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London rents beat inflation and rise to new highs

The prime central area has recorded slightly lower annual growth than the all prime London average, rising by 7.5 per cent over the last 12 months to leave rents -1.0 per cent below their former peak.  In the second quarter of 2011 alone, prime central rents received a 3.8 per cent boost compared to 1.8 per cent across all prime London, suggesting that this area is bucking the trend and will fast regain its peak.
The lower end of the prime central London market, where weekly rents average £1250, have seen the sharpest rent rises, up 4 per cent in the quarter and are now 6.4 per cent above their peak.  By contrast, ultra prime properties, with average weekly rents of around £4000, remain 8.0 per cent below their peak, but have risen by 3.6 per cent in the last quarter.  
Flats have marginally outperformed houses across all prime London and rents are now 4.9 per cent over peak, compared to 2.1 per cent for houses.  A similar pattern is emerging in prime central London locations
“A number of different factors are now driving the market,” says Yolande Barnes, head of Savills residential research.   “A boost in demand from international and corporate tenants is driving values in central locations, but rental growth is underpinned by strong and growing demand from would be buyers unable to access home ownership.  Constrained stock levels are creating competition and an upward pressure on rents.
“For now yields are flat-lining at 3.8 per cent gross (or around 2.3 per cent net of all property costs) as rental growth has effectively been matched by capital value growth over the past year. This is expected to continue with Savills forecasts for both prime central London rents and capital values to grow over the whole of 2011 – rents by 7.0 per cent and values by 8.0 per cent.   For all prime London our 2011 forecasts are for rental growth at 8.0 per cent and capital value growth at 6.0 per cent.”
Savills research forecasts rental growth to outpace capital value growth very slightly over the coming five years in prime London and expects yields to remain broadly stable.  In the mainstream UK market as a whole, five year rental growth (at 31 per cent) is expected to be considerably greater than capital growth (12%) so yields should continue to move out in many markets.
The biggest price rises over the past year were seen in St John’s Wood and Regents Park where international tenants dominate, and the prime East of City locations, Wapping and Canary Wharf where a revival in financial sector employment and sentiment are boosting occupancy rates. 
In St John’s Wood and Regents Park rents are continuing to rise sharply, recording 4.9 per cent growth in the quarter and are now 20.6 per cent over peak.  In the East of City rents rose by 11.6 per cent in the past year, and by 2.0 per cent in the past three months.  However, these locations fell most sharply in the downturn and rents therefore remain 7.5 per cent from peak.
Other locations which attract City-based tenants are Islington and Hampstead have risen 11.3 per cent over the past twelve months, though their varied client base and more limited stock levels mean that rents are now 15.2 per cent above peak.
Jane Ingram, head of lettings says: “After several years of steady, if unexciting, growth the prime central London market has experienced its most dramatic quarterly improvement for some years.
“Tenants staying put (either “can’t buy” or “won’t buy”), limited development supply and steady corporate demand are all squeezing prices.  Unless stock comes into the letting market from the sales market, these factors look likely to dominate for the remainder of the year.

“Sector by sector, the picture is far from consistent with one and two bedroom properties and family homes having made most of the running with properties offering the best of locations and presenting at their best performing even better.”

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