The weak UK economy is impacting on rental prospects in the London lettings market but is likely to be contained by supply and demand fundamentals, it is claimed.

For two years from the middle of 2009 the prime London lettings market delivered very strong rental growth for landlords. Not only did rents recover all of the losses incurred during the 2008 financial crisis, but by early 2011 they hit all time highs.
 
This growth was underpinned by the recovery of the central London economy, which was gathering pace at least up until the middle of last year, according to Liam Bailey, head of residential research at Knight Frank.

In addition there has been a steady recovery in the ratio of demand versus supply but economic prospects have weakened, leading to slower rental growth and the recent period of declines. It seems likely however that the current demand and supply balance will limit rental falls.

‘Although the volume of new tenancies fell slightly in the three months to December, compared to the same period in 2010, by 2%, evidence from our other market measures confirms a more positive outlook. Demand, in the form of new tenant registrations, has risen by 20% over the past year, whereas new rental instructions are only higher by 6%,’ he explained.

‘The relative position of demand and supply is best illustrated by the ratio of new applicants to new rental instructions, which has risen from 2.94 in the three months to December 2010, to 3.44 in the same period in 2011.

‘We expect to see rental growth in central London for the whole of 2012 to equate to around 4% or 5%. While positive, this rate would represent the lowest level of growth since late 2009. But it would also represent a shift to a more sustainable trajectory for the market after two years of sharp rental increases,’ he added.

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