Prime London rental values up but price growth remains muted

Rental values in prime central London continued to climb in May, and annual growth of 4.2% was the highest figure since December 2011, the latest published data shows.

It compares to a decline of 1.4% in May 2014 and the positive upwards momentum over the last year has been driven by the recovering UK economy and the transfer of demand from the sales market ahead of last month’s general election, according to the report from Knight Frank.

A mood of hesitation around the election, combined with the two bank holidays, meant activity in May was slower compared to last year in what was a stop start market, the report says.

Indeed, the number of new prospective tenants was down 12% in May compared to the same month in 2014, while the number of viewings declined 18%.

In spite of the recent dip, new prospective tenants and viewings in the 12 months to May 2015 are up by 12% and 7%, respectively, and activity is expected to increase over the summer as part of a seasonal trend among students, families and corporate tenants.

Demand has remained strong in markets including Marylebone and Hyde Park, particularly in lower price brackets, suggesting companies and private renters are still cost conscious despite the improving economy.

Prime gross rental yields edged upwards to 2.96% in May, their highest level since August 2013, widening the spread between the risk free rate on a 10 year government bond.

Meanwhile, in the prime central London sales market annual growth is lower than at any time since the last general election in 2010. Although prices grew 0.3% in May, an annual increase of 2.3% is the lowest since November 2009.

‘This relatively low level of growth underlines the gap between the expected impact of the result and the reality of a property market still digesting a series of tax changes,’ said Tom Bill, head of London residential research at Knight Frank.