Blog Post No. 199
London Rent Surge: Rents Expected to Surge by Nearly a Quarter in 5 Years – 3rd Oct Property Bulletin
New Property Market Forecast: London Rents Set to Surge by Nearly a Quarter in Five Years London, a city renowned for its sky-high property prices, is poised for yet another steep increase in rents, according to the latest forecast by Knight Frank. The revised projections indicate that London rents are expected to surge by an additional seven percent by the end of this year, outpacing the rate of growth seen in the rest of the UK.
The housing landscape in London has been characterized by an increasingly acute imbalance between the supply of rental properties and the burgeoning demand to inhabit them. Several factors contribute to this imbalance, including landlords exiting the market due to punitive tax policies, a resurgence of office-based work drawing more workers back to the city, and a growing number of tenants unable to afford homeownership.
Recent research conducted by Hamptons underscores the severity of the situation, with the average rent in London now standing at a daunting £2,287 per month. The divide is even more pronounced within the city, with outer London commanding an average of £2,141, while inner London reaches a staggering £3,055 per month.
Over the next five years, London’s average rent, already at historic highs, is projected to rise by 23.3 percent, surpassing the 22.2 percent growth forecasted for the rest of the UK. Tom Bill, Head of Residential Research for Knight Frank, explains this trend, stating, “We anticipate stronger rent growth in London this year and the next, as the supply-demand gap takes more time to correct. This is especially true as landlords have been leaving the sector due to mounting tax burdens and increased regulations.”
The repercussions of these soaring rents are evident as young tenants grapple with limited options. Many are forced to move back in with their parents or seek housing outside the capital, all while a greater proportion of their income is absorbed by rent, despite modest wage growth.
Lucian Cook of Savills adds a cautionary note, asserting that the exorbitant housing costs may lead to a talent drain in London, as recent graduates opt for more affordable cities. However, there is some relief on the horizon, particularly in the city’s central districts, where the supply-demand imbalance appears to be easing. Vendors, not under financial duress, are opting to rent their properties while waiting for property prices to appreciate, notes Knight Frank.
Looking ahead, Knight Frank predicts that London rents will rise by 5.5 percent next year, compared to five percent in central London and five percent across the UK.
Interestingly, the top end of London’s housing market, where multi-million-pound properties change hands, is expected to recover faster than any other part of the country. Despite the “erratic” mortgage market of the past year, which has dampened sentiment and caused house prices to fall in even the most affluent areas of London, there is renewed optimism. This is despite the return of overseas buyers, due to factors such as Liz Truss’s recent fiscal measures and the rapid rise in the Bank of England’s base rate over the past year, leading to mortgage rates three times higher than they were three years ago.
While the luxury housing market in London’s core areas like Knightsbridge, Belgravia, Mayfair, Kensington, and Chelsea is less reliant on borrowing and more on cash buyers, this instability has still impacted buyer confidence and decision-making.
Despite looming uncertainties, such as the General Election, the current predictions paint a more optimistic picture. House prices across the UK are expected to decline by seven percent this year, compared to a milder three percent in the upscale “prime central London” (PCL) areas. In 2024, UK values are projected to fall by an additional four percent, remaining stable in PCL before experiencing a 2.5 percent increase. This is followed by three percent growth in the two subsequent years.
Tom Bill of Knight Frank suggests that PCL may experience a smaller correction than other parts of the capital and the UK. This is due to factors such as a higher prevalence of cash sales within Zone 1, the full return of international travel, and a marginally stronger recovery expected from 2026. Despite the challenges faced by PCL, including substantial stamp duty on properties over £937,000 and the Brexit-related impact on international buyers, prices in these exclusive pockets of the capital have less room to fall, still sitting 15 percent below their peak in mid-2015.
London Welcomes a New ‘Luxury Town’ on the Thames with Porsche’s Backing
Picture a futuristic London in 2050, where traditional boroughs have evolved into a collection of opulent townships, all funded by multimillion-pound corporations. It might seem reminiscent of dystopian tales like ‘The Hunger Games,’ but it could very well be the future of the capital. London is now witnessing the development of a brand-new ‘luxury town,’ and it’s none other than the sports car giant, Porsche, that’s backing this endeavor.
Thames Living is set to become an entirely new township nestled along the banks of the River Thames. According to a statement, Thames Living aims to be “a vibrant place bringing jobs, creating opportunities, and delivering new local services for all the community.” While the precise details of this luxurious town remain somewhat elusive, the project promises to offer “modern, high-quality amenities” encompassing parks, entertainment, hotels, dining, hospitality, and retail, as described on its website.
As for the exact location of this posh new town, it’s still under wraps. What we do know is that it will occupy a unique spot along the river and will be conveniently within a ten-minute walk from a train station that can whisk residents to central London in under 20 minutes. The timeline for the town’s construction is also a bit hazy, with Thames Living scheduled for an official launch in 2023. Rest assured, we’ll keep you informed as more details emerge.
While Porsche itself isn’t directly funding the project, Thames Living enjoys the support of Porsche Consulting, a subsidiary of the renowned luxury car manufacturer.
If you aspire to embrace the high life in this new Porsche-backed town, you can reserve your place by visiting the Thames Living website, where a £10,000 deposit secures your spot.
UK banks are displaying increasing caution when it comes to lending for housing development in London, a clear indication of the weakening outlook for the capital’s property market. According to Nicole Lux, a senior fellow at Bayes Business School who specializes in real estate finance, lenders have reduced the leverage ratios they are willing to offer developers by up to 10 percentage points since the beginning of the year, based on her research. This reduction in credit availability is compounding the challenges faced by homebuilders, who are grappling with rising costs, reduced demand, and the impact of higher mortgage rates. As a result, London home prices have seen a decline of approximately 4% in the past year, as reported by mortgage lender Halifax.
However, the situation is even more concerning for land values. During economic downturns, land values typically decrease more than the properties built on them. This is partly because developers must increase profit margins to safeguard against potential further price declines during the construction process. Additionally, developers are scaling back land purchases, leading to a collapse in the value of development land deals. Data from MSCI Real Assets shows that less than £1.45 billion worth of sites have been sold in the UK this year, compared to over £6.5 billion in 2021.
In some parts of the city, particularly upmarket areas, land values have been negatively affected by the slowdown in the luxury property market, which began before the Brexit vote. For instance, at the former Earls Court exhibition center in west London, revaluation losses have amounted to around £827 million ($1 billion) from their peak.
Antony Antoniou, managing director at broker Robert Irving Burns, attributes the land market’s struggles to a combination of fiscal, legislative, and market changes. Despite these challenges, the Dutch pension fund APG and a Delancey-managed fund purchased the Earls Court site in 2019 for £425 million, with plans for 4,500 homes and a green technology research hub. However, the land’s value plummeted by over 15% to approximately £540 million last year, following a 12.6% gain in 2021.
Nicole Lux’s research also reveals that banks have reduced the so-called loan-to-cost metric for housing development in London, dropping it from about 65% to around 55% compared to the end of the previous year. She points out that securing development finance is now very challenging due to UK banks’ cautious approach. Most of the remaining lenders willing to provide credit for development are specialized debt funds, limited in their capacity to handle deals in significant volumes, and they have reduced the loan-to-cost ratio to 60% from 70%.
With sales of newly-built properties hitting their lowest levels in over a decade, some developers are resorting to discounted bulk sales to address their backlog. Others are considering renting out projects originally intended for sale.
The challenges faced by developers also extend to dramatic markdowns on land acquired during the property boom. For instance, the value of British Land Co.’s Canada Water project, a mixed-use development larger than Earls Court, fell by 17.4% in the year through March. This decline exceeded the 24.2% cut to the landlord’s warehouse portfolio in the capital, primarily consisting of development sites.
About a mile away from Canada Water, on the outskirts of Canary Wharf, the construction of what was planned as the tallest residential skyscraper in western Europe has yet to commence following a change in planning rules after the Grenfell tower fire in 2017. The Chinese developer, Greenland Holdings Corp., recorded a £56.7 million impairment on the project in 2021.
The construction industry is experiencing broader instability, with companies going insolvent at the highest rate in a decade. Data from Molior London indicates that a record number of housing projects in the city stalled in the second quarter. These setbacks have consequences for London’s economy, which has already seen delays in the Crossrail 2 project and growing speculation of delays or cancellations for sections of a high-speed rail link between London and Manchester.
In recent developments, homebuilder Inland Homes Plc, which owns a residential development site near Heathrow Airport, entered administration after a subsidiary breached covenants on a loan from HSBC Holdings Plc. The parent company also indicated consideration of provisions against specific assets and is likely to breach covenants with other lenders.
The challenges with land values in London are having a ripple effect across the country, with urban brownfield land prices in the UK declining by 18% in the 12 months through June, as reported by Knight Frank LLP. Over half of homebuilders anticipate a drop in property values in the current quarter, prompting one in five to increase their margins due to market uncertainty.
Meanwhile, Berkeley Group Holdings, traditionally London’s largest homebuilder, has announced that it will be highly selective in pursuing new opportunities in land. Competitor Crest Nicholson Holdings anticipates a significant reduction in future land activity.
London’s office market is facing a severe “rental recession,” with the amount of vacant office space reaching its highest level in three decades, according to a report by investment bank Jefferies. In the City of London, the historic financial district, office vacancies now account for 10% of total office space, while in central London’s West End, the figure is 7%. In the newer financial district of Canary Wharf, vacant units exceed 20%. This situation mirrors London’s office market conditions in 1993 when the UK economy was in recession. The persistently high vacancy rates are attributed to the prevalence of remote work even three years after the start of the pandemic.
Jefferies estimates that office utilization in London has fallen by 20% since the end of 2019 as remote and hybrid work models have become more widespread. This decline in occupancy has reached a “tipping point” where rents typically begin to fall. As a result, Jefferies downgraded the stock of four major property developers, including British Land and Derwent London.
The bank predicts that the technology sector will follow retail in reducing its office space as utilization shrinks, and landlords lose pricing power due to tenants offloading surplus space. As an example, Meta (formerly Facebook) has agreed to pay £149 million ($181 million) to break its lease on a 310,000-square-foot office near London’s Regent’s Park. The move reflects a broader trend of tech companies downsizing office space.
HSBC also announced plans to move from its global headquarters in Canary Wharf to a smaller building closer to London’s city center. These developments have raised concerns among regulators about the commercial real estate market’s impact on banks and developers, as falling property values could pose a risk to financial stability. The residential rental market in London, in contrast, is experiencing high demand and chronic supply shortages, leading to significant annual rent increases.
Mortgage rates are on the decline, sparking a rate war in the mortgage market. This development may present a golden opportunity for first-time homebuyers. Let’s delve into the details.
After a year of financial turbulence, mortgage rates are finally beginning to fall. This change marks the start of a competitive rate war among lenders. To take advantage of this situation, first-time homebuyers need to navigate the mortgage market strategically.
Approximately a year ago, a significant financial event led to a surge in mortgage rates. Borrowers were grappling with higher mortgage repayments due to consecutive interest rate hikes. Over the course of a few weeks, the average two-year fixed-rate mortgage jumped from 3.66% at the beginning of September 2022 to 5.24% in early October 2022, eventually reaching 5.90% in November of that year. This increase not only affected those looking to remortgage but also individuals seeking new mortgages for home purchases, leaving them with higher repayments and fewer options.
Subsequently, further base rate increases and economic events pushed average mortgage rates to peak at over 6% at one point. However, a recent rate war has emerged as lenders reprice their fixed-rate mortgages, with many offering deals below 5%. The Bank of England’s decision to pause base rate increases also offers hope that the so-called mortgage crisis may be subsiding.
L&C Mortgages, a fee-free broker, reports that while the average two-year fixed-rate currently stands at 5.78%, not far from the high in November 2022, there is optimism in the market. More lenders are cutting their rates, including HSBC, which recently joined the list of top lenders reducing rates across its range. This trend suggests that the chaos of the past year may be coming to an end.
David Hollingworth, Associate Director of Communications at L&C Mortgages, believes that borrowers can now look ahead with more confidence. Falling fixed rates and the halt in base rate increases indicate that the market may be nearing its peak. He emphasizes that improvements in fixed rates are expected to continue, driven by better inflation figures and stable interest rates.
For first-time buyers, falling mortgage rates present an opportunity to enter the property market. Additionally, fewer landlords in the market due to high rates and new regulations mean less competition in the housing market. Falling property prices have created a buyers’ market, but first-time buyers must act swiftly to reap the benefits.
David Walsh, Director at London-based broker Kite Mortgages, suggests that falling borrowing costs and improved market sentiment could attract more buyers, leading to increased competition for first-time buyers. However, he notes that a potential challenge for all buyers, including first-timers, is the limited availability of housing stock.
If you’re a first-time buyer looking to capitalize on this opportunity, it’s advisable to consult with a broker who can provide guidance on available options and help you secure the best deal. Michelle Lawson, Director and Mortgage & Protection Adviser at Lawson Financial Ltd, recommends using a broker to review all available products and secure lower rates offered by lenders. Going directly to lenders may not yield the same benefits, so it’s essential to leverage the expertise of a knowledgeable broker. As the rate war intensifies, it’s a favorable time for first-time buyers to enter the market.
A £10 million scheme aimed at assisting first-time homebuyers in Jersey to step onto the property ladder has been officially launched. The program will enable eligible islanders to access up to 40% of the funds needed to purchase a home in the open market.
Originally allocated in the 2020 government plan, the £10 million budget has been affected by a 23.8% increase in inflation since then. However, the funding will be available once the final policy development phase is complete, with expectations of availability by spring 2024.
To qualify for the scheme, applicants must be genuine first-time buyers with no prior property ownership in Jersey or overseas. Deputy David Warr, Minister for Housing and Communities, anticipates that the initial £10 million will assist approximately 60 households. If successful, the scheme may be extended.
Buyers will be required to provide a 5% deposit for the purchase, and those already on the assisted purchase pathway will have the option to register. Eligible individuals include those with a maximum household income of £65,000 for a one-bedroom flat, £85,000 for a two-bedroom flat, £105,000 for a two-bedroom house, £125,000 for a three-bedroom house, and £135,000 for a four-bedroom house.
The government plans to work with local banks, lawyers, and estate agents to refine the allocation and prioritization of funds in the coming months. They will also implement limits on total property costs to support as many households as possible.
Minister Warr believes that the scheme will create a ripple effect in the housing market. It aims to help middle to lower-income families who may have dreamed of homeownership but lacked the opportunity to realize it.
However, Sam Mezec, leader of Reform Jersey, points out that the scheme is similar to one proposed by his party in 2022 and criticizes the government’s handling of the housing crisis. He emphasizes the need for expansion and quicker action due to delays and inflation affecting the program.
Minister Warr defends the delay, stating that the scheme needed careful consideration to avoid market disruptions. He believes that the current market conditions make it an appropriate time to launch the scheme. The government is collaborating with the States-owned affordable housing provider Andium Homes to implement the program.