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The London property market has seen increased rentals of late. Londoners who have been unable to purchase their first house have resorted to renting, which has helped boost the segment.
This was highlighted in CB Richard Ellis’ UK Residential ViewPoint for 1Q2011. Says head of residential research in the UK Jennet Siebrits, “In the early 1990s, deposits averaged 5%, but lenders are now demanding at least 20%, she says.
“As a result, the deposit can be in the region of £30,000 (RM149,000), higher than the average annual earnings of £25,000.”
As higher costs prevent many first-time owner-occupiers from buying a home, demand for rental property has spiked. A report by property consultancy Savills also highlights that mainstream rental growth has been particularly pronounced in greater London where the average residential rent rose by 16% in 2010. The latest Savills rentals index for prime rentals in London shows that the average rent increased by 3.4% in the first three months of 2011 and 12% in the past 12 months.
This is good news for landlords in London and may stir an interest in London properties, which have been widely marketed in Malaysia in recent times. To ensure that Malaysian investors are well-informed about London properties and the rental market there, CB Richard Ellis Malaysia recently invited rental experts from UK-based Benham and Reeves Residential Lettings to meet some potential Malaysian investors.
Benham and Reeves Residential Lettings has almost 60 years of experience in property rentals and management. It has nine branches in London and offices in India, Dubai, Hong Kong and Singapore, which provide personal, one-stop service to landlords with investment property in London. The company only deals in letting residential properties and are not involved in selling property.
Benham and Reeves managing director Anita Mehra and director Marc von Grundherr were in Malaysia to find new clients to increase their rental property stock, and will also be visiting other countries in the region for the same purpose.
“We have an acute shortage of rental property,” says Von Grundherr. “On May 1, 2010, we had 510 properties to let across our 10 offices. [However,] On May 1, 2011, we [only] had 206 properties. This is a 60% drop in the availability [of rental property] because tenants are renewing their leases. With the increased overseas demand, we have even less stock to offer them.”
To encourage more Malaysian landlords to partner with Benham and Reeves, the usual letting and management fee of 16% of the annual rental value has been reduced to 13% for new clients.
Mehra explains that potential clients are able to seek advice from Benham and Reeves for free and the management fee only applies once a tenant is secured. “We don’t charge everything in advance and once on board, we charge quarterly,” she says.
Moving to a different beat
The short supply of residential property in a global city like London makes property there highly attractive.
Mehra reveals that even during very difficult periods like a recession, owners of prime London properties survived as the supply is limited. London does not allow wide-scale property development at the expense of its heritage buildings with great historical value. This is in contrast to many other countries where historical buildings give way to high-rises to cater for a growing demand.
CB Richard Ellis “UK House Price Forecast 2011” for 1Q2011 says “the London market has been particularly resilient over the past few difficult years, both from a capital value and rental value perspective. In fact, average prices in London are now 75% higher than the rest of the UK, compared with 65% in 2008.”
Another reason for the high demand for residential property is London’s global reputation. Von Grundherr quotes the saying “New York is American, Paris is French, London is global”. London, he says, is completely different from the rest of the UK as “it is like its own country”.
In London, popular units with tenants are studio, one-bedroom and two-bedroom apartments, say Mehra. The size of a studio is about 300 sq ft while one-bedroom units are about 500 sq ft and two-bedroom apartments start from 700 sq ft. For a two-bedroom apartment, Mehra suggests investing in a unit with two bathrooms, or else the unit will be considered as a one-bedroom apartment with a study, which means lower rent.
Asking rents for studio, one-bedroom and two-bedroom units range from £300 to £800 per week. However, not every unit is alike. Von Grundherr explains that a one-bedroom apartment in a prime location in London will attract higher rent compared to a two-bedroom unit in a less-strategic location.
Rental yields are between 2% and 6.5% but this is dependent on location. Mehra says that as London is a very expensive city, landlords must be aware that certain costs, like repairs, are high, compared with Malaysia.
Mehra advises potential clients that wish to have Benham and Reeves represent them to get the letting consultancy involved early. “We would like to be involved at least three months before [the completion of the project],” she says. “We can prepare all the necessary materials and advertising to create demand, do the furnishings and even help in the handover process to ensure that the unit is in proper condition, so that the landlord doesn’t have to fly over to check the unit.”
A realistic expectation of the asking rent is also provided. If a landlord has bought an apartment for investment, he should expect many other units to come onto the market at the same time. In view of this, Mehra suggests that landlords accept a lower rent to fill the unit first and revise the rent when the unit is put back on the market.
This is a key tip which Mehra and Von Grundherr strongly believe will make or break a potential tenancy.
“If you have a one-bedroom apartment, it must be fully furnished when it is ready for letting because this is expected,” Mehra says. “For a four-bedroom apartment, you don’t need to because the tenant will most likely have his own furniture.”
Von Grundherr concurs and adds that “the mistake some Asian investors make is hoping to let out a unit unfurnished. But in an apartment block where there are so many units available, a tenant will take a unit that is fully furnished instead of one that isn’t.”
Benham and Reeves has a sister company called In:Style Direct, which provides special one-off payment furniture packages. The interior design experts will ensure that the unit looks in top condition and in the expected style. This is important because tenants are very demanding and expect top quality furnishings if a rental unit is in a prime London location.
In addition to knowing your market, having a reliable and skilled agent to act on your behalf is important. As most Malaysians are not familiar with the nitty-gritty of letting out property in London, an agent will be able to sort out all matters including the inspection, background check of the tenant, doing up the tenancy agreement, collecting rent, making sure the unit is well taken care of and many other aspects that only someone on the ground would know.
When it comes to maximising your investment potential, Mehra and Von Grundherr believe that investors have to be advised on what to buy and where. “Small apartments are highly affordable for many investors who have not previously purchased [property] in London,” says Von Grundherr.
“These are particularly attractive to tenants faced with rents rising by 10% or more a year. Many of our corporate and overseas student tenants want smaller, easy-to-manage units.”
In addition, it is important to look at where demand is highest, both now and in the future. Mehra says, “Research shows that London has 285,000 international students. That figure will grow by 10% to 20% in the next five years, producing a 47,000-bed shortfall by 2016 as the number of incomers exceed the campus accommodation [capacity]. Knowing where to buy to take advantage of this trend is the key to investment success.”
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 863, June 20-26, 2011
