London Bankers Become Landlords as Rents Hit Record
Vivek Jeswani became a landlord by accident when Deutsche Bank AG (DBK) transferred him to New York two weeks after he moved into a new home in central London. Now back in the U.K., Jeswani views the apartment in Baker Street, the fictional home of Sherlock Holmes, as one of his best assets and is about to buy another home to expand his rental business.
“There are no other investments as attractive and you’ve got some security if you’ve got an asset you can use yourself,” the 36-year-old risk officer at China Construction Bank Corp.’s U.K. unit said. “There’s a good yield over 5 percent and being in central London, you’ve got demand domestically and internationally.”
London rents have risen more than 6 percent in the past year to a record, even as job cuts by banks reduce employment in the financial-services industry to a 20-year low. Technology and media companies are drawing workers to the city, while lenders restrict mortgages to all but the most creditworthy customers. That’s encouraged individual investors and companies including KKR & Co. to enter the rental market as central banks push down yields on debt to record lows.
The average rent in greater London climbed to 1,240 pounds ($1,974) last month, according to an index compiled by HomeLet. That was up 32 percent from October 2009, when rents averaged 940 pounds per month. The cost of renting a property in the rest of the country increased 7 percent between 2009 and 2012, said Homelet, the U.K.’s largest referencing and rentals insurance company.
The jump in London mirrors that seen in Manhattan, where the average apartment rent was $3,195 in September, 10 percent more than a year earlier. In Berlin, the average monthly rent was 524 euros ($670) in the first half, 13 percent more than a year ago, according to data compiled by Jones Lang LaSalle.
“Improving economic performance creates demand and migration regionally and nationally,” said Yolande Barnes, a director of Savills Plc (SVS)’s research team. “The economy of those cities is strong because they are world cities,” while asking prices are particularly high, she said.
In Britain, rising rents are encouraging investors to take out loans for buy-to-let transactions, a type of mortgage that helped fuel speculation during the housing boom. Loans of this kind totaled 4.2 billion pounds in the three months through September, the most since the third quarter of 2008, when the housing market was crashing.
Jeswani bought his first apartment in 1999 on Baker Street for 100,000 pounds and said he plans to spend 1.35 million pounds on the latest property, which he will move into, and then rent out the place where he’s currently living.
He’s renting out the one-bedroom Baker Street property in a mansion block by Regent’s Park for 395 pounds a week. That compares with an average of 475 pounds per week in the city’s Chelsea neighborhood and 550 pounds in nearby Knightsbridge, according to the Mayor of London’s website.
Demand for rental properties is growing because first-time buyers in the city typically need down payments of about 25 percent, according to the Greater London Authority. The average deposit is 57,175 pounds, more than double the national figure, said Halifax, the mortgage unit of Lloyds Banking Group Plc.
The restrictions on lending are reflected by a slump in the number of mortgages that have been granted in the past five years. Gross mortgage lending amounted to about 141 billion pounds in 2011, down from 363 billion pounds in 2007, according to the Council of Mortgage Lenders.
In August 2007, before the Northern Rock Plc bank collapse sparked the U.K.’s financial crisis, there were 829 mortgages available for those with a 10 percent down payment. Today, about a third of that number are offered at that loan-to-value, according to personal finance website moneyfacts.co.uk
In comparison, there are 101 buy-to-let products available with a loan-to-value of 70 percent at the moment, compared with 47 in August 2007, moneyfacts.co.uk said.
At the same time, bond investors are more willing to buy securities tied to buy-to-let mortgages. The extra yield they demand above benchmarks to hold the debt fell to 1.55 percentage points this month, half the spread in July and down from 11 percentage points in June 2009, according to JPMorgan Chase & Co. Paragon Group of Companies Plc, which lends mainly to landlords with more than 10 properties, sold 175 million pounds of bonds last month. The mortgage provider fell 1 percent today to 238.30 pence at 4:35 p.m. in London, trimming its gain this year to 30 percent.
Buy-to-let investors are likely to benefit from the Financial Service Authority’s mortgage market reform. From April 2014, lenders will need to be stricter on verifying incomes and must assess borrowers’ ability to handle higher interest rates.
“They don’t regulate the buy-to-let market,” Neil Chegwidden, director of residential research at Jones Lang LaSalle Inc. (JLL), said by phone. “Buy-to-let investors tend to be more affluent. Most have more than one property, so you’ve got greater security by writing that kind of mortgage.”
London rents are expected to rise 3 percent this year and 4 percent the following year, according to Savills. That’s also being fuelled by the lowest number of home completions in London for 18 months in the quarter through September, according to the Department for Communities and Local Government.
“For investors, the U.K.’s private rented sector looks an attractive option,” Barnes said.
KKR, the buyout firm led by founders Henry Kravis and George Roberts, is considering financing development of rental and for-sale apartments in the capital. The company is seeking to meet demand for housing from both U.K. residents and international renters and homebuyers, said Ralph Rosenberg, head of KKR real estate.
Rents in the U.K. capital will grow 26.4 percent in the five years through 2017, Savills said. That compares with 24 percent in London’s best neighborhoods, such as Knightsbridge and Belgravia, and 18.2 percent nationally.
That’s ideal for those seeking a place to put their money as potential returns diminish in London’s financial-services industry.
European and Japanese financial firms, with securities trading hubs in London, are cutting positions amid volatile markets and increased regulation in the U.K. UBS AG plans to cut 10,000 jobs as Switzerland’s largest lender shrinks its investment bank.
The decline in City jobs reflects a 20 percent fall in equity trading this year compared with a year earlier and a 50 percent fall in international orders for equity trading. U.K. mergers have dropped by a third, while international deal-making has declined more steeply, the Center for Economics and Business Research said this month.
The U.K. economy’s weakness is crimping the government’s tax revenue from company profits and contributing to an increase in spending. As a result, Britain’s budget deficit widened unexpectedly last month.
Technology workers relocating from overseas will help protect London’s richest rents from the gloom overhanging a European finance industry that’s cutting thousands of jobs this year, according to Savills.
This type of migration has helped drive the type of tenants Jeswani rents to, which have included people from India, Lebanon, Morocco and Switzerland. Soon, he will add a French couple to that list, though he’s unlikely to increase his rent.
“Given that there’s a huge demand, I’ve used that to filter out the type of tenant,” he said. “So if I don’t want students I can be fussy. I can avoid void periods and if someone wanted to share, I don’t want to get wear and tear, so I look for a single professional. I became an accidental landlord.”
To contact the reporter on this story: Chris Spillane in London at email@example.com.