Super-prime lettings boom as falling prices, stamp duty and Brexit deter buyers
Brexit uncertainty has certainly prompted growth in one area
– the prime rental market. In the first four months of this year a record
number of tenancies above £5,000 per week were agreed in London. These higher-value
rents have been supported by growth in demand from renters, particularly
corporates.
At Nicolas Van Patrick, we are not surprised by these
findings as in our experience the super prime rental market has been active for
the past four years. By this we mean rentals of £10,000 per week and upwards,
which are few and far between, so are therefore relatively easy to track. It
makes perfect sense: while the government is manoeuvring through Brexit, and
with property values coming down, people are looking for flexibility. Why buy a
£30m second home, paying stamp duty of £4.5m, when you can rent that property
for £1m a year? In a falling market, the savings are considerable: if you
bought a second property for £30m in 2014, values have fallen by circa 20 per
cent since then, resulting in a £6m loss, plus the £4.5m stamp duty. If you had
rented over the same period, paying £4m, you would have made a considerable
‘saving’ compared with buying. While renting is usually regarded as ‘money down
the drain’, when prices are falling the smart people rent super prime houses because
it is cheaper than buying.
While there has been a strong argument for super prime
rentals over the past few years, people have not been totally deterred from
buying. On a few of the bigger houses we have had tenants requesting an option
to buy or ‘right of first refusal’. This tends to be more common when it comes
to super prime properties which get let in markets where values are moving
downwards. The advantage for tenants is that they can ‘test drive’ the house to
discover whether they actually want to buy it.
Tenants should take advantage of this situation as under
normal circumstances developers would never go down this route – once houses have
been lived in, they lose that new sheen which commands a sales premium. But developers
are having to agree to rent out these properties to keep investors and/or
lenders happy. This is one area where yields are strong in London – super prime
houses are commanding big premiums in the rental market, often achieving a 5 to
6 per cent yield, as seen with developer Graham Hedger’s super-prime houses in
Notting Hill.
In Knightsbridge and Belgravia, rental values average £1,097
per week for a flat, rising to £3,243 for a house, according to LonRes. At
Nicolas Van Patrick, we expect these rental values to harden in coming months
as we get more clarity over Brexit and vendors, who have been holding off from
selling, will come back into the sales market, resulting in a limited supply of
rental stock. It is also likely that, following changes to mortgage interest
tax relief, all but the most professional of landlords will exit the market
because yields are generally so poor in London.
As far as tenants are concerned, we are finding that they are
remaining in situ and renewing tenancies as they take a ‘wait and see’ approach
or requesting a two-month rollover which can be broken on either side. Only
once there is more clarity when it comes to Brexit will many of these tenants even
think about becoming buyers.