Central London rents 'dip for first time in two years', says Savills

Tuesday 26th June 2012

Annual prime London rental growth has slipped back into negative territory for the first time in two years, down -0.4% year on year.

It comes despite a rise of 2.3% in the first six months of this year, according to the Savills prime rentals index.

Savills says it reflects weak short-term prospects in the financial and business services sector.
 
“The financial sector has long been the lifeblood of the prime London rentals market and rents have struggled to limp past their pre-Lehman peak,” said Lucian Cook, director of Savills research.
 
“The profile of tenants has changed as a direct consequence of weakened sentiment, with a notable decrease in big-ticket tenants employed in the financial sector in the prime central and east of City markets of Canary Wharf and Wapping. As such, there are a number of new and increasingly localised market forces being seen in the capital.”
Prime central London values remained flat over the past three months, while values are down -0.5% year on year. Stock levels have increased as overseas ‘safe haven’ buyers brought their investments to market, easing supply constraints and suppressing rental growth.
 
The safe haven effect has also impacted the upper end of the market which remains 5% down on peak. Traditional high net worth occupiers looking to shelter wealth have been inclined to buy rather than rent, while those continuing to rent have focused on iconic, fully-serviced buildings, meaning the ultra prime market has become increasingly selective, says Savills.  
 
Average rents across prime central London now range from £91 per square foot for the top quartile of rental properties to just £41 per square foot for the bottom quartile.
 
Savills says there has been recent evidence of increased levels of corporate demand, but in broad terms, the market trend is towards self-funded tenants, squeezing budgets and focusing demand away from the top end of prime central London. 
 
Demand from young, City professionals at the lower (£250-400 per week) end of the east of City markets is described as ‘red hot’. This has underpinned average values in these locations, where values rose 0.8% in the past quarter and are now 3.7% over peak.

The big news, according to Jane Ingram, head of Savills lettings, is that family demand is finally coming back to some key sectors of the prime market, where houses have underperformed flats over the past year – but its focus is shifting away from core central locations. This has benefited the traditionally domestic locations of south-west London.
 
Families have also returned to Kensington, Chelsea and Knightsbridge in the past few weeks and the £2,000 to £5,000 per week market has shown signs of picking up after a few months of very slow trade.
 
There are also signs of a ripple effect out of London, with the prime markets of South-East England seeing demand up 16% and values up 3.6% in the past six months, although still -1.5% down year on year. Demand is focused on key commuter towns, mirroring early patterns of recovery in the underlying housing markets.
 
Savills says the biggest issue facing the private rented sector is the need to increase supply.
 
Cook said: “As currently proposed, the new stamp duty regime would put investment funds and some of London’s landed estates at a disadvantage to the rest of the private landlord market, while the proposed annual levy would impinge on net income yields that are critical to the investment credentials of this sector.
 
“The recently published Treasury consultation paper, ‘Ensuring the fair taxation of residential property transactions’, opens the door for additions to the exemptions to these charges.”