Prime rents up marginally in London in 2013 but expected to rise more from 2016 onwards

Prime rental values across prime London saw a marginal increase of 0.5% over 2013, reflecting an increase in available stock rather than falling demand, a new report suggests.

The best performing prime location in terms of rental growth is the suburbs and this could be driven by a high number of tenants moving out from London, says the report from international property firm Savills.

The report points out that over the past two years, rents have shown little growth across the prime residential markets but adds that rental growth is forecast to return to the prime London market in 2014, albeit slowly.

Rental growth in prime commuter locations, although not dramatic, has been higher than in prime London over this period, with an increase of 4.7% in the commuter zones despite rental values experiencing a seasonal fall of 2.1% in the past three months. In comparison, London rents are up 1.2% over the same two year period.

Over the longer term, rental values in prime commuter locations are on average still 5.3% below their 2008 peak. However, in prime London, rental values are closer to their peak at just 1.7% below, which is a result of the relatively strong recovery in 2010.
 
The report says that this was underpinned by a lack of available rental stock which is no longer evident.Consequently, the market remains active without landlords being able to dictate rental values.

The report also points out that this increase in competing supply has been particularly evident in central London, reflecting an increasing level of overseas demand, but against this context, relocation budgets have fallen over the past year with the average budget in 2013 for a two bed and a four bed now 4.9% and 12.1% lower than in 2012 respectively.

Consequently, the largest rental falls have been seen in the higher value areas of prime central and prime north west London which achieve an average rent per square foot of £61 and £43 respectively.
 
Locations beyond the core central areas have seen stronger growth as tenants are looking for value and are increasingly willing to expand their search to locations they had not previously considered. The strongest rental growth over 2013 was seen by prime flats in the south west and the east of City.

Outside London, the prime rental market is largely confined to the high value suburban markets such as Elmbridge, Rickmansworth and Northwood, and areas within a 30 minute commute to London such as Sevenoaks, Guildford and Beaconsfield.
 
Beyond that, the prime rental market only extends to specific high value urban markets such as Cambridge, Winchester and Oxford. The report says that these markets are able to draw on a pool of demand from those relocating from London and/or commuting on a regular basis. They also attract international tenants in a way that other prime markets beyond those locations cannot.

This is reflected in the rental values commanded by these markets and prime rental levels vary from an average of £18 per square foot in prime suburbs, to £14 per square foot in the outer commuter zone that is around an hour from London.

In locations such as Elmbridge, this figure can be as high at £20 per square foot with exceptional properties achieving £30 per square foot.

The best performing prime location in terms of rental growth is the suburbs, driven by a high number of tenants moving out from London. Over the past year, rental values have increased by an average of 4.5% and are now 1.3% above their 2008 peak.

The inner commute areas are more varied. Annual rental value movements range from +8% to -8% depending on a number of local factors. Good schools, for example, play a significant role in rental values, as does proximity to public transport and the London station they connect to, which can impact different employment markets.

The report points out that a higher proportion of tenants in these markets are moving from within the local area when compared to the suburbs. Nonetheless, tenants relocating from London still plays an important role in this market, accounting for 23% of the total.

Further out in the commuter zone, the picture is more consistent, with rents increasing by 2.9% over the past 12 months and the highest growth seen in the urban locations.

A similar trend of outperformance is seen in the sales market, indicating demand in these locations from potential buyers new to the area who want to ‘try before they buy’ and rent first.

‘It is perhaps surprising in these prime locations that there is increasing demand from international tenants, who account for 28% of the market, up from 21% in 2012, the report says.

North Americans are the largest international tenant group, accounting for 10% of the overall market and yet they rarely go on to buy in the UK, preferring to stick to the rental market.

The report also says that there is a clear correlation between size and rental growth. For example, since the peak of the prime rental market in 2008, three bed properties have seen the strongest growth with average rental values across the prime commuter zone now just 1.7% below their peak.

Across the UK, the private rented sector grew by some two million households in the decade to 2011 and the largest growth was in the period since 2007 due to constrained mortgage availability.

Over the past few years, the government has introduced several initiatives to support home ownership, most notably the Help to Buy scheme. Yet, despite this, Savills expects the sector to grow by a further one million households in the next five years.

‘This increase in demand in the mainstream private rented sector has not been met with a similar increase in the supply of rental properties. This has resulted in rents being pushed up. In the mainstream markets, supply is likely to remain constrained, but less so in the more valuable markets which is where new activity is concentrated and where overseas investors are particularly active, the report explains.

There may have been only marginal rental growth in prime London in 2013, but given the recent increase in applicants and improved outlook and prospects for the economy, Savills expects this to pick up in 2014.

‘From 2016 onwards we anticipate rental growth in prime London to be increasing by 4.5% per year,’ said Savills’s Lucian Cook.