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.

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