Rental yields on buy-to-let investments in central London have dropped far more than in previous slowdowns due to an oversupply of rental properties and depressed demand from finance professionals, according to research by estate agents FPD Savills.
Until 2000 changes in rents and employment in the capital's financial district broadly tracked each other. However, FPD Savill's head of residential property research, Richard Donnell said “the fall in rents since 2001 has greatly surpassed the relative slowdown in employment growth over the same period.”
“The fall in rents since 2001 has greatly surpassed the relative slowdown in employment growth over the same period.”
FPD Savills head of residential property research Richard DonnellHe said this was due to the sharp increase in the supply of property available for rent. This has pushed up vacancy rates in the last quarter of 2001 to 13 percent, compared with 7.7 percent for the year as a whole.
However, Donnell doesn't expect the problems for London landlords to ripple out to the rest of the country. Rents have actually been rising in the North, Wales, Midlands and South West.
The prime central London residential property market has suffered far more than the rest of the UK and even Greater London. Donnell said this was because of its unique profile with 75 percent of tenants US and mainland European nationals, most of whom work in the financial services sector.
Prime central London rents have now fallen for the past four quarters and are now 16 percent lower than a year ago.
Those expatriates who are choosing to rent in London are being given much lower rental allowances by their companies and multi-national groups are also cutting back on their relocation packages.
Donnell said any improvement in the market was unlikely until the middle of next year at the earliest with an average vacancy rate for 2002 of 11 percent.
The average net yield on prime central London residential property, allowing for management costs, is currently 2.8 percent, this is expected to fall a little further to 2.75 percent by the end of the year.
The return is far lower than in other parts of the country. Greater London residential yields are closer to five percent and just under six percent for the UK as a whole.
LANDLORDS RELY ON CAPITAL GROWTH
Buy-to-let landlords in the City are therefore relying on capital growth to boost returns but this has also softened.
According to FPD Savills, although property prices in central London are up 225 percent over the last decade, rising around 20 percent a year, price rises this year have been much slower at 8.7 percent.
Job losses in the City have certainly affected this with two fifths of purchasers working in financial services. Savills is predicting the rest of 2002 will not see much pick up as traditionally most property price growth is seen in the first half of the year, with a slowdown in the second half. For example, since 1997 capital growth over the first half has averaged 9.5 percent compared with 3.3 percent over the second half
Prices are particularly bad for houses, where prices are rising at just 4.8 percent, while flats are going up at a better 11.5 percent despite falling rental yields.
“The market continues to attract demand from those looking to 'park' some of their capital in prime bricks and mortar,” said Donnell.
“This is especially true for international investors who are attracted by the relatively favourable tax environment for those investing in property.”