%. While continuing to rise, recent rental growth in the city markets of the Midlands and the North have been constrained by the weak underlying economic environment and the increase in stock levels in the lower tiers of the market in the past 10 years.

South and South East urban marketsAcross the main urban rental markets of the South and South East, levels of private renting tend to be higher given greater difficulties in getting a foot on the housing ladder. Here the market

tends to divided between high value supply constrained markets, such as Oxford and Brighton and lower values that have seen much bigger increases in the level of renting, such as Southampton and Portsmouth.

Across this group, average two bedroom asking rents have risen by 8.7% in the past two years and by 4.0% in the past year. Within this group the strongest rental growth has been seen in the most expensive markets, where increasingly affluent groups of renters, unable to access mortgage debt, have widened the profile of tenant demand.

Making sense of the mainstream market

PRS households Total households 2011

% of Total households2001 2011 Increase

Birmingham 46,155 80,588 75% 410,736 20%

Leeds 37,901 62,310 64% 320,596 19%

Manchester 31,422 61,411 95% 204,969 30%

Liverpool 28,513 50,987 79% 206,515 25%

Bristol 25,846 45,571 76% 182,747 25%

Total 169,837 300,867 77% 1,325,563 23%

TABLE 2

Large urban markets

Source: Savills Research

TABLE 3

Urban markets in the South and South East

Source: Savills Research

LocationAverage monthly

rental value of 2 bed properties

PRS households 2011 % PRS households % growth in PRS

2001 - 2011

Oxford 1,380 16,715 30% 35%

Brighton & Hove 1,127 37,518 31% 38%

Cambridge 987 12,994 28% 33%

Reading 983 17,018 27% 67%

Southampton 789 25,501 26% 53%

Portsmouth 759 22,140 26% 69%

TABLE 4

High value South East markets

Source: Savills Research

LocationAverage monthly

rental value of 3 bed properties

PRS households 2011 % PRS households % growth in PRS

2001 - 2011

Windsor & Maidenhead 2,042 10,567 18% 34%

Elmbridge 2,013 8,651 16% 43%

South Bucks 1,630 3,393 13% 46%

Guildford 1,555 9,215 17% 31%

St Albans 1,407 8,216 15% 50%

Sevenoaks 1,378 5,804 12% 45%

SE high value markets Within the highest value markets of the South East, the private rented sector tends to be a much smaller proportion of all housing; the demographic profile being more weighted towards affluent family households. This means the needs-based rental demand of 'Generation Rent' is less of a driver with family lifestyle renters more dominant.

As a consequence in these markets rental properties of four or more bedrooms make up 25% of all advertised rental stock and three bed properties a further 20%.

Spotlight | Prime Rental Markets

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Please contact us for further information

Savills plcSavills is a leading global real estate service provider listed on the London Stock Exchange. The company, established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 200 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East.

This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.

Jane IngramHead of Lettings020 7824 9048jingram@savills.com

Lucian CookDirector020 7016 3837lcook@savills.com

Sophie ChickAnalyst020 7016 3786schick@savills.com

Kirsty LemondAnalyst020 7016 3836klemond@savills.com

Savills LettingsSavills Research

TABLE 5

London & the interaction with house prices

Source: Savills Research

Borough Average house price

10 year house price growth

% PRS households

% growth in PRS 2001-2011

Kensington & Chelsea 936,941 112% 39% 27%

Westminster 687,114 105% 43% 37%

Camden 574,904 86% 34% 31%

Hammersmith & Fulham 519,972 81% 33% 52%

Islington 458,952 84% 28% 72%

Richmond Upon Thames 448,581 69% 23% 28%

Wandsworth 390,097 69% 33% 48%

Average 573,794 86% 34% 41%

Across these markets average asking rents for three bedroom properties have risen by 12.8% in the past 12 months, in a market where demand among owner occupiers for stock has limited the supply of available properties to those renting through choice.

London and house pricesIn London renting is more prominent than the rest of the country accounting for 26% of all households, though this varies from 11% in Havering to 43% in the City of Westminster.

Across the main prime boroughs of London, private renters account for more than one in three households. However, with the exception of Islington, the level of growth in the private rented sector has been below the average for London as a whole.

Here the bulk of under 35s are priced out of the rental market unless they share with other young professionals, the other option open to them is to migrate to areas such as Hackney where the number of private rented sector households has more than doubled in the past 10 years.

Growth in the private rented sector has also been strong in the least affluent boroughs. For example, in Newham levels of private renting have doubled, while in Barking and Dagenham they have risen by 176%.

In such markets, house prices have become increasingly dictated by the investment value of property. A consequence of low owner occupied demand leaves such markets more dependent on yield sensitive investor demand that has constrained levels of house price growth.

Source: Savills Research

Five-year rental value forecastsTABLE 6

Rental forecasts Across the UK as a whole we are expecting the shift towards renting among those unable to raise a deposit stock to drive rental growth in line with earnings over the next five years.

While we expect this to support rental demand amongst young professionals, and therefore underpin rental growth in the one and two bedroom prime flat market, we do not expect it to have the same impact in the prime markets.Prime central London rents are more obviously driven by City sentiment and corporate demand, with a historic

correlation with the FTSE. As a consequence they are more volatile than the mainstream rental market. We are forecasting rental growth of 3.0% in 2013 and 24.0% by the end of 2017 in prime central London, though we acknowledge the potential for further city job cuts presents the biggest risk to these forecasts.

Nonetheless, landlords in the prime central London market are forecast to benefit from strong capital value growth over the forecast period, something which underpins the investment attributes of this sector. ■

Rental Growth 2013 2014 2015 2016 2017 5 years to end 2017

UK Mainstream2.5% 2.5% 3.0% 4.5% 4.5% 18.2%

Prime Central London

3.0% 5.5% 4.5% 4.5% 4.5% 24.0%