New research also shows that supply is down with the number of new properties coming onto the market down in the second quarter of the year compared to the same period in 2013 with flats down 14% and houses down 27%.
The report from estate agency, W.A.Ellis in conjunction with independent property intelligence company, Dataloft and data provider Lonres, reveals that supply levels of flats have fallen most significantly in the lower price brackets, with new properties on the market below £750 a week down by 19% since March 2014. At the upper end of the price scale at £2,000 plus per week, supply levels have fallen by 10.2%.
Rental values achieved in the second quarter of 2014 were 5.1% higher than in the same quarter of 2013, a reflection of the improving economic outlook which sparked a turnaround in the market in late 2013.
The family house market in the prime central London sector is the most competitive with the number of family houses let so far in 2014 at W.A.Ellis up 12% on the same period in 2013.
Family houses are the most supply constrained homes. Since March 2014, houses have accounted for just 9.8% of properties brought to the market. The scarcity of family houses has meant tenants are paying 13.8% on average more for a house over a flat with the same number of bedrooms. In Kensington and Notting Hill this climbs to almost 25%.
The report also reveals that the lettings market has become more seasonal. Properties let between July and October accounted for 51% of all lettings in 2013. Over the last 10 years, properties marketed in November have taken 25% longer to let than those in September.
Gross yields for a two bedroom central London flat averaged 3% last year. Yields were lowest within the most expensive postcodes, with Chelsea and Knightsbridge recording yields at 2.5% and 2.3% respectively.
‘The growth in property sale values has prompted a number of landlords to cash in and sell their investment, one reason for the drop in supply levels in some areas of the market. Indeed, at W.A.Ellis, the percentage of vendors selling rental accommodation has risen from 22% to 32% over the past decade,’ said Lucy Morton, senior partner and head of lettings at W.A.Ellis.
‘This trend has been especially prevalent in the family house market, and is contributing to the current shortage of this type of rental property. The traditional buy to let market of one and two bedroom flats, however, is relatively unaffected,’ she added.
She pointed out that unlike investors in the mainstream housing market, investors in prime central London have long been willing to accept lower yields while prospects for capital growth remain high.
‘Total returns continue to be attractive, but growth in prices has outpaced rents and, as a result, yields in central London have fallen. The strength of the sales market is leaving some investors in a quandary. Many could release significant gains from the rise in value of their properties,’ said Morton.
‘However, selling up means missing out on the prospect of further growth. Average prices in prime central London have increased significantly, and are now 47% higher than they were in 2010,’ she pointed out.
‘Growth in the City employment sector has long been a barometer for the prime London lettings market, and with the London economy accelerating quicker than anticipated, coupled with London’s rising population, this will continue to drive demand for rental properties and support rental values,’ explained Morton.
‘From a prospective landlord’s view, the status quo of London’s market must be appealing, with tenant demand expected to rise at a time when London struggles with an acute undersupply of homes. As residential construction increases, there will be more opportunities for investors. As price rises to date have pushed owner occupation beyond the reach of many, landlords should be fairly confident in securing tenants. The capital growth value is clearly slowing and the savvy investor will benefit from the next nine months running up to the general election to build on a portfolio and invest in locations where there is an apparent shortage of stock and strong demand,’ she added.
Meanwhile, the latest figures from Benham & Reeves Residential Lettings show prime central London rents on the rebound but the independent letting agent is keen to stress that the statistics do not represent a recovery for the area.
Although average rents have improved by over 4% in the second quarter of this year, this is after three quarters of decline. Rents for the area are still down for the area year on year with letting agents having to temper landlord expectations.
Elsewhere in central London, rental values have mostly remained unchanged while the inner suburbs in both east and west London showing moderate growth of two to four per cent. In fact, almost all areas of London that have a strong domestic market have seen a sustainable rise in rental values while investor led markets in Knightsbridge and Canary Wharf have not faired as well.
The firm says that the biggest driver for this change is the value of sterling. With the European Central Bank refusing to rule out more quantitative easing and Sterling at a six year high against the dollar, the overseas tenants who are drawn to prime central London are seeing their spending power reduced.
Meanwhile, the British economy is gaining strength and consumer confidence is growing in the domestic market. This does not bode well for prime central London rents but explains rising rental values in the inner and outer suburbs favoured by British tenants.
'The rise in prime central London rental values is slightly misleading. 'Although rents have gone up, you have to look at prime central London's performance over the past year. It has a lot of ground to regain before it reaches former levels and with exchange rates as they are, I do not see growth in the short term. Right now, it is all about the domestic market,' said Marc von Grundherr, lettings director of Benham & Reeves Residential Lettings.
