Photographer: Simon Dawson/Bloomberg

Croydon Beats Chelsea as London Investors Chase Rental Returns

Updated on
  • Greater London suburb Thornton Heath is fastest-growing market
  • Value of buy-to-let remortgaging rose 64% in last 12 months

The fastest-rising neighborhood in London’s property market isn’t posh Knightsbridge or hip Shoreditch, it’s Thornton Heath, an unglamorous suburb of commuter-town Croydon that’s almost nine miles (14 kilometers) from Buckingham Palace.

While central London growth slows, values are jumping in some of the city’s cheapest neighborhoods as investors bid for homes they plan to lease. Prices in Thornton Heath, whose high street is peppered with halal butchers, corner stores and kebab joints, climbed 14.7 percent in the 12 months through June, the most of any district in the city and suburbs included in Greater London, according to property researcher Hometrack.

“It’s more investors looking to buy to rent than people actually wanting to live there,” said Derrick Drummond, sales and letting manager at Drummonds Property & Finance Group in Thornton Heath. “Foreign investors are now coming to areas that you wouldn’t have expected to get gentrified.”

Rents in London reached a record last month, attracting so-called buy-to-let investors who often pay only the interest on their mortgage each month. While that’s boosting values on the city’s periphery, where lower prices can help produce a higher return on investment, the Bank of England is concerned that this type of deal may be inflating a housing bubble.

Better Returns

Rental yields in Thornton Heath, a 23-minute train ride from Victoria station in central London, are about 5.2 percent for a two-bedroom apartment, according to LendInvest, a crowdfunded mortgage lender. The yield stands at 2 percent for homes in central London’s best districts, according to broker Hamptons International.

“Some of the lowest-value markets in London are the ones now seeing the fastest house-price inflation,” said Hometrack research director Richard Donnell. “As an investor, you’ve got to find above-average yields, which typically means you move towards markets with lower capital values.”

Thamesmead, a district about four miles east of London City Airport, is another low-cost area that’s attracting investors, Donnell said. The district formed part of the backdrop for Stanley Kubrick’s dystopian world in the film “A Clockwork Orange.”

Central Slowdown

The demand for homes in cheaper districts contrasts with London as a whole, where value growth is flattening out, Donnell said. Prices gained 2 percent in the city’s best central districts in the year through June, according to broker Knight Frank LLP. Values in Chelsea were down 0.7 percent in the period, while Mayfair gained 3.1 percent.

Bank of England officials in July asked for a review of potential threats to the country’s financial stability from loans for rental homes, which made up almost 20 percent of all new mortgages in the first quarter compared with about 4 percent in the early 2000s.

U.K. buy-to-let investors borrowed 1.4 billion pounds to buy homes in June, 40 percent more than a year earlier, and took out 1.8 billion pounds ($2.2 billion) for remortgaging, a 64 percent jump, according to data compiled by the Council of Mortgage Lenders. That compares with a 22 percent gain in total mortgage lending.

OneSavings Bank Plc, a buy-to-let specialist lender backed by JC Flowers & Co., is offering landlords lower-ranking mortgages that allow them take equity out of their portfolio to buy more homes, according to Chief Executive Officer Andy Golding.

“The only way you’re going to slow down a demand market for rental property is to either build a lot more social housing or build a lot more affordable housing,” Golding said.

The BOE, which is seeking extra powers to regulate the buy-to-let market, has expressed concern that any decline in house prices could be amplified by investors selling rentals, particularly when interest rates rise and make leasing less profitable.

Chancellor of the Exchequer George Osborne in July announced a plan to reduce the mortgage-payment tax break given to U.K. landlords over four years starting in 2017. He will limit the tax relief to the basic rate, which currently stands at 20 percent, compared with a reduction of as much as 45 percent today. The move will check growth of buy-to-let lending, Moody’s Investors Service said in a report this month.

Demand for rentals is set to keep rising, with 26 percent of U.K. households leasing from private landlords by 2022 compared with 18 percent in 2013, Phillip Monks, chief executive officer of Aldermore Bank Plc, said in a call with analysts on Thursday. “The buy-to-let market continues to represent a significant growth opportunity,” he said.

While low-cost properties are generating higher returns, they are generally less attractive to buyers, according to Hometrack’s Donnell. “The risk of going into cheaper markets is that if you have to sell in a hurry, who’s going to buy from you?”

For now, though, adding more homes remains attractive. Total return, a combination of rental income and value gains, was 11.5 percent in London in the 12 months through July, according to brokers Reeds Rains and Your Move. That compares with a 2.3 percent return from U.K. equities in the same period.