Are Rents Falling?

The ‘Landlord news’ at the moment is full of stories of falling rents.

Findaproperty recently revealed that rents are falling in central London. After the fall out in the banking sector and following on from several years of strong rental growth we are not surprised by this trend. Property Hawk has set out to find out, is this trend being replicated across the country and what are the prospects for rents over the coming months?

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London rents on the slide
Rents in central London appear to be on the slide. Findaproperty’s recent figures show a drop in asking prices of up to 11.7 per cent or £221 a month in ‘the City’. Much of these falls can be put down to the surplus of new property following the speculative property investment boom of recent years. Added to this, job cuts in the financial sector have contributed to the fall. Other central London areas recording significant rent falls are Canary Wharf and Kensington and Chelsea.

Andrew Smith of Findaproperty said: "Areas that used to be populated by City workers either renting by themselves or occupying a corporate let have felt the pinch the most."

Despite this Liam Bailey, head of residential research at Knight Frank, sees some recovery in central London rents after strong falls last year: "Demand for rental property is strong, with applicant volumes up by 20% year-on-year, the reason we have falling rents at the current time is that this demand growth has been offset by even more rapid growth in supply – up by almost 50% over the same period. There appears to be some equilibrium becoming established in the London market – where rents fell back sharply last year – by almost 20% in several location, so far this year rents have slipped but only by a further 5%."

This optimism conflicts with data from upmarket agent Savills who are more pessimistic on central London prospects:
Jacqui Daly, Director, Savills Research notes that "with ever gloomier prospects for employment in the Capital, rental values in central London fell by a further -6.4% in the final quarter of 2008 to leave them down -7.7% from their peak earlier in 2008. This downturn primarily affects the corporate lettings sector. The latest economic forecasts reporting greater falls in the financial and business sector workforce means that we expect total rental values in prime Central London to fall by at least another -8% during 2009 " .

According to Findaproperty rents outside central London in more outlying London Boroughs are proving more resilient.

Andrew Smith comments: "We attribute this to tenants willing to expand their area of property search to achieve more affordable rents and these areas are less reliant on city workers."

‘Accidental landlords’ put pressure on rents.

The BBC has also picked up on the trend of falling rents.
It attributes the downward pressure on rents largely to the difficulties in the private sales market, the so called ‘accidental landlord’. Many owners are giving up on selling their property in the current saturated market and deciding instead to let. This arrival of the accidental landlord in the market has caused rents across the UK to fall. The average monthly rent dropped by £42, down to £830 this year from £872 in February 2008 according to data produced by Findaproperty.

Falls have been particularly heavy in the North West with rents down 14.3% on the year. The steepness of these falls can be in part attributed to the heavy oversupply of apartments in Manchester which has resulted in many buy-to-let landlords having to accept lower rents in an attempt to attract tenants.

However there may be some hope for landlords in these areas according Jacqui Daly head of research at Savills who monitor rents in over 100 locations throughout the UK.

“ the regional city centre flatted markets, for example Leeds and Manchester, experienced high levels of supply 18 months – 2 years ago, which coincided with large falls in rental values.

"Development in these markets has now slowed, with many schemes on hold or stalled, as consequence of the deepening financial situation. As a result supply and demand in the rental market is now equalising. Over the past year, our monitoring of rental values in these markets shows that values have now stabilised and flattened out.”

National mixed picture
The data from Findaproperty paints a real mixed picture of rent changes across the UK. A snapshot of the regions for instance shows even some areas such as the East Midlands and the North East recording rental rises:

• Scotland: £683, down 2.3% year-on-year
• North East England: £625, up 10.6%
• North West England: £592, down 14.3%
• Yorkshire and the Humber: £595, down 2.3%
• West Midlands: £643, down 4.9%
• East Midlands: £633, up 2.4%
• Wales: £651, down 2.3%
• East England: £787, down 4%
• London: £1,669, down 5.9%
• South West England: £815, down 2.4%
• South East England: £1,066, down 6.1%

Savills, Daly is generally optimistic “ We generally haven’t seen rental falls other than in Central London where the corporate market has been badly hit by the downturn in the Finance & Banking sector."

‘We expect UK average rents to show a slight increase of 1% in 2009, however, there will be considerable variations to this at a local level.”

Buyers Market
What is clear from the stats is that what a couple of years ago was a sellers markets for landlords has rapidly reversed. Landlords who have recently benefited from a series of base rate cuts reducing their finance costs are competing increasingly hard to attract tenants.

This leaves Tenants as the real winners as the large number of available properties leaves them in a strong position to negotiate on rents and services.

For example, some tenants are becoming more demanding and landlords more desperate, so some landlords are offering extras such as cable and satellite TV, weekly cleaners or even improving the property to make it more appealing.

There are also positives in the current market which suggest rents will be able to hold up. Many prospective purchasers are unable or unwilling to purchase a property increasing rental demand. Student numbers are increasing as potential workers put on hold a career or look to ‘up skill’ ready for the economic up turn.

Rents in the public housing sector continue to rise as Council and Housing Association budgets come under increasing pressure.

All this is likely to underpin rental levels generally.

Property Hawk view.
The rental data is clearly very mixed. As Savills point out the variation in rental levels can vary significantly at the micro level with rents rising and falling in certain parts of the same city or even town.

Chris Horne Editor of Property Hawk points out that
“the current economic environment is very unstable with rising unemployment and wage cuts reducing a tenant’s ability to fund rental increases.”

His advice to landlords is: “Landlords will need to get savvy when looking at which areas to buy in. Areas in which tenants are largely dependant on manufacturing employment such as near car plants are likely to be seeing falling rents over the coming months. To avoid this landlords should look to buy in areas with high proportion of public sector workers – teachers, nurses, etc where job prospects and wage increases are more secure. Where they have existing property to rent they need to keep their properties in good decorative order to ensure they attract the best tenants and the highest rents. It’s also more important to than ever to reference your tenants and landlords should seriously consider rent guarantee insurance to secure their rental incomes.

Rental data
Property Hawk recognises the lack of comprehensive rental data means that being able to draw on any meaningful rental trends is very difficult for landlords. Findaproperty’s attempt to set up a rental index should be welcomed.

There have been attempts in the past to collect meaningful data on rents in the private sector. The Centre For Housing Research attempted to collate data in their own rent index in the 90’s.

The main problem with taking the rental data from sites such as Findaproperty is that as they come from letting agents and therefore reflect the asking prices for rental property. Asking prices can be very different from the agreed rents, particularly in fast moving rental market. Just as in the sales market, asking prices will tend to underestimate agreed rents during time of over demand and over estimate them during periods of oversupply as tenants negotiate them down.

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I keep hearing about this ‘accidental landlord’ business and people who can’t sell their property, deciding to let them instead.

At first glance this would seem an obvious reason for why rents are falling, due to more rentable properties coming on to the market. However, one question remains, where are these ‘accidental landlords’ living themselves?

Surely, they themselves need to live somewhere and if they can’t sell their property and move out in order to let it, then where are they going? They can’t all be moving back in with parents and if they can afford to buy another property without first having to sell their current one then (a) we can’t have much of a credit crunch going on and (b) house prices would not be falling due to demand.

Something just doesn’t seem to be adding up.

Kind Regards

Matt

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