London Property – the Outlook for Rents in the Buy-to-let Sector
The UK economy has been through a rough time over the last 3 years. House prices dropped off a cliff during the credit crunch in 2008 and, prime central London property excepted, have only recently started to crawl back to somewhere approaching their pre-crash level. The upside for buy-to-let investors and private landlords is that London rents have reached near record highs. But how long will this continue? What are the risks for buy to let investors in London in the longer term? Is now a good time to invest in London rental property?
The economics of investing in residential property is driven by four main factors – (1) house prices (i.e. the cost of buying into the market) (2) tenant demand (3) supply of available property for rent and (4) mortgage rates and availability. Let us consider each of these in turn.
First, house prices. According to Land Registry figures, prices of flats and houses to rent in London increased last year – the only area of the UK which did not report a fall. No one can predict whether this will continue but very few experts are expecting a significant drop in London house prices in the medium term, with most agreeing that prices will stay broadly flat over the next 12 months.
Secondly, tenant demand. London is in many ways a separate economy to the rest of the UK. It is not so much a UK city as an international city and this does not look set to change. London has always attracted workers from other Commonwealth countries, notably Australia, New Zealand and South Africa but many reports now classify London as the fifth largest French city in terms of population. Although some East Europeans workers may return home as jobs become harder to find, anecdotal evidence suggest that many have settled here and intend to stay. And whatever the state of the economy, people still need somewhere to live.
London’s historically strong demand for rental property has been given a further boost by the inability of many of its even quite well-off inhabitants to get on to the property ladder. People who would in the past have purchased a home are finding that mortgages are still in short supply and that many lenders require hefty deposits. Although the base rate is at a record low, the rates charged by lenders do not generally reflect this. As a consequence, renting flat in London, rather than buying, is the only option for many, increasing tenant demand still further. So, as far as anyone can predict, demand for rental property in London is set to remain strong.
The counterbalance to tenant demand is the supply of available property for rent. No matter how big the demand for places to rent, rent levels will drop if there are more properties available then there are tenants seeking accommodation. And the signs are that there is currently something of a mini-boom in buy-to-let, increasing supply and potentially pushing rents lower.
One reason for this is the phenomenon of the “accidental landlord” – home owners who have been pushed into letting out their property because they have been unable to sell it and need to move. Another factor is that the government is actively seeking to make it easier for institutions to invest in the private rented sector. We are already seeing some housing associations branching out from their social housing roots by building homes to let for profit at market rents. This is likely to continue: good news for those renting flats in London, perhaps not such welcome competition for private landlords seeking to let London flats.
In other words, although tenant demand is likely to remain strong, the indications are that the supply of homes to rent in London will increase. The overall effect on rents is difficult to predict but it is probably unwise to count on rents continuing their steep upward path in the medium term.
Finally, all private landlords considering expanding their portfolio will need to consider the cost of finance. The situation is much improved from two years ago, with many lenders seeing buy-to-let as less risky than straight residential mortgage lending. But the debt crisis in the Euro-zone is pushing up the cost of finance and lenders are passing this on to borrowers in the form of higher mortgage rates. Most experts consider that the problems in the Euro-zone are far from being resolved and the possibility of another 2008-style credit crunch is very real. If we are lucky, that won’t happen. But if it does, finance may seize up and borrowers whose rate is tied to LIBOR could find their payments increasing dramatically.
So what conclusions can we draw from this? As always, nothing is certain but London residential property remains a fairly sound investment, especially if you are prepared to stay in for the long term. My advice to any would-be landlords: if you tread carefully and don’t overstretch yourself, London rental property is still an excellent investment. Just don’t quote me on that.
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