Record London Rents Lure Overseas Landlords to House Market

(Bloomberg) -- The U.K.’s struggle to secure a favorable Brexit deal may be giving Prime Minister Theresa May a headache, but it’s making London’s battered buy-to-let market attractive overseas again.

Foreign-based landlords owned 12 percent of the homes rented out in the capital at the end of the first half, up from 7 percent last year, according to a report by Hamptons International. A falling pound has made it cheaper for overseas investors to buy homes using their local currencies, and many have been lured by a red-hot rental market that’s still at record levels.

Record London Rents Lure Overseas Landlords to House Market

“I was convinced rents would drop as people fled the U.K. after the Brexit vote -- in fact, everyone was expecting Armageddon,” said Agus Marcos Blanco, a 39-year-old pharmacist in Barcelona who shelved plans to purchase a London property immediately after Britain voted to leave the European Union in 2016. Now, with rents having stayed buoyant, he’s looking for a buy-to-let investment in the U.K. capital.

It’s not an entirely rosy picture for foreign landlords. By some measures, growth in the rental market has cooled or even declined. According to the latest available data from the the Office for National Statistics, rents in the capital slipped 0.3 percent in July from a year earlier.

Falling home values could easily wipe out any rental yields earned by landlords, as Britain’s housing market grapples with the impact of Brexit and rising interest rates. U.K. home prices fell 0.5 percent in August from a month ago, the biggest monthly drop since 2012, Nationwide Building Society said Friday.

Still, the jump in foreign interest is a boon for London’s real estate market as many domestic buyers have turned away after being priced out.

The imbalance between supply and demand in London has pushed average rents to 1,615 pounds ($2,100) a month, according to Homelet, the U.K.’s largest tenant-referencing company. That’s the highest since it began collating the data in 2011 and 72 percent above the country-wide average of 937 pounds per month.

Record London Rents Lure Overseas Landlords to House Market

Juan Guerrero, head of foreign-exchange trading at Banca March SA in Madrid, estimates the pound could bounce back as much as 15 percent against the euro if the U.K. negotiates a successful EU divorce deal. A home worth the London average of 483,000 pounds costs a European buyer 537,500 euros at the current exchange rate, and would be worth around 70,000 euros more after such a rebound.

While the pound has rallied in recent days as the prospect of a no-deal Brexit has appeared to diminish, some forecasts have the U.K. currency sliding toward levels versus the euro last seen in 2009. That would mean rental returns would be worth less when converted back to a landlord’s own currency.

Marcos Blanco, who has bid an undisclosed amount for a two-bedroom apartment in Bow, East London, is undeterred by the prospect of a further drop in sterling. “I think all the negative news has been factored in, and the only way is up,” he said. “Time will tell.”

©2018 Bloomberg L.P.