The previously strong residential rent growth has recently eased in the prime rental market of London, while in the prime markets of the South East we have seen rental values soften slightly. Price movements of 0.4% in the former markets compares to -2.3% in the latter over the three months to the end of September. This, in part, reflects a weakened outlook for the financial and business services sector which makes a significant contribution to rental demand.
Across the prime rental markets of London, 55% of new of tenants over the past five years have been employed in the financial services sector, the highest proportion being seen in the markets of central London and Canary Wharf/the Docklands. Within the prime markets of the South East, this figure remains as high as 33%, with a further 11% of tenants coming from other business services sectors.
Oxford Economics has forecast a 1% contraction in employment in this sector in London in 2011 and reduced their forecasts for growth in 2012. In particular, corporate tenant demand remains suppressed In 2011 these lettings have accounted for 7% of new tenancies in central London, some way below the 23% seen in 2007.
Despite this, the level of prevailing letting activity has prevented stock levels rising to unsustainable levels, keeping supply and demand broadly in balance.
This has been underpinned by high levels of tenant renewal and an increase in the length of term taken by new tenants. Over the period from 2007 to 2011 the average length of tenancy has risen from 360 days to 416 days as tenants have increasingly looked to secure terms in excess of a year.
Similarly, in the main, a relatively strong sales market (particularly in London) has prevented the return of the accidental landlord. In 2011 80% of prime landlords, have let property as a conscious investment activity, up from 70% during the first half of 2008 when accidental landlords were at their most prevalent.
Such factors have allowed landlords of prime property to continue to secure rents at or close to their asking rent. In the third quarter of 2011 agreed rents averaged 99% of asking rent in the prime London market, a figure close to that achieved at the peak of the market and much higher than the 94% seen at the bottom of the market.
Relative rental levels
Comparing rental levels across the different prime residential markets is complicated by the differing nature of the residential stock.
It is of no surprise that rentals in prime central London are by far the highest, fuelled by predominantly international demand. Here foreign nationals account for three out of every four tenants.
There are two predominant tenant groups, those from North America (who traditionally rent rather than buy) and Western Europe. Between them, these groups account for just under 50% of tenant demand.
As a consequence average prime residential rents vary from £37,000 per annum for one-bedroom properties (higher than the average rent for a prime four-bedroom property in the London hinterland of the South East) to £182,000 per annum for four-bedroom properties.
Such has been the historic strength of demand from affluent young tenants employed in the financial services sector that the next most expensive rental market is that of the Canary Wharf and the Docklands, though here the market is essentially confined to flats. Nonetheless, rental levels for one and two-bedroom flats average £20,900 per annum and £28,800 per annum, the latter being
roughly 25% above rents for broadly comparable product in prime south-west London.
Here the demand for family housing is strong, leading to average rents of £46,300 for four-bed houses in this area. By contrast the average rent for a four-bedroom house in the prime markets of counties adjoining London is £28,500, though here there is substantial variation by location.
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