London Rents Drop In Line With Property Prices

London Rents Drop In Line With Property Prices

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London residential rents are falling hand-in-hand with property prices and landlords have to reduce rents to entice tenants, according to latest reports.

Rents in the capital are now 5% lower than they were in December 2007 and at their lowest since December 2005 and have fallen for the ninth month in a row without showing any signs of abating.

The latest Land Registry property price figures show prices in London fell 2.3% in December, leaving the average house price at £307,071.

Rents also fell an average 2.3% in the same period across Greater London according to the primelocation.com monthly rental index.

The worst rent drops are in Islington, the City and Docklands, says the report.

The decline in rents is blamed on ‘accidental’ landlords and developers trying to let unsold property until house prices start to rise.

Fewer overseas workers seeking jobs in the capital as the pound has plummeted against the euro and job losses in banks and financial services are also cited as a contributing factor.

The overall result is more letting property is on the market at competitive rents as landlords would rather have paying guests contributing to the mortgage than having to cover voids out of their own pockets.

The winners are tenants, who can afford to choose from a larger pool of good quality property at more competitive rents.

The real losers are developers. In the end, they will lose the premium of selling a new property because putting in tenants makes the development second-hand.

Many have no choice as they are left holding properties on development finance with no exit route to cheaper lending and no buyers offering a financial escape.

The fear is that when house prices do start to rise, property owners and developers who are letting because they can’t sell rather than as an investment, may release a glut of property on the market. This could knock back prices in the property market just when the sector starts to turn.

Strategy in the buy-to-let market is changing with the advent of lower mortgage rates and falling property prices as landlords with sensible borrowings on good quality family homes are now making money from rents rather than capital appreciation.

For landlords who have held property for some years, this is tax free income as rental losses from times of high interest rates will see them through for a year or two before letting starts to make a profit.

By that time, a general election is due and interest rates may rise again.

Falling rents are squeezing small buy-to-let investors with highly geared portfolios of lower quality property or new build apartments who are finding tenants hard to come by.

Accountancy group UHY Hacker Young is handling receivership of a number of property portfolios, of which struggling private landlords owned half.

The Association of Residential Letting Agents (ARLA) says would-be sellers who can’t find buyers are one of the main forces pushing down rents. Void periods have extended slightly from 3.4 to 3.8 weeks.

Photo credits: Larsz [via flckr]