Rents in London’s prime rental sector up slightly by 0.1% in first quarter of 2014

Prime rents in London increased modestly by 0.1% in the first quarter of 2014, in contrast to the small falls seen in rents at the end of 2013, according to a new report.

This leaves values some 0.5% below where they were this time last year, says the analysis report from international property consultants Savills.

It points out that although rental growth continues to be lacklustre across London, this is not a result of low levels of demand as the private rented sector continues to increase.

By contrast, the supply of rental property is currently the major consideration in the prime London market. The prime East of City market saw the strongest rental growth over the quarter and annually due to uncharacteristically low levels of stock.
 
In the core areas of prime central London, including Mayfair and Sloane Street, new build stock coming on to the market from foreign investor landlords has put a slight downward pressure on rental growth. In Kensington, where the growth in new supply has been slightly less significant, rents have risen 1% year on year compared to a 1.6% fall in core PCL areas.

Across all of prime London, houses outperformed flats over the first three months of 2014, with house rentals increasing on average by 0.4%.
 
‘Behind this trend has been a noticeable increase in corporate budgets over the first three months of 2014. Companies have been prepared to relocate the families of their most valued staff in a way they were reluctant to do before the economic recovery took hold in the capital,’ said Lucian Cook, Savills director of residential research.

‘Demand for flats has been strongest from sharers and young professionals in the core and mid-market bracket due to hurdles to home ownership,’ he added.

The report also points out that rental growth in the prime commuter zone has outperformed prime London over the past year. ‘A surprisingly high proportion of tenants in the commuter zone are international, accounting for 37% of tenancies in 2013 of prime stock in the highest value areas. Demand from this group has been supplemented by domestic households who are renting before committing to a house purchase,’ explained Cook.

‘Properties that are within a town centre, close to local amenities such as schools and stations, remain more popular than rural locations. With this trend towards prime urban living also being seen in the strengthening prime regional sales market, rental stock is being put under pressure as some short term landlords take advantage of the increasing prices for prime property outside London,’ he added.

Looking forward, the firm expects that rental growth across the residential markets as a whole is likely to be relatively strong, driven by those unable or unwilling to enter the world of homeownership though there are some affordability constraints in the short term.

‘Accordingly, rental growth will be dependant on the outlook for earnings growth and wider economic recovery. Much stronger employment growth in the professional, technological, media and communications sectors are likely to underpin demand in the prime and upper mainstream markets,’ said Cook.

‘On the supply side, the stock shortages in the east of City will not last forever. From 2015 onwards an influx of new build, buy to let stock will come to the rental market as the development pipeline matures. This will suppress rental growth unless the development stock matches demand in terms of type and price, by meeting the need of corporate tenants so prominent in this market,’ he pointed out.

‘Across the wider prime London market; much depends on the political backdrop and the approach to overseas ownership of a building pipeline of new build stock and correspondingly the extent to which this continues to be added to rental supply, something unlikely to impact significantly in the prime regional rental market,’ he added.