Source: Savills Research
Demand continues to come from professional couples and young families.
■ Annual rental growth of 1.4% was seen in the prime rental markets of London’s commuter belt, following small falls in the three months to September.
■ One or two bed properties have seen growth of 0.5% over the quarter compared to those with three or more bedrooms which have either remained flat or fallen slightly.
■ Looking forward, demand for prime rental property over the medium term will be underpinned by the strengthening economy of the UK and those following the traditional relocation routes out of London.
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TABLE 1Prime Rental Movements to Q3 2015
Rental values in the prime markets of London’s commuter belt fell by a marginal -0.2% in the third quarter of this year, leaving annual growth at just 1.4%.
Smaller properties continue to outperform larger ones. Rental growth of properties with three or more bedrooms has either remained flat or fallen slightly over the quarter. In comparison, one or two bed properties have seen marginal growth of 0.5% in the three months to September.
This reflects a divide in the market between needs based renters who are looking for smaller properties and ‘big budget tenants’ looking for trophy properties, who remain relatively scarce.
The demand comes from professional couples and young families, looking for flats and small houses, who aren’t yet ready to buy or who are working on a ‘try before you buy’ basis. 42% of tenants renting in the commuter belt are doing so because of employment relocation, meaning they may want to get to know an area before committing to a purchase.
Being near to good schools is very important to young families renting in the prime commuter belts who want to be within walking distance. This has resulted in stronger rental growth being seen in locations with a good reputation for education such as Winchester and Harpenden.
Properties that are within a city or town centre, close to local amenities such as shops and stations also remain popular. City locations in the prime commuter zones of London saw growth of 0.3% over the quarter as a result of this demand. In contrast, both village and rural locations saw falls of -0.6% over the same period.
Outlook
Looking forward, we expect the demand for prime rental properties in the suburbs and key commuter locations of the capital to continue, especially as we see an increase in those following the traditional relocation routes out of London.
Over the next five years, the UK economy is set to continue strengthening. This will underpin demand for prime rental property over the medium term as more people move to the commuter zones of the capital for employment opportunities.
A potential short term risk to the sector is high levels of stock coming onto the market as a result of accidental landlords. This is more likely at the top end of the rental market as higher tax burdens are felt by potential buyers.
Following the stamp duty changes introduced in the autumn statement of 2014, there has been an increase in the number of this type of landlord coming to the market as homeowners are currently delaying a sale of their property until the market has adjusted to the new stamp duty rules.
According to Savills data, the proportion of recently let prime rental properties in the commuter belt which were previously owner occupied has increased from an average of 29% in 2014 to 36% so far this year.
On the flip side, we expect the finances of those landlords with a buy to let mortgage to be put under pressure as the restrictions on tax relief for interest payments take effect. This is likely to curb the amount of rental stock brought to the market underpinning rents over the longer term.
