Research article

What goes down must come up (eventually)

What can previous rental downturns tell us about the prospects for the market going forward?

The two most recent periods of double-digit falls in the prime London rental market occurred after 9/11 and in the aftermath of the financial crisis. These resulted in rental falls of 20% and 15% respectively, and occurred more quickly and more universally across the market than the recent decline.

In this downturn, prime London rents have fallen by an average of 9.6%, but this varies significantly across different parts of the market. In central London, rents have fallen by 16.5%. Across the rest of the prime London market, they have fallen by just 6.4% on average. So, why the difference? Previous rental downturns have primarily had single triggers which have hit occupational demand, particularly from overseas and the financial and business services sector. The drivers of the current downturn are more complex.

Figure 4

Timeline of major downturns and recoveries in prime London rents 
Source: Savills Research

Demand has undoubtedly been affected by uncertainty in the financial services sector and constraints on corporate budgets. But a more diverse range of needs-based tenants has partly offset this, particularly outside of central London. In more expensive parts of the market, the high cost of stamp duty has also made renting look comparatively more attractive. This has supported rental demand, even if tenants have been more cost-conscious.

Competing levels of supply have been equally influential. In part, this has come from accidental landlords, who have been faced with a drawn-out period of malaise in the sales market. But it has also come from increased competition from new build stock, acquired by cash-rich investors and, to a lesser degree, an increasingly sophisticated build to rent sector. What then are the chances of a rental recovery?

In previous downturns, rents recovered to their previous highs over periods of between two and five years after the rental market bottomed out. In each case, however, the market struggled to rise above those highs.

The ability to deliver such a rental recovery over the next five years depends partly on what Brexit will mean for London’s high-value employment markets. But, given the existing development pipeline, we expect supply to remain an equally important factor. These are topics we expand on in our next article Capital expenditure.

Figure 3

Source: Savills Research
Note: These forecasts apply to average rents in the secondhand market. New build values may not move at the same rate

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