The latest lockdown will keep rental demand in London very weak and prolong the drop in rents there. There is no doubt that they will recover in the summer if vaccines are successful and the virus restrictions are eased, but we think that some of the reduction compared to rents elsewhere will be permanent.
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- The latest lockdown will keep rental demand in London very weak and prolong the drop in rents there. There is no doubt that they will recover in the summer if vaccines are successful and the virus restrictions are eased, but we think that some of the reduction compared to rents elsewhere will be permanent.
- The new lockdown prolongs a perfect storm for rental demand in London. Mandatory working from home, the closure of the city’s cultural attractions, shops, and the fact employment in London has been particularly hard hit will keep tenant demand very weak in the near term. Newly agreed let prices in the capital were already down by 5.2% y/y in November 2020 and this could grow to an 8% y/y drop in Q1. (See Chart 1.)
- Assuming a successful vaccine rollout and restrictions being eased, London rents will recover much of their recent fall in the summer. The return to office working, even if only for two or three days a week, the reopening of attractions, and the promise of interaction with friends and colleagues will draw many renters back to the capital. (See here.)
- But some of the drop in London rents relative to elsewhere is likely to be sustained. First, while some will live in London despite the increase in home working, for others living with parents or renting or buying a house in a more affordable area will be a more attractive option. (See here.) Second, it will take time for the larger drop in employment in London than elsewhere to be made back up. And some of the jobs in the retail and hospitality sectors that were sustained by office workers, such as city centre coffee shops and gyms, may be permanently lost.
- Outside London, rents have been remarkably resilient. (See Chart 1 again.) According to the RICS national tenant demand has risen in recent months, particularly in rural areas. Like homebuyers, renters appear to have also reassessed their location and space requirements due to home working.
- But the impact of the pandemic on tenants is still being mitigated by the extended notice period for landlord possessions (six months for notices served until March 2021) and the furlough scheme. A National Residential Landlords Association survey recently showed that 7% of tenants are in arrears, up from 1% before the pandemic. And based on past form, the rise in unemployment to 7% that we anticipate this year is consistent with a 2% drop in national average rents. But we doubt the drop will be that large because we expect a swift economic recovery that would mean unemployment is not be elevated for long.
- The official measure of rents recorded by the ONS, which we forecast, measures the price of all ongoing rental contracts. It is therefore far less volatile than measures based on the price of new lets like the Zoopla index. While it is a better gauge of landlords’ income, it is a poor guide to current market conditions.
- The drop in newly let prices in the capital will grow further in the near term, perhaps to 8% y/y in Q1. Outside London, we think new let prices will stagnate rather than drop. Moves in the official measure of rents will be less dramatic, as usual. Crucially, though, we expect London rents to be marginally below their January 2020 level at the end of 2022, but rents outside London to be 3% higher. (See Chart 2.)
Chart 1: Zoopla New Let Prices (% y/y)
Chart 2: ONS Index of Private Rents (Jan 20=100)
Sources: ONS, Capital Economics
Andrew Wishart, Property Economist, +44 (0)7427 682 411, firstname.lastname@example.org