Rent increases for small flats as luxury rents fall

The rental sector is often a reliable barometer of general market sentiment due to the high turnover of property and applicants’ ability to react quickly to changing economic conditions.

In 2016, as stamp duty changes and economic uncertainty impacted sentiment, stock levels of Prime Central London rental property saw a marked increase with vendors deferring sales in a softer market. Over the last three months, 22,045 properties have been available for let, according to industry website Lonres, with a 25.4% annual increase in available stock.

Naomi Heaton, CEO of London Central Portfolio, said:

“With a greater level of availability, tenants can shop around and are increasingly attracted to newly refurbished properties (new-lets). They are also very budget conscious and look for good value. They will therefore opt for small units and prioritise location over size to get what they want. This is resulting in a resilient performance for the mainstream sector where rents average under £1,000 per week.”

The latest lettings audit from LCP, who specialise in this sector, reflected a robust 3% uplift over forecast rents for new-lets in 2016. One bedroom properties showed the strongest annual performance with a 4% uplift. Over the last three months, one bedroom properties performed particularly positively with void periods reached an 18 month low of 17 days and rents achieving 8% over forecast.

Reflecting tenants’ desire for newly refurbished properties and the opportunity for choice in the current market, re-lets (older properties being let to new tenants) showed a weaker picture, with a 1.6% fall in rents in 2016. However, the slowdown in the re-let market was compensated by renewal increases for tenants in situ. Average rental growth was 1.3% in the last quarter with landlords often able to achieve contractual rental increases in excess of that which can be achieved in the open market.

Larger units, on the other hand, have been more impacted by the increased level of stock and tenant budget cuts, as corporates tighten their belts in the face of global instability. Over the year, LCP has reported void periods for two bedroom units in the mainstream sector increasing by 24%, with rents at re-let falling 2.2%.

More expensive units, demanding rents of over £1,000 per week, are reported to have seen significantly more price suppression. According to Knight Frank, rental growth in the price bracket £1,000pw – £1,500pw has fallen by 8.1% and over £1,500pw by 6.5% in 2016.

Naomi said:

“In much the same way as the sales market, we have seen fragmentation of the lettings market in 2016, according to price. Demonstrating a market dynamic which was conspicuous during the credit crunch, the uncertain economic outlook has resulted in tighter tenant budgets, putting a downward pressure on rents in the luxury rental sector, where rents are over £1,000pw. This has been compounded by increased numbers of properties to rent as owners defer sales in a softer market.

“In contrast, the mainstream market has continued to put in a positive performance, being far more accessible to the wider tenant pool. However, landlords still need to ensure their properties remain immaculate to stand out from increasing competition and to meet the demands of today’s tenants.

“In 2017, it is possible that the rental market as a whole will see some upward pressure in rents as landlords seek to recoup the increased entry and running cost due to the additional rate stamp duty and the forthcoming reduction in mortgage interest relief. Stock, however, is likely to remain high which may well curtail the level of rental increases achievable.”