London's rental market

The London Intelligence – Issue 3

London's rental market

London’s private rental market continues to grow: 2016 was, according to the English Housing Survey, the first year that there were more renters in London than homeowners, and there are now more than a million private renting households in the capital. The proportion of renters (private and social) could rise to 60 per cent by 2025.

The data in this issue – mainly provided by Dataloft on the basis of a sample of actual rental transactions – allows a greater understanding of London’s tenants and their renting habits, as well as the performance of different subsets of the market, enriching our analysis and having potentially important implications for this growing tenure.

The cyclical nature of the housing market, and the current level of uncertainty in the political and economic environment, means that relying solely on new homes for sale would significantly limit the speed and scale of delivery, not least of much-needed affordable homes which are often dependent on cross-subsidy from private homes for sale. There is also an increasing need to deliver homes across a number of different tenure types, including homes for sale, private rental, shared ownership and affordable homes.

To meet this wide and growing range of needs, and in response to what the latest data was telling us, we recently announced our move into the Build to Rent sector which will create homes for Londoners designed to be rented, from the start. This will enable us to deliver more homes faster, and invest more in places that will bring socio-economic benefits, from new jobs and public amenities to affordable homes for local people. We hope this will usher in a new renting era in London.

Stephanie Barbabosa – Head of Build to Rent, International Operations, Lendlease

Rental Price Index

Source: Office for National Statistics

According to the Office for National Statistics’ experimental rental price index, London’s rental level rose by only 0.4 points in the year to December 2017, which was the slowest annual growth since October 2010. This continues the trend of a slowdown in the capital’s rental market, which is markedly sharper than the rest of England, where the index grew by 2 points.

Rental data

1 – Annual change in rents paid

Source: Dataloft

Dataloft figures confirm that the London Market is more subdued than England and Wales as a whole, with reported rents actually falling up to 1 percentage point in the last three quarters of 2017. While rents rose marginally in the national market, they have also experienced a slowdown, mirroring the ONS index.

The granularity of the data allows an interrogation of different trends in price growth for different types of rental property in London. In the year to December 2017, smaller properties showed modest growth – though one- and two-bed flats had seen rents decline in the previous period, stimulated by an influx of properties onto the market. Meanwhile larger properties saw significant falls in Q4, dragging the overall level into the negative. Only terraced houses have seen persistent rental growth over the last two years.

There was a marginal uptick in rents in Q4 2017, but it would be unwise to read to much into this. It is a price correction rather than growth and leaves rents at broadly the same level at the end of 2017 as they were in 2016. In between, rental values had dipped, particularly for 2 bed flats, because supply rose in 2016 and early 2017 as new developments were completed and after the introduction of 3% surcharge for additional homes in April 2016. By the end of the year the surplus capacity seemed to have been absorbed and rents regained some lost ground.

Sandra Jones – Managing Director, Dataloft

2 – Geographic distribution of rental prices

Source: Dataloft

London’s rental market is not geographically homogenous, however, and these figures suggest a variety of trends are occurring across the capital. Strong price growth occurred in zones 3-5 during 2016, while inner London areas saw more marginal growth, as cost pressures moved out of prime areas. In 2017, however, growth was much more subdued, if not negative, across all on London’s zones – zone 5 saw the largest drop of 2.6 per cent.

3 – Rent affordability

Source: Dataloft

By contrast with other measures comparing average rents to average incomes, this data shows the proportion of income spent on renting by renters in the Dataloft sample (just under a quarter of London renters). This has remained relatively constant over the last three years, at between 30 and 31 per cent of income, suggesting that within this sample, renters tend to regard this level of rent as an affordability threshold – perhaps “trading down” in the face of rising rents.

The slowdown in London house prices appears to be having a knock-on effect on rents, which is likely to be a result of new flats coming onto the market and tax changes affecting London more than the rest of the country, where the slowdown is less marked. With prices falling, landlords who might otherwise sell are keeping their homes on the rental market.

This is a positive development for London but there needs to be a sustained decrease if people on modest incomes are to feel better off.

Expensive rents were still rippling out to outer London in 2016, as renters looked further afield for affordable homes. So it’s interesting that the subsequent falls in 2017 appeared to happen simultaneously throughout the capital.

Dan Wilson Craw – Director, Generation Rent

4 – How far do London’s renters move?

Source: Dataloft

Analysis of the distance moved by renters shows three groups: around 25 per cent of renters move very locally, with an additional 15 per cent moving slightly further afield but within the same part of London. Just under a third have moved between two and 10 miles, essentially within London. And 25 per cent move from further afield – from overseas or over distances of ten miles.

In 2017, more moves were local than in the previous year, reflecting continuing strong neighbourhood ties for many Londoners, and the proportion of both short and long distance moves was higher than across England and Wales.

Only 31 per cent of London renters moved between 2 and 10 miles – i.e. made a move from one area of London to another. Most either moved within the same neighbourhood or from another area altogether (under 2 miles or over 10 miles). This has significant implications for the Build-to-Rent investors. Build-to-Rent schemes are often pitched at a rental level that has no precedent in the area. They will hope to attract tenants in on the strength of their offer, from other parts of London.

Sandra Jones – Managing Director, Dataloft

5 – Age profile of London’s renters

Source: Dataloft

Individuals renting in London have a distinctive age profile compared to the whole of England and Wales – a higher proportion are in their twenties (49 vs 44 per cent) and thirties (31 vs 27 per cent). This is perhaps unsurprising given the large young population in the capital, and research that suggests housing wealth is disproportionately owned by the older generation in London.

The youngest renters generally live in zones 1 and 2, perhaps indicating that younger people are more willing to pay higher prices or live in worse quality accommodation for the sake of being in a more central location. Indeed, analysis suggests different tenants prioritise different aspects of a property when deciding to rent – older ones may, for example, prefer size – for which you generally get better value in outer London.