Overseas investment has become a more prominent feature of London’s new build housing market in recent years, especially investment from Asia, and this is set to have a knock on effect on the city’s rental market.

This is because the demand and supply dynamics of housing in London, especially in central areas, is being boosted by the private rented sector (PRS) and as more foreign investors buy more of them want to rent out their investment.

Knight Frank’s London Development Report shows that supply for property across London is set to be far outstripped by demand in the coming years, further exacerbating a shortage of housing already affecting the capital.

Add to this demand the current constraints in the UK mortgage market, which has become a major challenge for first time buyers trying to buy their first home, and it is clear how the PRS has grown in importance.

The recently published new census data shows that London has seen the biggest rise in the number of households, which range from people living alone to large families, in the PRS over the last 20 years compared to every other region in the UK.
 
Since 1991 the number of households in the PRS in the 13 inner London boroughs has more than doubled, climbing by nearly 190,000 to 372,000. There are more than 100,000 households in the PRS in the four boroughs of central London, up 50% from 1991.

Knight Frank says that the rising demand for rented property has pushed up average rents in recent years. This coupled with strong capital growth, has resulted in enviable returns on London investments.

However the consolidation in the financial sector had a knock on effect on rents in prime central London in 2012, with modest declines in average rents which ended the year down 3.2%. Yet the picture is much more localised than this. Some areas saw rents rise last year,including Kensington, up 0.6%, the City up 3.2%, Canary Wharf up 1.3% and Notting Hill up 1.5%, while Belgravia saw rents climb by 0.9% in the last three months of 2012 alone.

The firm says that the appetite for rental property also remains undimmed, especially in the sub £1,000 a week price band.
‘The recent dip in average rents, coupled with high capital values has put a further squeeze on yields. Finding a yield of more than 4% in prime central areas is now the exception rather than the rule,’ its report says.

‘Investors have typically been more interested in a central location than an extra percentage point or two in annual yield however. There is also potential for more capital growth, coming on the back of a 53% rise in prices since the market trough in 2009,’ the report explains.

‘After pausing this year, we forecast that prime central London property prices will climb by a further 17% by the end of 2017, which will be coupled with increased demand in the private rented sector as the economy gets back on track, and the sector grows in importance as a whole,’ it adds.

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