London Renters Win in Billionaire Playgrounds as Values Soar
College student Phil Morris and his three roommates split a monthly rent of 2,600 pounds ($4,400) for a four-bedroom row house in London’s Fulham district. A new homebuyer would pay about three times that much for a mortgage on a similar property in their postcode.
“We were surprised that we could live in Fulham, in such a wealthy neighborhood,” said Morris, 21, a chemistry major at Imperial College London. “It’s a nice, family-sized property in a pricey area.”
Home prices in London’s best districts have risen three times faster than rents over the last five years, according to broker Knight Frank LLP, making it much cheaper to lease a home than to own one in neighborhoods like Knightsbridge, Mayfair and Kensington, home to billionaires including Lakshmi Mittal and Len Blavatnik. While the gap probably will narrow in the coming months as leasing demand rises, constraints on raising rents mean change will be slow in coming.
“People are thinking, ‘Let’s stay put and wait for six to 12 months and see what happens to the sales market,’” said Gary Hall, a partner at broker Knight Frank LLP. “There’s so much press at the moment about the sales market overheating that people are just not prepared to pay the prices.”
While it’s generally cheaper to buy a home in the U.K. than to rent, the opposite is true in London’s prime neighborhoods, according to Lloyds Banking Group Plc. (LLOY) Rents in central London’s best districts fell 3.4 percent in the three years through June, according to the Knight Frank report.
Central London property values have vastly outpaced U.K. economic growth as foreign investors flooded into the market and buyers took advantage of the Bank of England’s record-low benchmark interest rates to borrow ever greater multiples of their income.
On average, London buyers take out mortgages worth about 3.1 times their annual income, equal to the peak before the financial crisis and higher than any other U.K. region, according to a study by EY Item Club, the London-based group sponsored by EY, formerly Ernst & Young. Prices have surged 65 percent in prime areas since June 2009, according to Knight Frank.
“The factors that were driving capital growth weren’t applicable to rental growth,” said Liam Bailey, head of residential research at Knight Frank. London price increases will slow “a lot” in 2015 and rise by 4 percent to 5 percent in the longer term if the economy remains robust, he estimated.
Rents will climb 3 percent to 4 percent this year and next and as much as 4.5 percent in the long term, meaning the gap between rent and price growth “won’t narrow significantly,” Bailey said. Rents rose in line with inflation over the last five years, Knight Frank estimates.
The average house price in Fulham, known for its tree-lined roads, restaurants and art galleries, is now more than 1.9 million pounds, according to broker Foxtons Group Plc. (FOXT) That’s more than 10 times the national average of 172,011 pounds, according to Land Registry data.
A person buying the average home where Morris lives would pay more than 7,100 pounds a month for a 25-year mortgage with a 20 percent down payment and an interest rate of 3 percent. That’s 4,500 pounds more than the student and his roommates pay.
The average home in Kensington & Chelsea costs more than 31 times the median income of a full-time worker in the borough, according to a February report by the Greater London Authority. In Westminster, which includes the Mayfair district, it’s almost 20 times earnings and in Hammersmith & Fulham homes cost 16 times salary. The average for England is 6.8 times a full-time wage, the report said.
Christophe Choquart, a 46-year-old banker in the equity sales unit of Lisbon-based Banco Espirito Santo SA, has been leasing a two-bedroom apartment near Gloucester Road in west London’s Kensington neighborhood since April for 2,100 pounds a month. He is considering buying a home next year in Chiswick or Wembley, outside prime central London.
“I’m pretty open to renting for a while,” he said in an interview, citing the pound’s strength. “Where I rent now is probably too expensive for a family of four.”
Increased corporate budgets are driving up rents as the economy grows, Savills said last month. London will add 368,000 workers over the next five years, a quarter of them in technology industries, the broker said.
“We expect to see the downward trend of yields over the last four years begin to be reversed,” broker Douglas & Gordon said in its July market report. The yield is rental income as a proportion of the property’s value.
Landlords, who face the possibility of falling prices and higher borrowing costs, may now be able to raise rents as the supply of homes fails to keep up with the growing demand, the broker said.
For the first time in more than 40 years the number of households equals the number of homes in London, according to Christine Whitehead, a professor at the London School of Economics who researches housing. “There is nothing left for vacancy or mobility or anything else,” she said.
Christian Scheuring, a 32-year-old project manager at Internet marketing company Bazaarvoice Inc., said he wants to buy a home even though he gets a good deal on his rent in Wapping, between the City of London and Canary Wharf (SBD) financial districts. His rent of 230 pounds a week is helping him save for a deposit.
“Property prices have exploded around me,” he said. “My landlord probably knows he can get more for it, but he hates finding new tenants and dealing with letting agents.”
Scheuring said he’s concerned he will be priced out of the city center.
Prices “will consistently rise faster than income” in London due to long-term supply factors, according to a July forecast by the U.K. government’s Office for Budget Responsibility.
Morris recently renewed the lease on his shared Fulham home after agreeing to a 3 percent hike from the current 160 pounds a week. If the increase had been a little bigger, he said he would have considered leaving Fulham. He may not need to worry.
“Rents tend to stay within the bounds of income growth,” said Johnny Morris, head of research at broker Hamptons. “The underlying income growth just isn’t strong enough to support growth equivalent to the sales market.”
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