hey have risen by 10% in the past twelve months and now stand an average of 4% higher than at their 2007 peak with no evidence of a slowdown on the horizon.
The prime central area has recorded slightly lower annual growth than the all prime London average, rising by 7.5% over the last 12 months to leave rents -1.0% below their former peak. In the second quarter of 2011 alone, prime central rents received a 3.8% boost compared to 1.8% across all prime London, suggesting that this area is bucking the trend and will fast regain its peak.
The lower end of the prime central London market, where weekly rents average £1,250, have seen the sharpest rent rises, up 4% in the quarter and are now 6.4% above their peak. By contrast, ultra prime properties, with average weekly rents of around £4,000, remain 8% below their peak, but have risen by 3.6% in the last quarter.
Flats have marginally outperformed houses across all prime London and rents are now 4.9% over peak, compared to 2.1% for houses. A similar pattern is emerging in prime central London locations.
‘A number of different factors are now driving the market. A boost in demand from international and corporate tenants is driving values in central locations, but rental growth is underpinned by strong and growing demand from would be buyers unable to access home ownership. Constrained stock levels are creating competition and an upward pressure on rents,’ said Yolande Barnes, head of Savills residential research.
‘For now yields are flat lining at 3.8% gross, or around 2.3% net of all property costs, as rental growth has effectively been matched by capital value growth over the past year. This is expected to continue with Savills forecasts for both prime central London rents and capital values to grow over the whole of 2011,’ she added.
Savills is forecasting that prime central London rents will see an increase in rents of 7% and an increase in values by 8%. For all prime London the forecasts are for rental growth at 8% and capital value growth at 6%.
Looking further ahead Savills research forecasts rental growth to outpace capital value growth very slightly over the coming five years in prime London and expects yields to remain broadly stable.
In the mainstream UK market as a whole, five year rental growth at 31% is expected to be considerably greater than capital growth at 12% so yields should continue to move out in many markets.
The research also shows that the biggest price rises over the past year were seen in St John’s Wood and Regents Park where international tenants dominate, and the prime East of City locations, Wapping and Canary Wharf where a revival in financial sector employment and sentiment are boosting occupancy rates.
In St John’s Wood and Regents Park rents are continuing to rise sharply, recording 4.9% growth in the quarter and are now 20.6% over peak. In the East of City rents rose by 11.6% in the past year and by 2% in the past three months. However, these locations fell most sharply in the downturn and rents therefore remain 7.5% from peak.
Other locations which attract City based tenants are Islington and Hampstead which have risen 11.3% over the past twelve months, though their varied client base and more limited stock levels mean that rents are now 15.2% above peak.
‘After several years of steady, if unexciting, growth the prime central London market has experienced its most dramatic quarterly improvement for some years. Tenants staying put, limited development supply and steady corporate demand are all squeezing prices,’ said Jane Ingram, head of lettings.
‘Unless stock comes into the letting market from the sales market, these factors look likely to dominate for the remainder of the year. Sector by sector, the picture is far from consistent with one and two bedroom properties and family homes having made most of the running with properties offering the best of locations and presenting at their best performing even better,’ she added.
