City centre rents are falling, according to Rightmove’s recent lettings market snapshot. Some major city centres have seen annual falls of 12% and more. This follows a significant contraction in demand for rented accommodation in city centres.
I can see why tenants are currently not keen to rent in the city centre; it’s like a ghost town, with bars and restaurants shut, along with non-essential shops, gyms, casinos, etc. If you needed accommodation for 6 months, living in a 5th floor city centre flat with no balcony doesn’t seem too appealing.
The problem has been exacerbated by the fact a significant number of tenants are now working from home, with many now aware that for them this is likely to become the new ‘normal’ when the lockdown ends. I know from the experience of the past 9 months that Zoom meetings are not practical for training new starters, nor for brain storming, therefore I anticipate most companies will want staff to return to their offices for a number of days a week at least, I can see many working from home for two or three days as well.
I can see changes in the office market, as I can in the retail market, with office work space being changed from small, individual offices to more meeting rooms and training centres. For those companies who adopt this new ‘normal’, appropriate space will be needed in their homes – working from a dining room table or in the corner of a bedroom on a temporary basis will not make a happy home life as the years go by!
The typical one and two bedroom city centre flats of 450 sq.ft. to 800 sq.ft. really don’t meet the requirements for working from home and relaxing, especially if it’s occupied by a couple and both need to work from home a couple of days a week.
As demand has waned for city centre accommodation, so tenant demand has increased for suburban properties over the past 12 months. If fact, the rise we witnessed in rents in 2019 in north west Leeds continued throughout 2020, and it appears this is being maintained into 2021 by the number of tenants we have on our books.
Not only is demand rising for properties with a larger floor area i.e. 850+ sq.ft., but the demand is especially strong where there is an additional bedroom or reception room which can be used as office space. Where this is coupled with outdoor space, the demand rises even further, tempered only by the tenant’s affordability.
My conclusion at this moment, is that we’re going to see a significant short-term readjustment of rent levels in the city centre coupled with a hike in suburban rents. In the medium-term city rent levels will stabilise as we see the reopening of the economy – hotels, bars, restaurants, cinemas, casinos, etc. will all require staff, and with changing shift patterns and night time work for many, their employees will, I suspect, still prefer to live nearby i.e., in the city centre.
Long-term, it’s difficult to predict what will happen to city centre rents. There are a significant number of developments in the pipeline for the city – only this week the old Tetley site as been earmarked for conversion into a city ‘park’, with surrounding retail, office and residential accommodation. Call Lane is currently being redeveloped with a focus on residential and pedestrian use, which nicely links the commercial area of the city with the riverside, an area with a huge amount of further potential.
What can safely be determined, is that rental demand in the suburbs is not going to wane any time soon. It will be some years before the city centre is considered ‘residential’ enough for families, unlike many other cities around the globe. We don’t have the open spaces, schools, medical centres, etc. in the city, let alone the sort of accommodation families are looking for. Yet, the suburbs already cater for family life, there’s just a shortage of housing to meet the demand. Until we see a significant increase in housing projects that meet the requirements of average families, demand on housing is going to see rental values continue to rise.
Existing landlords are facing higher tax bills due to recent changes in the tax system. Those with high loan-to-value mortgages are not going to make a profit from their property which has led to a number of landlords selling-up. This may be excellent news for first time buyers as it means more properties in the market to choose from. However, each time a rental property leaves the market, it has an incremental effect on driving rental values up on the remaining rental properties. It will cost tenants more.
Landlords can circumnavigate the tax changes by purchasing property in a Limited Company (still paying Corporation Tax on any profits) but they cannot easily transfer existing properties into Limited Companies without incurring Capital Gains Tax and Stamp Duty Land Tax. Owning property in a limited company can be excellent for Inheritance Tax and retirement planning, without the necessity to sell the assets and incur Capital Gains Tax.
Further tax changes on individual landlords may well see even more properties leaving the rental market. Do I hear cheering from some quarters? I’m sure I do, and rightly so for some. But if you are a tenant faced with renting for the foreseeable, this can only result further increases in already expensive rents.
With record low interest rates and rising rental values, this is an excellent time to buy investment property in north west Leeds. With gross yields in the suburbs of 6%+ for one and two bedroom properties, the returns are way above rates in deposit accounts. The bank base rate is not expected to change any time soon, and if you are concerned about rates potentially rising, there are some excellent fixed rate mortgage deals available today. Whether you buy a property in your own name (if you are buying for cash or only need a small mortgage, this may be your preferred choice) or in a new limited company (to maximise tax relief), I wouldn’t hesitate. I’m expecting a mini boom over the next couple of years in the suburban rental market, with steady growth thereafter.
– A Newsletter Editorial by Director Michael Moore FNAEA, MARLA.