These are driven by falling capital values and uncertainty regarding future returns from other assets, says Savills who today publishes its quarterly rentals index.
Key points include:
Prime central London rents are continuing to fall, down -4.7% this quarter and down a total of -11.7% since their peak (NOTE: the prime market is much more sensitive to City wobbles and therefore atypical – mainstream rents are not falling to the same extent)
Houses have fallen more sharply in the past quarter; down -5.1% (-13.0% from peak) compared to -3.8% for flats (-10.7% from peak)
The areas must susceptible to City job shocks have succumbed to most severe falls and are continuing to fall most sharply. This is particularly noticeable in the rental market for East of City flats (Wapping, St Katharine's Dock, Limehouse, Shad Thames) which is down 19% from peak (-8.4% in the last quarter)
The north of prime central London (St John's Wood, Regent's Park, Hampstead) has fallen less sharply, with average rents down by just -2.5% and 7.2% from peak, a pattern Savills attribute to its more balanced population by profession, age group, nationality, and more traditional owner-occupier stock.
In terms of activity levels, Lucian Cook, director of residential research at Savills, "Whilst the number of those looking to rent remains relatively high and letting activity strong, many potential renters are looking to secure a deal in there knowledge that there is less demand from corporate tenants and an abundance of supply from those who have been unable or unwilling to sell. The impact is most noticeable in those areas such as Docklands, where the City job environment has had the most profound impacts . By contrast, rents in more diverse markets such as Hampstead have remained more robust.
"We are beginning to see the earliest signs of investor interest in prime central London – driven by a combination of falling capital values (and for foreign investors, the falls in the value of sterling) and diminishing returns and security of other assets, against which bricks and mortar is beginning to look attractive again. Yields are beginning to push out and are currently at 4.8% (gross) for prime central London rents.
"Further, in the medium term, the inability of first time buyers to raise deposits, rather than the inability to afford mortgage repayments, means that they will remain excluded from entry to the market, boosting demand for private rental property and co-ownership or equity loan schemes. This presents a huge opportunity for investors in private rental stock. If acted upon this should, in turn, not only underpin the recovery but secure the future of the private rental sector as an investment model."
