The Olympics undoubtedly contributed to slower market activity in the third quarter of 2012 causing rents to fall slightly in the prime markets of Central and North London and contributing to very low levels of rental growth in other parts of the prime rental market.
More fundamentally, weak economy and a lack of employment growth in the financial and business services sector has suppressed demand, whilst stock levels have risen as overseas investors have brought rental stock to the market. As a result, on average, rents across the prime London markets do not show any meaningful growth compared to either this time last year or the previous quarter.
Levels of corporate demand remain broadly unchanged. However there is evidence that demand for houses amongst those employed in the financial and business services sector is shifting from Central London to less expensive prime areas such as Fulham and Richmond.
Over the last three years tenants from the financial services sector have risen from 59% to 67% in South West London and fallen from 76% to 68% in Central London.
Our analysis of rents on a per square foot basis shows there is a 55% differential between rents in Central and South West London, meaning a saving of £70,000 per annum in the cost of renting an 2,000 sq ft family house.
As a consequence while rents in Prime Central London saw a -0.4% fall over the quarter, rents in prime South West London rose by 0.4%, with rents for houses (as opposed to flats) rising by 0.9%.
A secondary consequence has been an increasingly international tenant profile in the South West London markets, with an increase in demand from European tenants, who accounted for 29% of the market in the this quarter of 2012, particularly apparent.
Despite low levels of rental growth in the Islington flats market, North London has not benefitted in the same way as South West London. Prime rents fell by -1.5% over the quarter and -4.1% over the year, on the back of rental falls in the family house markets in Hampstead and Islington.
However, average rentals in the Prime East of City market did increase slightly over the quarter given the first hint of an increase in corporate tenants who accounted for 12% of demand in H1 2012.
Outside of London rents continued to rise modestly in the prime markets of South East England. Here there is evidence of people renting before committing to a house purchase in the commuter zone. Applicant levels therefore remain strong in the core commuter towns which continue to outperform fringe locations. Agents are reporting a fundamental shortage of stock, suggesting more investment is needed in the sector.
£ per sq ft analysis
Even in the prime markets there is evidence of tenants becoming increasingly cost conscious, considering how much space they can attain at what cost in different locations and for different properties.
Assessing rents on a sq ft basis has become increasingly relevant to growing numbers of tenants, replicating something we have already seen in the sales market.
Within Prime Central London the rental range is particularly wide, indicating the importance of both location and the quality of accommodation in what has become an increasing discerning market.
Top decile rents of £109 per sq ft go some way to explaining the trend for office to residential conversion of large traditional properties in the most desirable streets and, in some cases, the reconversion of previously subdivided properties back into a single house.
The ability to deliver scale is a particularly important driver for landlords given stock shortage, resulting in higher rents per sq ft for
5 bedroom plus properties compared to one and two bedroom units.
By contrast in South West London smaller one, two and three bedroom dwellings typically attain higher values per square foot than larger four or five bedroom family dwellings, with one and two bedroom flats delivering the highest income yield to investors, driven by demand from young professionals and sharers, a position much more akin to the wider rental market.
A similar pattern is being seen in the prime North and East London regions, where properties with 5 bedrooms plus average £26 per square foot and yield 3.0-3.5%, while one and two bedroom properties can generate £34 per square foot and yield just over 5.0% – the highest in the capital.