Falling London rents force investors to look at alternative investment structures

Over the last two years London rents have forged ahead of rents in the rest of the UK, hence London landlords have comfortably beaten inflation with rental increases …

UK Houses

Over the last two years London rents have forged ahead of rents in the rest of the UK, hence London landlords have comfortably beaten inflation with rental increases of 2% per year between June 2015 and June 2017. This is in spite of a year-on-year drop of 2.6% for the month of June 2017.

Headline figures suggest that London rents have major affordability issues

Research by Hometrack indicates that rents have been increasing by an average of 4.5% per annum since 2007. Initially, wage growth kept pace with this, but since 2013, rent inflation has significantly outpaced the growth in average incomes.

Given that London has long had some of the highest rents in the UK, it’s hardly a surprise that this disparity would be most obvious there. One very feasible explanation for the recent drop in rental prices is that landlords are doing their best to keep rents as low as they can to help tenants who may be uncertain about how their financial situation will develop in the light of the forthcoming Brexit.

Looking beyond the headlines

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While London is undoubtedly an expensive place to live, it’s at its most expensive if you are a single person living on your own. This is presumably why flat-sharing is so prevalent in the London rental market, particularly in city-centre areas, which are popular with young adults in their pre-child life stage. When the rent of a one-bedroom flat is split between two people, affordability becomes much less of an issue.

Times are taxing for private landlords

While landlords in London may want to keep rents as low as they possibly can, in recognition of the fact that we are living in uncertain times, the fact still remains that, as a minimum, landlords have to cover their costs and recently those costs have started to increase and may increase further depending on what way the political winds blow.

Private landlords may also find themselves increasingly reliant on agencies to deal with the legalities of property management (such as the right-to-rent scheme) and if agencies are taking on both more work and more complex work, then they are presumably going to need to charge for it and ultimately those fees will need to be fed back to tenants if the property is to remain viable as an investment. London landlords may also be feeling apprehensive about the government’s proposal to cap deposits at one month’s rent.

The fact of the matter is that London is a destination which attracts a lot of people whose financial and professional track records are meagre to non-existent, currently higher deposits can be used to mitigate this risk, but if this is banned, then landlords may become much more reluctant to take on tenants without a proven rental history.

Looking at alternative approaches

By this point, many private landlords will already have heard about the option of transferring their property portfolio to a private company, in short, while this currently has advantages from a tax perspective, the upfront costs and complication may mean that it is an impractical solution for smaller-scale landlords. An alternative approach (or one which could be used alongside becoming a limited company), would be to look at areas outside London, such as the north of England, where the relative affordability of house prices makes it easier to keep rents low and still achieve a good yield.

Author Bio

Hopwood House are specialists in property investment, with a wide range of property investments in London in the buy-to-let and commercial property markets.

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