The lie of the land for lettings

William Raynor looks at the lopsided market for property rents in London

LETTING a property out can be much more complicated than buying or selling it, and by the same token the market is more complicated too. At least, so say those involved, that's the case in in London, and perhaps seldom more than now.

As Malcolm Harrison, spokesman for the Association of Residential Letting Agents (Arla), puts it: "It's not easy to talk in broad-brush terms because the letting market is so split."

The association's 1,250 members - "bonded" and regulated - are split with two thirds in the provinces and one third in London.

In the capital, in turn, the divide between lettings to private and corporate tenants is perhaps most marked, and when it comes to the ultimate split, determined by level of rent and ability to pay, they do not touch the bottom end at all.

"Arla agreements account for 40 to 50 per cent of all made nationally," says Mr Harrison, "and when figures are often commercially sensitive and in London can go up to pounds 7,500 a week for a penthouse, it's terribly difficult to tell what's going on."

We cannot claim the overview and sector summaries that follow are comprehensive or scientific, but we hope they will provide a reasonable snapshot.

Overview

In London, the uncertainties that characterise letting in more normal times have been exacerbated by big selling-price rises that mitigate the attraction of obtaining steady rent, and by fear of further economic dominoes collapsing in the Far East.

"There's a very buoyant demand from the financial sector - the main applicants being Europeans and Americans," says Richard Cotton, a partner at Cluttons Daniel Smith. "And there is also growing interest from institutional investors."

Some who are more pessimistic suggest that, low as the Far Eastern percentage may be, the fall of any more Pacific tigers could have a dramatic effect, sliding down from developments in which investors from those countries have paid small deposits to secure properties "off-plan" but then find that they are unable to meet the balance on completion.

For housing associations, which are squeezed by rents that have to be kept as low as possible and rising land values that have put more and more schemes for further development out of reach, any fall in the market would be manna from heaven.

As, of course, it would for private tenants too, especially those on middle, fixed or fluctuating incomes, and students with grants already stretched to the limit.

The top end

On average, according to figures collected by Knight Frank, estate agents, good four-bedroom houses fetch nearly pounds 1,300 a week in Chelsea, slightly more in Kensington and slightly less in Hampstead. "The only cry", says Juliet Hill of the firm's office in salubrious Kensington, "is that there's a dire shortage of good property to let, and this has meant some fairly amazing rents being obtained over the last six months."

For instance, four to five-bedroom period family houses that were expected to make pounds 3,000 to pounds 3,500 a week are making pounds 1,000 a week more; and good one-bedroom flats fetch up to pounds 400 a week, against pounds 275 a year ago. These properties are attracting tenants who are "mostly young, foreign, corporate, either getting rent as part of their packages, or on company lets, and who particularly love the Central Line on the north side of Hyde Park, because it can get them to the City and on to Canary Wharf".

The Far East factor

In terms of the tenants Knight Frank deals with in Chelsea, Kensington, Hampstead, Wapping and Canary Wharf, the Far East does not appear significant. In Kensington, for instance, Far East customers account for less than 10 per cent - the rest comprising Americans with just under 40 per cent , Europeans with just under 30 per cent and Britons with 16 per cent. And in terms of the firm's client investors - that is, private landlords - the picture is similar apart from Kensington, where Far Easterners account for no less than half.

In the past, according to Juliet Hoeg of Cluttons, Far East (mainly Hong Kong and Singapore) investment in Docklands could also reach 50 per cent, but now she says, there is a lot more local money coming in.

Docklands

"Developers are throwing buildings up like they're going out of fashion", says Ms Hoeg. But the portents are mixed.

In 1996, 800 new units were sold and during 1997 2,500, although in the final quarter figures were back down to the level of 12 months before. "Although seasonal factors shouldn't be ignored", says one authority on Docklands, "what this suggests is that in sales and lettings, the market may slip down a notch or two until the Jubilee Line lifts it up again in the autumn."

Meanwhile, on her books, Ms Hoeg has tenants who are 50-50 corporate- private and flats to let that range from one-bedders at less than pounds 300 a week to a 3,000 sq ft penthouse near Tower Bridge at pounds 1,500.

The middle market

"As a rule", she says, "the cheaper the flat, the higher the return." So for an investor who recently bought a one-bedder for pounds 140,000, she has obtained a weekly rental of pounds 265 and thus a gross return of 9.8 per cent - which, within Zones 1 and 2 on the tube, seems about as good as landlords can get.

"Our maximum in gross return on capital is 7.5 per cent to 8 per cent," says Michael Behr of Behr & Butchoff, estate agents, whose two offices cover a swathe north from St John's Wood to Highgate. "That can net down to 4 to 5 per cent, which means if you've got a property now worth pounds 300,000, you'll clear pounds 12,000 to pounds 15,000 a year letting it and take up to 25 years to get your money back. Sell up and invest the money at 7 per cent, and even after tax you could be earning a lot more."

Hence the growing hole in mid-price lets left by so-called "reluctant landlords" who bought at the peak of the previous upturn, found the only way to recoup was to bring in tenants and, when prices rose, started offloading as soon as they could.

Hence, too, the "Buy to Let" scheme launched by Arla and half-a-dozen members in the Council for Mortgage Lenders. This is catching on in outer London and the commuter belt, where gross yields on property which is cheaper to buy can reach 12 per cent. According to Mr Harrison, Buy to Let is rapidly gaining popularity among those who are "comfortably off, cautious, middle-aged, and want investments they can walk past". For tenants not so comfortably off, the prospect could be distinctly suburban.

Students

For students, the current state of the letting market is a headache - particularly for those on discretionary grants and for the 50,000 or more studying on the mainly central campuses of London University.

"Once they come out of halls of residence", says Bob Miller, the deputy accommodation officer of the University of London Union (ULU), "most want to live near their places of study and not to pay more on public transport, for which they get no concessions.

"But in building up our register of private landlords for them, we're now having to look at all postal districts in Zones 2 and 3, and explain that areas further out can have compensations."

The problem is such, he says, that many are now choosing universities so that they can continue living at home. Otherwise, the best solution is to team up with three or four friends and rent a whole house or flat. In Zone 2, this will cost them pounds 65 per head for each week, and the ULU's management team can help, ideally taking over the head lease and acting as landlord itself. The ULU also has properties of its own but only with beds for a lucky 600.

The 'social' end

London's 470 housing associations, says Chris Hampson, a policy officer at the National Housing Federation, are "being squeezed from all sides".

To get the standard 50 per cent capital grants they need from central government, they have to keep their rents as low as possible; yet to raise the balance for new developments through the usual private channels, they need in the present climate to show much higher returns. And because, with rising land values, the private sector has been encroaching more and more on its territory, the housing association movement has had to abandon many new schemes or use up "land-banks" accrued in less inflationary times.

None the less the average housing association rent across London for one to three-bedrom flats has remained at a mere pounds 59.50. But don't get too excited - unless you are on a local council's waiting list and already have social housing priority.