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The investor's guide to the City
Summer 2023

The Square Mile is adept at changing its stripes. It ushered in the transition from merchant bankers to global traders during the late 1980s, a shift which shaped the skyline with the arrival of the Gherkin, Heron Tower and Walkie-Talkie within a decade. But in today’s era of flexible working, its historic fabric has offered the smaller more flexible office space, which is increasingly tempting the big banks back from Canary Wharf, less than a generation after they left.

Like much of Central London, flat values in the City sit below their 2018 peak. Over the last 12 months prices are down by 0.8% to stand around 13% below where they were five years ago, but 133% above where they were in 2008. It’s been a similar story for flat values across the capital as a whole, albeit to a lesser extent with prices slipping 3.9% below their 2017 peak. Over the same period, houses rose in value by 18.3% with most of this growth coming during or immediately after the pandemic.

However in a higher interest rate environment, there are signs of this trend starting to reverse, with flat values beginning outpace house values over the last few months. And this is likely to continue over the medium term as higher interest rates have driven up the monthly mortgage costs for both first-time buyers and those trading up. This will put a floor under flat values following their steady fall behind house values for much of the last five years.

While prices may have drifted backwards slightly in recent years, it's been a very different story for rents. In the City, the average flat rent now stands at £3,535 per month, up 16.4% on the same time last year. This means that rents are up 18.0% on pre-Covid times, having dropped sharply during the pandemic before recovering over the last couple of years. House rents recovered more sharply during 2021 meaning annual growth stands at just 2.1%.

It's been a similar story across the capital, with rents up 12.9% over the last 12 months, a larger increase than anywhere else in the country. This reflects the 43% fall in the number of homes on the market from 2019 levels, although stock levels have recovered slightly from where they were last year. While it’s likely that rental growth will slow over the course of the next year, it’s still likely to outpace house price growth by a considerable margin.

Flatlining prices coupled with rapidly rising rents are translating into higher yields. While the City is far from alone, gross yields here have increased from around 3.6% to 5.3% over the last three years. While heavily leveraged investors will still struggle to realise returns on these numbers given where mortgage rates are, investors who’ve been in the market for a while and those purchasing with low loan-to-values are enjoying record rental growth.

The record rates of rental growth and higher yields will ultimately serve to underpin current and future house prices. For the most part, the downward drift in prices over the last five years has been coupled with minimal rental growth, but that has changed significantly over the last couple of years which is likely to translate into capital values going forward. And while vanilla buy-to-let remains challenging for leveraged landlords in the current climate, potential rental values tend to form part of the calculation for many people buying a second home.

Looking beyond this year, it seems likely that we’re approaching the end of the current property cycle, which began in 2009. If history serves as a guide, as a new cycle begins, London’s price growth will likely outpace the rest of the UK, following seven or eight years of everywhere else playing catch up. And Central London postcodes, like the City, are likely to be at the very forefront of that recovery.

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