Growth in prime London rents falters as supply soars
Date: July 2008 | 
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Key Highlights:
- Residential rents in prime central London continue to grow, but at a much slower pace than last year as a result of increasing stock, much of it formerly owner-occupied
- Quarterly growth was just 0.6% during the second quarter of the year, compared to 4.2% over the same period in 2007
- Annualised growth has dropped to 7.6% from a peak of 15% at the end of last year
- Wimbledon is the strongest performing area, with rental growth of 11.2% over the past three months in the wake of a spike in demand for large, high quality homes, which are in short supply
- We believe that both rents and yields will recover towards the end of the year as the amount of new supply begins to fall and enquiries increase
Liam Bailey, Head of Residential Research, Knight Frank comments:
"Residential rents in prime Central London continue to buck the trend seen in the sales market, and are still increasing – although not at the pace seen last year, when quarterly growth hit more than 4%.”
"Overall, rents grew at 0.6% between April and June, and are now 7.6% higher than at the same time last year. This is driven by the increase in demand from those who have chosen to delay buying a home, opting instead to rent until the market stabilises.”
"However, this phenomenon is now being balanced by the amount of supply coming onto the market, another consequence of the slowdown in sales. Many frustrated vendors – those who need to move or have found their ideal next home – are choosing to rent out their property, which has rapidly enlarged the pool of rental homes available. This is beginning to compensate for the reduction in supply last year, when many landlords opted to sell and realise their capital value gains.”
"Nevertheless, there are geographic variations in this picture. Rents grew fastest in West London, at 2.9% – perhaps reflecting the continued interest in these prime areas from the international market.”
"The market was weakest in parts of South-West London, where values for flats fell by 6% and for houses by 1%. This is a direct result of the number of developments that have now completed along the river, which has produced a substantial new supply in more central areas.”
"There is also some evidence that the market for flats priced at over £1,500 per week is suffering, mainly as the City professionals who dominate this sector are opting to economise and rent cheaper properties as a result of concerns over the financial markets.”
"One particular bright spot in the market is Wimbledon, where rental values have shown surprisingly strong quarterly growth of 11.2%. This is partly because of the number of highly specified, previously owner-occupied homes coming onto the market in this location. It is also the result of the increasing demand for this leafy village location from wealthier individuals, unaffected by the credit crunch and attracted by the stock on offer and the quality of the nearby schools.”
"Moreover, the combination of declining sales values and increasing rents has pushed up yields, which now stand at 4.07%, up from 3.94% during the first quarter of the year. The continuing weakness in the sales market will further push up this figure.”
"We believe that rents should also begin to rise again towards the end of the year, as supply bottoms out and demand, buoyed by a stagnant sales market, continues to rise.”
Tim Hyatt, Head of UK Lettings, Knight Frank, comments:
"The market for lettings remains strong, but rents are under pressure as a result of the amount of new properties coming to the market. There is now double the amount of stock available compared to this time last year.”
"However, a shift will occur in the market later this year, when new supply begins to dry up. Rising interest rates and a weak sales market look set to create more tenants, who are increasingly rejecting the view that rent is dead money.”
"Both demand and values look set to rise significantly – we are in for a busy time over the next six months, although we are still struggling to find the middle ground on which tenants and landlords can agree.”
"Moreover, as sales values fall and rents increase, holding properties for cashflow purposes will become viable as yields increase. Already, we are seeing developers who were previously working on a “buy and sell” model seriously considering holding onto properties purely for the rental returns.”
For further information, please contact:
Liam Bailey
Head of Residential Research
Email: liam.bailey@knightfrank.com
Tel: 020 7861 5133
Mob: 07919 303148
Tim Hyatt
Head of UK Lettings
Email: tim.hyatt@knightfrank.com
Tel: 020 7861 5044
Mob: 07979 792 258
Davina Macdonald Lockhart
London Residential Press Manager
Email: davina.macdonald.lockhart@knightfrank.com
Tel: 020 7861 1033
Notes to Editors
Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank and its New York-based global partner Newmark Knight Frank operate from over 165 offices, in 36 countries, in six continents. For further information about the Company and this research, please visit www.knightfrank.co.uk/lettings