Rents in central London’s prime market down but activity is stronger

Rental values in the prime central London lettings market fell by 3.6% in the year to July 2016 but activity is stronger than last summer, the latest index shows.

Values were down due to higher stock levels and a degree of uncertainty surrounding the European Union referendum result, according to the report from international real estate firm Knight Frank.

Where the rental value is regarded by prospective tenants as being right properties are being taken up and the number of tenancies agreed in the three months to June rose 3% compared to 2015 and viewings increased 15.8%, the data from Knight Frank also shows

While overall the number of new prospective tenants fell 6.8% over the same period, the number of tenancies started via Knight Frank’s corporate relocation service increased 72% in the same period but prime gross rental yields were flat at 3.1%.

According to Tom Bill, head of London residential research at Knight Frank, there are parallels between the lettings and sales markets because the Brexit vote has reinforced the existent pricing trends rather alter market fundamentals.

‘Demand has been relatively flat since the start of the year due to uncertainty surrounding the state of the global economy, particularly in the financial services sector, which contributed towards a slowdown in rental value growth from its last peak of 4.2% in May 2015,’ he said.

‘This trend has been compounded by higher levels of supply as stock has moved across from the sales market, with more vendors becoming landlords due to weaker conditions in the prime sales markets,’ he pointed out.

‘In the three months to the end of June this year, the number of new rental properties placed on the market rose by 49% compared to the same period last year. As a result, landlords are reducing asking rents to prevent void periods and tenants are becoming more selective,’ he explained.

Indeed, properties where the asking rent is perceived as too high are struggling to get viewings and Bill believes that the referendum result has simply reinforced this dynamic and landlords are increasingly taking a pragmatic approach to asking rents against the background of wider Brexit uncertainty and rising stock levels.

He also pointed out that despite the three month decline in the number of new prospective tenants registering, the expectation is that rental volumes will continue to rise over the summer and into the autumn.

‘The uncertainty ahead of the Brexit vote could be an explanatory factor for weaker registrations, although early signs are positive with no significant announcements that companies are pulling back from relocating staff to London following the referendum,’ he added.

Knight Frank also found that relocation budgets in many cases have risen due to the effects of a weaker Sterling, which means tenants are looking in higher-value areas and at higher value properties compared to last year.

The number of new prospective tenants registering with a budget of £1,500 plus per week increased 11% in the three months to 24 July compared to 2015.

‘Combined with the fact that rental values have been declining, it means tenants are widening their searches to higher value areas. For example, senior executives are increasingly able to rent in areas like Mayfair while some young professionals are looking in areas like Kensington rather than east London,’ said Bill.

However, activity in the £5,000 plus per week super prime market has been quieter by comparison since the Brexit vote following a relatively strong 12 months. ‘Tenants in this higher price bracket are typically more discretionary and able to take a longer term view as the precise implications of the Brexit vote become clearer over the coming months,’ Bill added.