London lettings today AN OVERVIEW OF PRIME CENTRAL LONDON’S LETTINGS MARKET.

Significant growth in the private rental sector over the past decade now sees 16.2% more households living in private rented accommodation than in owner-occupied properties. Performance of the rental market is closely linked to the capital’s strengthening economy. We see demand rising and the new supply of rental properties easing, resulting in a rise in average rental values.

Our detailed analysis into this significantly growing market demonstrates the how and why. We explore the factors that have influenced today’s market, what might affect it in the future, as well as a detailed analysis of all of the elements influencing London’s lettings market from an investor’s perspective.

SUMMER 2014

MAYFAIRFOR RENT

8%

MARYLEBONEFOR RENT

-1.6%KENSINGTON & NOTTING HILL

PIMLICO & ST JAMESSOUTH KENSINGTON & WEST BROMPTON

CHELSEA, BELGRAVIA &

KNIGHTSBRIDGE4.1%-2.5%-0.8%2.5%

Q1

10

Q1

07

Q1

06

Q21

0

Q2

07

Q2

06

Q31

0

Q3

07

Q3

06

Q41

0

Q4

07

Q4

06

Q1

11

Q1

08

Q21

1

Q2

08

Q31

1

Q3

08

Q41

1

Q4

08

Q21

2

Q2

09

Q1

12

Q1

09

Q31

2

Q3

09

Q41

2

Q4

09

Q1

13

Q21

3

Q31

3

Q41

3

Q1

14

Q21

40% 5% 10

%15

%20

%25

%

GROWTH POINTS The private rental sector of central London is on the up.

• The size of the sector has grown by 38% over the past 10 years, with 16.2% more households now living in private rented accommodation than in owner-occupied properties.

• Rental values achieved in Q2 2014 were 5.1% higher than in Q2 2013, a reflection of the improving economic outlook which sparked a turnaround in the market in late 2013.

• The CEBR recently announced that the London economy is now growing faster than predicted, upgrading its forecast for 2014 to 4.2%, with a further 3.4% growth expected in 2015.

NEW INSTRUCTIONS

NEW INSTRUCTIONS

TIME TAKEN TO LET

TIME TAKEN TO LET

AVERAGE RENTAL VALUES

AVERAGE RENTAL VALUES

Source: W.A.Ellis – properties let in prime central London. 2014 to date.

Source: Lonres

Source: Lonres – Jan/May 2014 compared with Jan/May 2013

Source: Lonres, using analysis from 2005-2013

30%

50%

20%

40%

10%

0%

-10%

-20%

-30%

Chelsea, Belgravia & Knightsbridge

All PCL

Time to let Difference in length of time (%) taken to let in relation to a property marketed in September.

Annual change in new instructions and average rent across prime central London

Chart shows the rental premium achieved for houses with 3 or 4 bedrooms over flats of the same size in 2014 by area. For example, in Kensington and Notting Hill so far in 2014, houses with 3 or 4 bedrooms have let for 25% more than flats with 3 or 4 bedrooms. Source: Lonres – Mayfair and Marylebone excluded due to sample size. 2014 to date.

15%

30%

10%

25%

5%

20%

0%Kensington & Notting Hill

South Kensington &

West Brompton

Pimlico & St James

Premium rental values achieved for 3/4 bedroom houses over 3/4 bedroom flats

Tenant nationality

Change in average rental values achieved

SUMMER 2014 waellis.com

-14%

-27%

-4%

+4.2%

0%

+9.2%

APRIL – MAY 2013 VS APRIL – MAY 2014

HOUSES

FLATS

Stock: availability levels

A major change in the prime central London rental market is in supply. In 2012, there were 25% more properties on the market than in 2010. But since March 2014, the number of new properties on the market has dipped compared with the same period in 2013, and the number of flats is down by 14%, while the number of houses on the market is 27% lower, year-on-year.

Supply levels of flats have fallen most significantly in the lower price brackets, with new properties on the market below £750 a week down 19% since March 2014. The highest availability is seen in flats priced between £1,000 and £2,000 per week (with a fall of less than 1%). Meanwhile, at the upper end of the price scale, supply levels have fallen by 10.2% in flats and houses priced at over £2,000 per week.

Demand: where it lies

Growth in the City employment sector has long been a barometer for the prime London lettings market. With the London economy accelerating quicker than anticipated, the CEBR has upgraded its forecasts, now expecting 2.8% growth in London employment this year. This will continue to drive demand for rental properties and support rental values.

Corporate lets, which accounted for a significant proportion of lettings in the early 1980s, are also beginning to return – albeit with smaller budgets than before the downturn.

Overseas tenants are vital to sustain this growth in the lettings market. Just 30% of our properties in central London so far this year have been let to UK tenants. The largest group of tenants have been from mainland Europe (44%) and 11% have come from North America. Interestingly, before the Lehman Brothers collapse in 2007, around 70% of the prime central London tenant base were US Citizens. This dropped right down to 40% after the crash and has never picked up.

Landlords: recent trendsThe growth in property sale values has prompted a number of landlords to cash in and sell their investment. Indeed, at W.A.Ellis the percentage of vendors selling rental accommodation has risen from 22% to 32% over the past decade. This trend has been especially prevalent in the family house market, and is contributing to the current shortage of this type of rental property. The traditional buy-to-let market (one and two bedroom flats), however, is relatively unaffected.

We’ve met a new breed of landlord: the ‘rent-to-let’ landlord. Homeowners who need to move for work, lifestyle or family reasons but are reluctant to sell their primary home for its growing capital value, are choosing to let this and rent another property rather than sell and buy.

Focus on: family housingThe family housing market of prime central London is the most competitive. At W.A.Ellis the number of family houses let so far this year is up 12% on the same period in 2013 due to increased tenants based in London and those still coming from overseas. June to September is typically the busiest time for letting houses (last year 43% of our house tenancies were agreed at this time) and we expect strong activity over the coming months.

But as indicated, family houses are the most supply-constrained homes in central London. Since March, houses have accounted for just 9.8% of properties brought to the market. The scarcity of family houses has meant tenants who favour houses over flats are paying a premium. Across prime central London tenants are paying, on average, 13.8% more for a house over a flat with the same number of bedrooms. In Kensington and Notting Hill this climbs to almost 25%.

Seasonality: its significanceRecently the lettings market has become more seasonal. This is in contrast to the sales market, where seasonality now plays less of a role.

The run-up to the start of the academic year is still the busiest time of year for W.A.Ellis. Alongside demand from those working in the City, families and students keen to settle before the start of the school year or university term increase demand for properties in the summer months. Properties let between July and October accounted for over half (51%) of all lettings in 2013. December is the quietest month, with less than half the number of properties let compared to August.

With less demand for rental properties towards the end of the year, landlords marketing properties at this time find that they take longer to let. Over the last 10 years, properties marketed in November have taken 25% longer to let than those in September.

Landlords are expressing concern over tenants moving out before Christmas and leaving a void in rental income. Some have even asked whether it would be prudent to include a clause in the lease to prohibit or penalise tenants looking to vacate between November and March.

ANNUAL CHANGE IN NEW INSTRUCTIONS

44%EUROPE (EXCL. UK))

30%UK

11%NORTH AMERICA

9% MIDDLE EAST

4%RUSSIA

1%AFRICA

1%ASIA

ANNUAL CHANGE IN AVERAGE RENT ACHIEVED

Source: Lonres Note that Q2 2014 figures compare April and May 2014 with April and May 2013

JANUARY

MARCH

MAY

JULY

SEPTEMBER

NOVEMBER

FEBRUARY

APRIL

JUNE

AUGUST

OCTOBER

DECEMBER

LUCY MORTON RICHARD BARBER TIM DES FORGES SIMON GODSON DANIEL WIGGIN JAMES WILSON

£Retail

W.A.Ellis is a prime central London sales and lettings agency. Specialist departments include professional valuations, surveying, property management, development and investment consultancy, refurbishment and project management services to add value to any residential property.

lmorton@waellis.com rbarber@waellis.com tdf@waellis.com sgodson@waellis.com dwiggin@waellis.com jwilson@waellis.com

waellis.com

Disclaimer: This report is produced for general information only. While every effort has been made to ensure the accuracy of this publication, W.A.Ellis accepts no liability for any loss or damage of any nature arising from its use. At all times the content remains the property of W.A.Ellis under copyright, and reproduction of all or part of it in any form is prohibited without written permission from W.A.Ellis.

Date of publication: July 2014

The investor market Residential property has become one of the best performing asset classes over the past decade. According to the IPD UK Annual Property Index, the residential sector delivered a total return of 13.3% over the 12-month period to December 2013 and was beaten only by the office sector, which recorded a 14% return. Over the longer term, residential property has shown a sustained outperformance, with three, five and ten-year annualised total returns exceeding those of commercial property.

Unlike investors in the mainstream housing market, investors in prime central London have long been willing to accept lower yields while prospects for capital growth remain high. Total returns continue to be attractive, but growth in prices has outpaced rents and, as a result, yields in central London have fallen.

Gross yields for a two bedroom, central London flat averaged 3% last year. Yields were lowest within the most expensive postcodes, with Chelsea and Knightsbridge recording yields at 2.5% and 2.3%

respectively. While average yields in areas such as Marylebone, Notting Hill, Pimlico and West Brompton exceeded the prime central London average, none were higher than 4.1%.

The strength of the sales market is leaving some investors in a quandary. Many could release significant gains from the rise in value of their properties. However, selling up means missing out on the prospect of further growth. Average prices in prime central London have increased significantly, and are now 47% higher than they were in 2010.

For an investor in the capital, there is certainly no shortage of demand, with London’s population now at 8.4 million and rising. With the upbeat economic outlook for the UK economy and London firms moving into expansionary mode, demand for housing is expected to increase. This was substantiated in the April 2014 CBI London Business Survey, which showed more than half of firms interviewed continuing to increase their headcount.

From a prospective landlord’s view, the status quo of London’s market must be appealing, with tenant demand expected to rise at a time when London struggles with an acute undersupply of homes. This has certainly not escaped buy-to-let investors. Statistics published by the British Property Federation confirm that this investor group acquired 48% of London’s new homes in 2013, while owner occupiers accounted for 32%.

As residential construction increases there will be more opportunities for investors. As price rises to-date have pushed owner occupation beyond the reach of many, landlords should be fairly confident in securing tenants. The capital growth value is clearly slowing and the savvy investor will benefit from the next nine months running up to the General Election to build on a portfolio and invest in locations where there is an apparent shortage of stock and strong demand.

10-year annualised return on investment by sector

10%

8%

6%

4%

2%

0%

Source: IPD UK Annual Property Index

Residential Office Industrial Bonds Equities

ALL PROPERTY

Source: Lonres – sales and rentals over 2013

Top 5 areas for rental yield in 2013

Pimlico 4.1%

Marylebone 3.6%

Notting Hill 3.4%

West Brompton 3.1%

South Kensington 2.9%