London rents beat inflation, rise to new highs

KUALA LUMPUR: Prime London rents have been rising above inflation rates for at least the past 18 months, according to the latest research from Savills.

Jane Ingram, Savills’ head of lettings, said: “After several years of steady, if unexciting growth, the Prime Central London market has experienced its most dramatic quarterly improvement for some years. Tenants staying put (either “can’t buy” or “won’t buy”), limited development supply and steady corporate demand are all squeezing prices. Unless stock comes into the letting market from the sales market, these factors look likely to dominate for the remainder of the year.

“Sector by sector, the picture is far from consistent with one and two-bedroom properties and family homes having made most of the running with properties offering the best of locations performing even better,” she said in a press release.

According to Savills, Prime London rents in the past 12 months have risen 10% and averaged 4% higher than their 2007 peak.

Rents in the Prime Central London area increased 7.5% in the past 12 months, a slightly lower annual growth rate than the all Prime London average. In 2Q11, Prime Central rents had a 3.8% increase compared with 1.8% across all Prime London, suggesting that this area is bucking the trend and will fast regain its peak.

The lower end of the Prime Central London market, where weekly rents averaged £1,250 (RM6,009) had the sharpest rent increases by rising 4% in 2Q and 6.4% above their peak. Whereas, ultra prime properties, with average weekly rents of £4,000, increased by 3.6% in 2Q but remained 8% below their peak.

“A number of different factors are now driving the market. A boost in demand from international and corporate tenants is driving values in central locations, but rental growth is underpinned by strong and growing demand from would-be buyers unable to access home ownership. Constrained stock levels are creating competition and an upward pressure on rents,” said Yolande Barnes, head of Savills residential research.

“For now yields are flat-lining at 3.8% gross (or around 2.3% net of all property costs) as rental growth has effectively been matched by capital value growth over the past year. This is expected to continue as Savills forecasts both Prime Central London rents and capital values to grow over the whole of 2011 — rents by 7% and values by 8%. For all Prime London, our 2011 forecasts are for rental growth at 8% and capital value growth at 6%,” added Barnes.

Flats marginally outperformed houses across all Prime London and rents are now 4.9% over peak, compared with 2.1% for houses. A similar pattern is emerging in Prime Central location, it added.

Savills research forecasts rental growth to outpace capital value growth very slightly over the coming five years in Prime London and expects yields to remain broadly stable. In the mainstream UK market as a whole, five-year rental growth (at 31%) is expected to be considerably greater than capital growth (12%) so yields should continue to move out in many markets, it said.

According to Savills, the northern and eastern parts of London still dominate London rental growth. In the north, St John’s Wood and Regent’s Park rentals increased sharply by 4.9% in 2Q and is now 20.6% over peak. In the east, a revival in financial sector employment and sentiment boosted rentals of Wapping and Canary Wharf by 2% in 2Q and by 11.6% in the past year. However, these locations fell most sharply in the downturn and rents remained 7.5% below peak.

Other locations which attract City-based tenants are Islington and Hampstead, having risen 11.3% over the past 12 months, though their varied client base and more limited stock levels mean that rents are now 15.2% above peak, said Savills.

This article appeared on the Property page, The Edge Financial Daily, July 8, 2011.