Why London Has Regained Its Popularity With Renters

The return to (part-time) office life

There’s no denying that the property market has seen its fair share of changes over the past few years, and the commitment of property ownership has become less appealing to many. This has pushed up rentals and made buy-to-let a more appealing option, due to its versatility, including commercial lets. Home and office lives have had a huge reorientation since the pandemic, and while patterns vary across industries and employers, hybrid working is the way forward for many. 

Hybrid working is one of the reasons why rentals have regained popularity – rentals allow for more versatility for businesses. There is also the opportunity to downsize or upsize depending on the needs of the business and with more adaptability than ownership offers. And for workers, after enforced remote working, the momentum to get back to in-person collaboration and a change of scenery has increased, fuelled by feelings of isolation. 

Capital’s appeal for buy-to-let investors

For buy-to-let investors, the capital is an appealing option and experts agree that this is expected to continue throughout 2023. In particular, the high-end rental market has experienced a resurgence in the past year thanks to high demand from the gradual return of tenants from around the world. The average price of monthly rents in London increased by over 15% in 2022, as workers were called back from home working and now they’re paying for the privilege of living in London once again. For investors, this means great profits and a healthy return on their investments. 

The drive to return to office life will look different, however. Office requirements are changing, with more businesses seeking collaborative spaces and a desire for commercial premises with more amenities that support development and wellbeing. Companies are also still working out how much flexibility they need to suit hybrid teams and hub-and-spoke working, where businesses have a primary headquarters in the city centre with several satellite offices closer to where staff live. What has become very clear is that businesses looking for real estate are using it as a strategic device to attract top talent and facilitate collaboration among staff. 

London’s hot spots regaining popularity

While there may have been a mass departure from London during the pandemic, now life is hitting its ‘new normal’ stride and people are returning. More people are looking to London’s popular hotspots, from Kensington to Bloomsbury, with properties getting snapped up quickly in these thriving neighbourhoods. 

For the space factor and luxury living, these areas have become the go-to, especially for family-sized properties. The best-in-class housing in areas like Holland Park, Notting Hill and Chelsea have seen a lot of interest in recent months, areas which previously suffered during the pandemic. 

Some of London’s top-performing areas include the North West region, specifically Maida Vale, Little Vence and St John’s Wood. These areas have seen a remarkable 6.1% growth in rental prices over the past three months, an increase largely attributed to an influx of students seeking accommodation while attending university and younger professionals returning to the city after the pandemic in search of high-end rental properties — both of which are prepared to pay a premium out of necessity. 

Likewise, East London neighbourhoods like Hackney and Bethnal Green have seen a rise in rentals and rent prices, driven by young creatives and families looking for more affordable properties in this area compared to buying. 

Competition for school catchment areas

Entry to London’s prestigious schools is incredibly competitive and the properties close to them are all but unaffordable to the vast majority of property buyers. Even those with a healthy budget to play with have found themselves renting in order to avoid the high price tag and still get their children into the top schools. 

The emergence of fiercely local property price bubbles has resulted in a rise in renters, even amongst the very wealthy, with many families paying over the odds for a home just to be in with a chance of their kids getting into their first-choice schools. 

Renters in more expensive areas enjoy the lifestyle and the style of home they live in, but may not be able to afford the runaway prices of property, even if they’re high earners. From top-rated schools in St John’s Wood to Garden House School in Chelsea and Eaton Square School in central London, affluent families are opting to rent instead of buy to be in with a chance of being accepted. 

Skipping steep taxes

It’s not just affluent families looking to rent rather than buy at the moment. Even A-listers and elite tenants are avoiding buying in London, from professional footballers to CEOs and tech billionaires, with the likes of pop stars Rihanna and Justin Beiber reportedly having been renting UK properties. But why? One answer is flexibility, as people in such industries often move around a lot or travel frequently and only need to stay in one place for a matter of months. 

But, an increasingly common reason is that the amount of tax they’d have to pay if they purchased a property makes it a more financially sound investment to rent. The sum of property tax has risen exponentially in recent years with the rise of stamp duty costs and an additional 2% levy on foreign buyers. 

This levy leaves affluent overseas buyers with rates of up to 17% of the purchase price when it comes to stamp duty costs, making renting a much more cost-effective solution to housing needs when stamp duty could result in fees of several million. It’s no wonder that rental growth in London’s most expensive areas has grown considerably since 2021, growing at a much more rapid rate than elsewhere in the UK. 

Flexibility and convenience 

If the pandemic taught us anything, it’s that there’s definitely value in being adaptable and having options, which is precisely what renting offers. Many people have decided in recent years that while home ownership was once the goal, it now doesn’t necessarily offer the same financial benefits. 

There’s far less stress with a rented property for tenants, and it makes larger, more central properties more accessible for people who wouldn’t be able to get a mortgage on a home of the same size. In some cases, rents also include bills and council tax, making it a much cheaper option compared to owning, especially given higher energy costs at the moment. Renting also gives tenants more versatility in terms of their location, especially given the rise in remote working. As a renter, workers don’t need to worry about the hassle of selling up or letting their home if they choose to work abroad or travel for an extended period of time. There are no financial ties for tenants if they rent rather than own, and that’s a huge advantage.

A growing Build to Rent sector

The growing Build to Rent sector has the potential to solve the UK’s issue with rental affordability. Research from Zoopla shows that a lack of affordability in the rental sector hit its highest level at the end of 2022 and costs the average single earner over one third of their income, with Londoners seeing the highest rent rises in the country. Supply and demand is at the heart of the problem, as we’ve seen, but Build to Rent could resolve the problem. 

Build to Rent is a property development designed with the intention of appealing solely to renters. Introduced in 2012, it’s now gaining popularity thanks to backing by the Government and the Home Building Fund. Build to Rent will help more properties to become available in major cities, including London, offering a level of service and flexibility that home ownership doesn’t necessarily provide, as well as benefiting local areas. It offers greater stability for people who are tired of living with the threat of eviction, through no fault of their own, and it delivers better quality homes. 

The continued investment in Build to Rent developments are spreading throughout the city, with new properties planned for Old Kent Road, Wembley and Wimbledon, as well as Canary Wharf’s iconic skyline. And as the market evolves throughout London, the financial return also increases and outperforms the private rental sector, offering as much as a 20% rental premium compared to a traditional rented property. 

Challenges to consider

So, is it all good news? Just like any aspect of the property market, the rental sector isn’t without its challenges. 

Cost of living

Experts have found that rents have been increasing across the capital for the past year, in part because of the rise in flexible working. Between January 2022 and January 2023, rents in Central London increased by an average of 25%, followed by a 20% rise in South London and a 19% increase in East London. Notably, three-bedroom flats in London experienced the highest annual rental price surge at 25%, potentially due to the “race for space” phenomenon, where people value larger homes more after spending more time indoors. 

The cost of living crisis has encouraged some tenants to stay put rather than risk higher rents and moving costs associated with buying, which has stagnated the usual levels of rotation within the market and contributed to the rise in central London prices. The high demand for properties that built up after the pandemic has led to a surge in applicants seeking properties to rent in the capital. 

The amount of money tenants are budgeting for rental outgoings has had to increase to accommodate the cost of living rises, with the average applicant putting forward as much as £500 per week as their top price to pay, according to letting agents at Foxtons — a 9% increase on January 2022.  

Demand is outstripping supply

Prime central London postcodes are some of the most desirable in the UK, both for rent and sale, and in areas such as Mayfair, it’s not unusual to see million-pound price tags attached to the luxurious homes here. London has long faced a struggle where supply and demand for housing is concerned, and it’s made the rental market particularly competitive — the result of landlords shifting to longer-term tenancies and people returning to the capital post-pandemic. There’s now record demand and a shortage of available properties, making renters extremely competitive when homes come on the market. 

The shortage of new rental homes coming onto the market has pushed prices to their peak, but now prices are starting to stabilise and are expected to plateau by 2024. The lack of available stock is likely to be a contributing factor in where this sector goes over the coming year, but the rising cost of living may lead to rental levels settling out of necessity. 

Despite financial challenges and political uncertainty, experts remain hopeful about the London lettings market, and 59% of respondents of a RICS survey stated that they expected further growth in the coming months — positive news for tenants and landlords alike.

The data shows that buy-to-let property is still delivering revenue growth, and it could be a great option for those looking for a steady income and have the time to wait for longer-term returns. Purchasing a high-quality property in an in-demand area could yield great rewards, especially since more people are looking for flexibility at the moment. The overall outlook for 2023’s rental market looks promising, but certainly not without its issues. Lettings are likely to remain resilient with demand expected to outstrip supply, something landlords and would-be investors should take note of.