Research article

Capital expenditure

London’s earnings remain a significant driver of rents in the commuter zone

The resilience of the London economy is fundamental to the strength of demand across the prime rental markets. Some 71% of prime tenants across the commuter zone work in London.

Our analysis of official earnings data shows the extent to which the effect of London’s high-value employment markets spread far beyond the capital.

As a headline figure, inner London effectively exports £65.4 billion of employee earnings to other parts of the UK each year. Outer London benefits from £24.3 billion of imported earnings, while more is imported into the rest of the country, primarily the South East and the East of England.

Exported earnings have a significant effect on rental affordability at a local level in prime areas. In Richmond, for example, the average full-time salary of a resident is £70,700, some £31,100 more than the average earnings of someone working in the borough.

Meanwhile, in Elmbridge, Surrey’s most affluent area, resident earnings of £61,500 are £17,500 above workplace earnings.

So, the status of London as a global commercial centre is key to rental prospects. In this respect, the feared exodus of financial firms to other European cities has not occurred. In November 2018, Britain and the EU agreed a deal to give London’s financial centre the same basic access to EU markets as already offered to the US, Japan and Singapore.

Though not all financial services are covered by this agreement, this reduces the risks to London’s position as one of the three most powerful global financial centres, alongside New York and Hong Kong.

Importantly, this means London is likely to retain a competitive advantage over other European centres such as Zurich, Frankfurt and Paris, all of which have much lower rankings in the latest Global Financial Centres Index published by Z/Yen. This will underpin future rental demand.

Competing supply

Much has been made of the challenges faced by the buy to let landlord. For those with debt, restricted tax relief on mortgage interest has changed the economics of residential investment, particularly in higher-value, lower-yielding markets. So, that part of the prime market is likely to contract over the next five years.

Equally, any improvement in the sales market is likely to reduce stock brought to the rental market by accidental landlords.

But that does not mean rental supply will necessarily fall. Instead, we expect cash investors to become increasingly dominant, especially in central London.

History suggests that overseas investors will be more active in this market once Brexit uncertainty clears and they have the confidence to exploit the currency play. That is likely to bring more stock to the rental market, even if the timing of this is uncertain.

The prime London rental market is also likely to see an increase in the amount of new build stock as the number of units completed in locations such as Canary Wharf, Nine Elms and Earl’s Court peaks in 2020. This is likely to provide more competition to landlords of similarly priced stock.

Even assuming that a no-deal Brexit is avoided, this suggests a relatively gradual recovery in London rental values. Overseas investment and new build completions are likely to be less of a constraint in the commuter zone, though these markets broadly have less ground to make up.

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