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Prime London property rents up for 20th month in a row

Knight Frank’s Prime London Lettings Index, April 2011, shows that the latest monthly rise contributes to an annual growth rate of 16.3%. Rents in central London have now risen by 25% since their low point in June 2009 and  marginally exceeding the previous peak reached in March 2008 by 0.2%.

Strong rental growth has outpaced capital value growth over the past year and  has pulled income yields higher, with prime central London gross yields hitting an average of 3.8% in April, up from 3.3% in June last year, it also shows.
‘The central London residential lettings market has been enjoying a quiet boom over the past 18 months. Demand for accommodation from a recovering financial and business services sector is high, and supply of accommodation has been weak, with potential supply leaking into the sales market as owners look to capitalise on near record prices,’ said Liam Bailey, head of residential research at Knight Frank.

‘Firm evidence of the ongoing strength of London’s prime rental market is presented by the
fact that rents rose by more than 25% since June 2009. This reflects a huge improvement since the middle of 2009, when the market was suffering from massive oversupply and weak
tenant demand,’ he explained.

‘With rents now marginally above their March 2008 peak level we still see scope for 5% to 10% rises in rents during 2011,’ he added.

Aiding the growth in rents is the fact that the volume of available rental properties has fallen
considerably, by almost 18% in the 12 months to April this year, compared to the previous 12 months, the report reveals.

‘Demand from tenants has held relatively firm, set against this weakening of supply. The reason for this resilience in tenant demand relates to the fact that employment conditions in central London are much healthier than they were 18 or even 12 months ago. Morgan McKinley, the City recruiter, reports job vacancies have increased by 27% over the past year,’ said Bailey.

‘Limited stock means that there are a large number of prospective buyers who are still locked out of owner-occupation and renting is their only alternative. While central London sales are outperforming the UK market, even here sales volumes over the past 12 months have been a third lower than they were in 2007,’ he added.

There is no evidence so far that rental supply is rising. ‘While high profile sales of new build developments to Asian investors are taking place, the reality is that for all the noise from this sector, we are talking about scores rather than hundreds of new prime market units in central London. There simply aren’t enough new units coming out of the ground to have anything other than a local impact in terms of depressing rental values,’ Bailey said.

‘As long as the mortgage market in the UK remains in its current parlous state, the volume
of equity rich investors is sufficient to be able to compete successfully with prospective owner occupiers, pushing more would be buyers into the rental sector. This is one reason why the £400 to £1,000 per week rental sector is particularly strong in terms of tenant demand across London,’ he added.

According to Tim Hyatt, Knight Frank’s head of lettings, with strong rental growth outpacing improvements in capital value for the last year, yields have begun to edge higher, much to the relief of landlords.
‘Despite this it is still difficult in the majority of prime London to achieve much more than a 4% gross yield and 3.8% is more realistic. Over time higher yields could be achievable. The one increasingly common question from prospective investors, especially following a period of strong rental growth, is how secure are rents at their new levels?,’ he said.

‘If we step back and take a longer view, we can see that rents haven’t actually risen significantly over time. While they are marginally above their 2008 peak, remarkably they are only 21% higher than they were a decade ago, surprising when you consider that household incomes in central London have risen by 48% in that time,’ he explained.

‘This should comfort investors. Even allowing for last year’s surge in rents, renting is cheaper
now for tenants, in real terms, than it was in 2000,’ he added.