Overall, the prime rental markets of London saw values increase
by a modest 1.4% in the first quarter of 2012, reversing the small falls seen in rents at the end of 2011. That leaves values just -0.2% below where they were this time last year. However, rental movements have been volatile over the past year and it was a mixed picture
across London.
In the South East of England, prime rental values rose by 1.1% over the quarter as applicant levels increased. This follows a weaker second half of 2011 when rental values suffered due to a lack of demand and stock levels crept up. That reflected a slowdown in the sales market, which has seen stock pulled back into the lettings market. Due to the falls seen over this earlier period, rents have fallen by -3.4% over the past year.
Central London was the strongest performer within the prime rental markets over the last year (+3.2%). However, the rate of annual growth is lower, reflecting a much weaker Q1 compared to last year. In line with rental growth slowing, we have seen a fall in demand with applicant levels per property easing back.
This in part reflects a weakened outlook for the financial services sector, which makes a significant contribution to rental demand across all prime rental markets. Over two-thirds of tenants are employed in this sector, second only to the East of City, and annual rental movements within this market have historically borne a close relationship with annual movements in the FTSE 100 (Graph 1).
Specifically, there has been lower demand from overseas tenants as the number of tenants posted abroad into London’s financial markets has fallen.
The proportion of new tenants from North America and Western Europe fell from 53% in the first half of 2011 to 40% in the second half, indicating that while the sales market benefited from the global turmoil, the lettings market has seen the opposite effect.
Domestic demand
By contrast, the more domestic prime markets of South West London saw the strongest rental growth of 2.3% over the quarter, reversing the fall in rents seen during the second half of 2011. This increase was bolstered by strong demand, particularly for family houses on the back of stock shortages. Supply levels are nearly -25% below the long-term average.
In the less stock constrained prime North London markets of Hampstead and Islington, rental values fell by -5.6% over the year. These markets have been particularly volatile over the period. The majority of these falls occurred towards the end of 2011 and reversed very strong growth in rents over the spring/summer market.
The East of City markets were initially the slowest to recover in the aftermath of the credit crunch. However, with rental growth of 1.8% over the year, the Docklands area is now recovering lost ground, as it has adjusted to a more diverse tenant profile and is now less reliant on the financial and business sectors. This has been a catalyst for renewed investor interest, particularly from Asian buyers.