Despite rental growth of 2.3% over the past six months, annual rental growth in the prime markets of London dipped back into negative territory for the first time in over two years in the second quarter of 2012.

For the past year, average rents have struggled to push beyond the previous peak seen pre-Lehman brothers. This reflects relatively weak short-term prospects in the financial and business services sector of the London economy, that is a key component of demand for prime residential rental stock. Oxford Economics forecasts that employment in this sector will contract by 0.9% in 2012 and increase by just 1.0% in 2013.

A consequence has been a more diverse tenant profile with a notable decrease in tenants employed in the finance sector seen in the prime central and East of City markets. However, there has been recent evidence of increased levels of corporate demand, with 13% of leases in London made to a company during the first three months of this year compared to 10% during Q4 2011.

Over the last quarter, houses in prime South West London showed the strongest growth where rents rose by as much as 1.8%. Here stock has noticeably been more constrained than Central London. At the end of May there were 3.7 months stock on the market compared to 4.8 months this time last year.

In addition, the more domestic markets of South West London are seeing an increase in demand from international tenants as demand has been divided and less expensive prime areas are taking advantage of the difference in rents between Central London and other prime areas. During the second half of last year international tenants accounted for 47% of all tenant, this has increased to 52% year to date.

Partly as a consequence, Prime Central London saw rental values remain roughly flat over the quarter. Here overseas investors, who have bought more investment property as a hedge against uncertainty in other markets, brought more stock to the market.

As a whole the ultra prime markets of London have yet to recover to peak values. Occupiers have more readily bought in order to provide a safe haven for their wealth. Those who continue to look to rent are focussing on iconic fully serviced buildings. In this respect the market has become increasingly selective.

In what is a more volatile market, rental values in South East England have increased by 3.6% in the first half of this year, leaving average rental values -1.5% below what they were this time last year.

This reflects an increase in demand seen throughout the South East of England as applicant levels increased by 16% over the first three months of the year against a notable fall in available stock.

There has been a difference between the rate of recovery in the core commuter towns and the slightly fringe village locations, with the latter underperforming.

Taken from
Spotlight: Prime Rental Markets Q2 2012