Rents in the sector have hit record highs having risen by 26.3% since June 2009, highlighting the dramatic turnaround in landlords’ fortunes on the back of new tenant demand from Asian and European tenants.
It shows that prime London rents have been rising for over two years and since January have risen by nearly 7%, including a 0.2% rise in August.
Despite the high levels of capital value growth in London over the past two years investors have been securing higher investment yields. Average prime gross yields have been pushed higher by rapid rental growth, moving from 3.3% to 3.6% in central London between June 2010 and August 2011.
Landlords are beginning to see increased competition, with new rental instructions higher by 23% in the three months to August, compared to the same period in 2010.
There is scope for more substantial increases over the next few months, with inspections of potential new rental properties up by 45%, according to Liam Bailey, head of residential research at Knight Frank.
Demand has also risen, offsetting the growth in supply, with an annual rise of 16% in new tenant registrations and a corresponding 17% rise in viewings in the three months to August.
‘One of the main drivers of this is the fact that international demand for London’s prime properties is even more pronounced in the rental sector than in the sales sector, with almost six out of 10 tenants coming from overseas,’ said Bailey.
‘While tenants from Asia Pacific have risen in importance this year, with a doubling in their
representation in our table of top nationalities, European tenants have grown as a proportion of the overall market, reflective of the demand for accommodation from smaller banks and financial organisations from Europe who have been setting up or expanding operations in London over the past two years,’ he explained.
The index also shows that the number of tenancies started in the three months to August rose by 13% year on year, but the pipeline of tenancies agreed, which is up by nearly 50%, suggests new lettings volumes will rise steadily through the third quarter.
‘Our view is that rental growth should continue in the prime London markets. Rents have surged recently, but over the long term they have not kept pace with average earnings growth in London, meaning that renting prime property is cheaper now than it was a decade ago. Our forecast is for above-inflation levels of rental growth over the next two to three years,’ said Bailey.
