London has always been a traditionally popular market for property investment. London Buy-to-Let performance over the last 20 years or so has seen incredible capital growth on top of rising rental returns.

Then, shortly following the EU referendum in 2016, everything stopped. London’s growth stalled and in some markets, prices declined.

Now, halfway through 2021, we’re starting to see London awaken once more. House prices in prime central London grew by 0.3% in the year to May – the first rise in prices in over five years. 

As the economy begins to reopen, demand is returning to London and it’s clear that the capital’s recovery is underway – particularly in the lettings market – in the three months leading up to May 2021, there were 76% more potential tenants in the market when compared to the same period in 2020. 

According to Savills, over the next five years rental price growth will outpace capital values, despite both metrics seeing impressive rises. London house prices are expected to rise by 12.6% by 2025, while rental growth is expected to increase by 19.3%, beating out the UK average.

In their own estimations, Chestertons believe that while prices in Greater London may drop by 2% by the end of 2021, central London and other high-value locations are likely to fare better, with prices stabilising and even rising towards the end of the year.

For Buy-to-Let investors, while the recovery may take a while, investing in London is no doubt back on their radars.  

For the first time in over 30 years, London’s population is expected to fall. As the ‘exodus’ continues with residents searching for more space and affordability, on top of overseas workers leaving the country, numbers continue to drop. 

The shift towards remote working has no doubt had an effect, although at this point it’s unknown on what scale. Connectivity is always a vital consideration for buyers and renters, plus London still maintains a largely unique lifestyle, which will continue to appeal to younger generations. 

At the same time, tenants appear to be making the most of falling rents by moving to properties with a shorter commute and extra space – all against a backdrop of the UK’s economic recovery. 

In terms of overseas workers, Savills believe that despite a fall in EU migrants, this has been offset by a rise of non-EU migrants. This is expected to continue, so despite the population taking a hit initially, they believe that this may be temporary.

As always, demand is vital for London and while it will be impacted by remote working, the vaccine rollout has the potential to kickstart a u-turn for those that have moved, attracted back to the city for all of the opportunities it can offer.

Office space is the market sector most affected by the pandemic, as companies shift to hybrid working. 

In their survey, PwC found that 258 of Britain’s biggest companies plan to cut the size of their property portfolio as remote working becomes more commonplace, while a third of those said they were looking to reduce their footprint by 30%.

It’s likely that ‘second-hand’ spaces will be the first to feel these cuts as modern, amenity-led workspaces become more desirable. With just 7.5m sq.ft of speculative space under construction, supply is dwindling, creating an incredibly competitive market. 

Knight Frank forecasts suggest a 10% reduction in office demand due to these changing attitudes to work, which would translate into a 2.1% decline in prime headline rents for London during 2021.

Their forecasts also suggest that rents will return to positive growth between 2022 and 2025 with an annual rise of 2.7%.

Although London appears to be entering its recovery phase, what markets should investors be considering in the meantime?

While property is a game best played over the long-term, London’s current yields are underperforming against the wider South East.

Over the next five years, Savills expect that capital growth in the South East will hit 17%, compared to London’s 12.6%.

This has made locations such as Basingstoke, Slough, Bracknell and Reading much more appealing – providing affordability with high growth potential.

With infrastructure projects such as Crossrail on the horizon, its expected that this price growth will continue, buoyed by the accessibility the line can provide.