The Daily Telegraph - Saturday - Money
‘Fomo made me return to London’ Want 12pc rental yields? Make the council pay
As cities reopen, buyers and renters are quickly moving back, writes Melissa Lawford
Overnight, lockdown erased many of the reasons that compelled people to pay extra to live in city centres. They decamped to the suburbs and countryside in well-documented droves.
But now bars, restaurants, museums and galleries are reopening, and we are approaching what analysts have hailed a new “roaring Twenties”. The urban gravitational pull is back – and with it, the sea change in the property market is slowly but surely reversing.
In June last year, Matt Richardson, 27, moved out of London with his girlfriend, back to Southampton where they are both from. They wanted to save money while the city was in lockdown and they were working from home. But last month they signed a new tenancy and moved back. Now, they are planning to buy their first home in south London.
“It was brilliant to see family and have a break from city life, but if anything it’s made me realise how much I love living in London,” said Mr Richardson. “With everything beginning to open up, I knew I’d get serious Fomo [fear of missing out] if I was 70 miles away from my favourite restaurants, bars and people. And my work is putting together a return- to- the- office plan – I didn’t realise how much I’d miss being in an office.”
Mr Richardson is on trend. Since lockdown restrictions began to ease, London has recorded the biggest uptick in sales activity of any region in the UK, according to Savills’ analysis of data from TwentyCi, a research group.
From June 2020 to April 2021, the number of agreed sales in the capital was 41pc higher than in the same period in 2019-20. Back then, London was significantly underperforming compared with the rest of the South. In the East of England, the difference was 53pc.
But since restrictions began to ease, buyers have rushed back to the capital. In March and April, the number of agreed sales in London was 61pc higher than the same period in 2019.
In the central borough of Hammersmith and Fulham, agreed sales were 98pc higher in March and April than in the same period in 2019. It was followed by Hackney, Wandsworth, and Kensington and Chelsea.
According to property website Rightmove, Walthamstow in north-east London is one of the most sought-after locations in the country to buy a home.
Employees are starting to return to their workplaces, too. Matt Salvidge, of Savills, said: “Corporate inquiry numbers have doubled over the course of the last four weeks.” This is the biggest jump since the pandemic began.
The return to the office is boosting city markets across the country. In Leeds, city centre sales so far this year are down 3pc on the same period last year, compared with a 30pc drop in activity across the wider Leeds area, according to property consultants JLL. “That sales activity is heading to the city centre at the expense of the wider market,” said the firm’s Nick Whitten.
JLL’s lettings activity in the first three months of the year in northern urban markets was up 57pc compared with the same period in 2019.
“It is driven a lot by the young,” said Mr Whitten. “There is also an anticipated rush from students, particularly in cities such as Leeds, Manchester and Birmingham.”
He added: “Cities are in line to enjoy a booming 12 to 24 months.” JLL has forecast that Birmingham will record 5.1pc annual price growth every year for the next five years. Philip Jackson, of Maguire Jackson estate agents in the city, said: “There has been an injection of positivity into the market.”
Martin Elliott, of Hunters estate agents in Manchester, said: “The conversion rate from inquiries to sales really is higher. That’s up 20pc compared to pre-pandemic levels.”
But buyers face major problems with supply. The fallout from the cladding crisis is constraining the availability of city centre properties, said Mr Elliott. Homeowners in affected blocks are unable to sell because their homes are unmortgageable.
“I have 10 properties for every 20
‘Being away from London for a year has made me realise how much I love the capital’
people looking, but only three or four of those homes are actually mortgageable and available for the market,” he added. The result is a major bottleneck. On properties that have the necessary certification, bidding wars are common and flats are frequently selling for 5pc over asking price.
Supply of new homes in city centres will be further constrained in the coming years. Building registrations for private homes built to sell dropped 62pc year- on-year from April to June 2020 due to the first lockdown, according to the National House Building Council, a warranty provider. Numbers have since recovered, but the temporary fall will translate into a steep drop in completions.
Developers have also shifted their focus towards building the larger homes that have been so in demand during lockdown. In the first three months of this year, there were 7,022 registrations for new apartments – 32pc fewer than in the same period in 2019.
Landlords are earning rental yields of up to 12pc by having the local authority pick up the bill.
Investors are increasingly letting out properties directly to councils and housing associations, which guarantee rent on long- term leases and in some cases pay above market rates. This is due to a severe shortage of social housing, which has forced some councils to secure properties for tenants by other means.
Social housing providers are leasing properties from landlords and property companies typically on three- to fiveyear leases, and yields in some areas can nudge 12pc. There is the added bonus that the tenancy is stable, and rent is paid on time and in full, said Max Armstrong, of North East Property Investment, a buy-to-let specialist.
Providing social housing is a role historically carried out by local councils, but is now often contracted out. Adam Kingswood, of Residential Investment Management, a Nottingham letting agent, said the pandemic and rising unemployment had added pressure to an already creaking system. But supply cannot keep up with demand. Government data show that in the entirety of 2020, only 70 local authority homes were built in the North East, a drop of 63pc compared with 2019.
In the East Midlands, 80 local authority homes were built last year. This was actually double the 40 homes built in the region in 2019.
“Because of how competitive the market is, local authorities are competing with normal tenants. In some scenarios, they pay more than market rates,” said Mr Kingswood.
He noted a four- bedroom house in Nottingham that was let out as social housing for £ 850 per month. “The normal market rent would have been £700,” he said. The landlord has boosted their yield from 7pc to 8.5pc. Robert Jones, of Property Investments UK, a buy-to-let specialist, added: “In the North West, landlords can achieve 8pc to 10pc yields letting this way, whereas they would normally be getting 7pc to 8pc.”
Investors are rushing to meet demand. Mr Jones, who also runs research portal property.xyz, said interest in the sector had spiked recently. Investing in social housing now accounts for one in 10 inquiries through property. xyz – double the pre- pandemic share. “Council houses haven’t been part of the agenda, and if the public sector won’t provide them, the private sector will,” said Mr Jones.
Some councils have set up private lettings divisions to attract landlords, said Mr Kingswood. “They contact us about our advertised properties on behalf of a tenant and will pay the deposit and the first month’s rent. They just do not have the social housing stock.”
Renting via a housing association means landlords do not need to pay a fee for an HMO (house in multiple occupation) licence. “In Nottingham, that saves them £980 for a licence that would last five years,” said Mr Kingswood. Local authority and housing association representatives also visit properties regularly, often weekly or fortnightly.
There are, however, some additional upfront costs. The criteria for social housing are tighter, and landlords must pay for fire doors and alarm systems. Mr Kingswood noted one landlord who had to pay an extra £4,000 to make a house fit the specifications. “It is definitely worth it for missing the void periods,” he added.
Another downside is that the agreements, which are based on commercial leases, will typically breach the terms of buy- to- let mortgages, which are based on properties being let out under assured shorthold tenancies. Investors wanting to let out properties in this way will need to have bought with cash.
The strategy is not well known, but awareness of the benefits is growing among investors. “It is starting to filter to the mainstream,” said Mr Jones.