While the central London property market…

8 December 2010, Al Nisr Media – Property Monthly (Dubai)

By Camilla Dell

…has begun to cool, and prices have started to flatten out, the rental market continues to be extremely active, which is good news for buy-to-let landlords and investors. The rental market has significantly changed over the last two years. While 2008 saw an unprecedented volume of rental stock which pushed rents down as a result of ‘forced landlords’ who could not sell, or did not want to sell in a falling market, 2009 was characterised by a far more normal volume of rental property as the sales market started to pick up. The year 2010 has by far been ‘the year of the rental’, with many areas now seeing a severe shortage of supply. At the same time, the volume of prospective tenants has been very strong this year.

A recent Knight Frank report showed that, compared to the last two years, 2010 has seen an increased number of new tenants for most months, which has helped landlords to raise rents through the year. Countrywide, the UK’s largest residential estate agency also revealed that there were a record-breaking 61,000 tenants entering the property market in the third quarter, an increase of 19 per cent from the previous quarter. There is also an average of 5.8 tenants currently vying for every one property in the market—a tempting prospect for any buy-to-let investor.

Another report, by Savills, shows that prime London rents rose by 2.7 per cent over the third quarter of 2010, taking year-on-year growth to 12.3 per cent and leaving rents just 3 per cent off their peak of March 2008. Interestingly, there is a huge geographical variation. Areas of North London, such as Hampstead and Islington have enjoyed the strongest rental growth at 4.2 per cent in the third quarter, an increase of 14.4 per cent in the year to date. The growth is coming from increased demand for smaller properties from city tenants.

At Black Brick Property Solutions, we have recently bought several one- and two-bedroom flats for our rental investment clients, and have secured tenants within a matter of days after completion of the purchase. Void periods are also at an all-time low, with many tenants renewing year on year.

High mortgage deposits

Another explanation for the buoyant rental market, particularly at the lower end of the market, is the availability of finance. With most mortgage lenders requiring a hefty deposit of around 25 per cent, many would-be buyers simply cannot afford to buy and are thus forced to rent. It is not surprising therefore that the lower tiers of the prime London rental market have seen the strongest growth over 2010 as caution among tenants and reduced corporate allowances have concentrated demand.

At the upper end of the rental market, there is increased supply, and static demand for family housing is stalling growth. However, according to Savills, in prime South West London the particularly strong sales market this year has reduced the supply of rental properties as accidental landlords returned properties to the sales market. Additionally, needs based family demand has continued, pushing the rental value of houses up by 11.2 per cent in the first six months of 2010. However, the rate of price growth slowed in the third quarter as demand from young professional sharers, as well as families became aligned with supply over the summer months.

Property investment pointers

Our advice to our investment clients has always been that investment into the London property market should be in prime property, in the best locations, as this will attract the best possible tenant. Options in Mayfair, Hyde Park, Marylebone, Kensington, Regents Park and St Johns Wood will bring in attractive rental yields, while also offering good long-term capital appreciation—an important consideration when buying Central London property. Generally, we feel that two-bedroom apartments in locations near to good shops and a tube station make the best rental investment, appealing to the widest tenant market. One-bedroom apartments, while high in demand, have perhaps less chance for appreciation as there is a limit on what someone will pay for these. We would advise investors to avoid ground or lower-ground floors. New builds are good from a maintenance and management perspective, but investors should remain wary as the potential for capital appreciation is not as good as it is with period properties. High-density developments in
particular should be avoided. As an indication of rents achievable, in the most established areas of prime central London you can expect a two-bedroom investment flat to rent for between £800 (Dh4,740) and £3,000 (Dh17,760) per week, depending on size, location and condition. In the more periphery areas, such as St Johns Wood and Notting Hill, a two-bedroom property will achieve anything from £500 (Dh2,960) upwards.

The future longer-term outlook for the rental market also looks positive, with many would-be buyers adopting a ‘wait and see’ approach, this could provide a further boost to the rental market. Knight Frank predicts that rents are likely to outperform significantly this year and next, but return to a more traditional pattern of growth from 2012. With low borrowing rates in the UK, and a healthy rental market, now is a good time to be considering diversifying into the prime central London property market. But it is important to remember that it pays to take advice to make sure you are investing in the right kind of property, in the right area, in order to attract good tenants and rental returns.

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