The overall trend is one of small rental falls, but hidden within this is a divergence of performance, according to the latest research from Savills.
Its report says that the continued economic uncertainty and threats to employment in the financial sector are affecting corporate relocation budgets, with single executives relocating rather than entire families.
This is hitting the family house markets in many prime London locations. Conversely, to the east of the City activity for one and two bedroom flats from the corporate sector remains strong.
Since September average prime London rents have fallen by 1.9% leaving annual growth at 0.5%. However, this figure masks some regional variations, form example, in central London values fell by 0.7% but rose by 0.7% in Islington.
Values in South West London fell by 1.8% for the quarter as the demand for family housing slowed and the stock available outweighed demand. However seasonal growth earlier in the year, that was fuelled by corporate tenants looking for value beyond the central London market means that annual growth remains positive at 2.3%.
In the core of prime central London market of Knightsbridge, Sloane Street, Chelsea and Mayfair where the average rent at £65 per square foot is highest, flats continue to outperform houses year on year up 0.5% growth compared with a 0.6% fall for houses. Demand for well finished flats in a portered block from students and young professionals being a key driver.
‘Across the board tenants are looking for value for money and well maintained stock, particularly flats continue to let well provided that the rent reflects the quality. If more new build rental stock comes to the market; this could affect rental values further; given the backdrop of a weak employment market in the financial and business services sector. In those circumstances we would expect tenants to negotiate on rents and landlords drop asking rents to avoid lengthy void periods,’ said Sophie Chick of Savills research.
Outside of London in the South East rental levels fell back slightly during the fourth quarter by 2.7%, partly due to a seasonal fall in applicant levels. However, rental values have increased by 1.6% for the year given demand from people renting before committing to a house purchase in the commuter zone. These improved rental values have encouraged some ‘accidental landlords’ to continue letting their properties on longer terms than they had initially signed up for, Savills said.
Here the mid market rental stock at £1,000 to £3,000 per month continues to perform most strongly given a sustained increase in demand from young professionals, who pre-credit crunch may well have been homeowners, but are now hindered by the need for sizeable deposits.
Across the UK as a whole Savills expects a shift towards renting amongst those unable to raise a deposit stock to drive rental growth in line with earnings over the next five years.
However, unlike the mainstream markets, in the prime markets, the inability to buy will be much less of a driver of demand, although we do expect this to support rental demand amongst young professionals, and therefore underpin rental growth in the one and two bedroom prime flat market.
It also says that prime central London rents are driven by City sentiment and corporate demand, with strong ties to the health of the FTSE and are more volatile than the city’s mainstream rental market.
It is forecasting rental growth of 3% in 2013 and 24% by the end of 2017 in prime central London, adding that the potential for further city job cuts presents the biggest risk to these forecasts. Nonetheless, landlords in the Prime central London market are forecast to benefit from strong capital value growth over the forecast period, something which underpins the investment attributes of this sector.
