London’s prime rental markets are beginning to segment as tenant demand is becoming increasingly varied depending on property type and location. The overall trend is one of small rental falls, but hidden within this is a divergence of performance.

Average prime London rents fell by -1.9% during the fourth quarter of 2012 leaving annual growth at 0.5%. However, this figure masks some variations both in terms of location and the type of property; in central London values fell by -0.7% but rose by 0.7% in the prime rental markets of Islington.

Continued economic uncertainty and threats to employment in the financial sector are affecting corporate relocation budgets, with single executives relocating rather than families. This is hitting the family house markets in many prime London locations.

Conversely, strong demand for one or two bedroom flats is being seen from young professionals and wealthy students. Over the last quarter, rents for one beds have out performed the rest of the market as rental prices stayed flat compared to a fall of -1.9% for all properties.

Central London

In central London (Chelsea, Kensington Mayfair, Knightsbridge and Belgravia), where the average rent at £62 per sq ft is highest, flats continue to outperform houses year-on-year recording 0.2% growth against a -1.7% fall.

Demand for well-finished flats in a portered block has been driven by international students from wealthy families and professionals in the early stages of their career.

Domestic London

Values in South West London fell by -1.8% over the quarter as the demand for family housing slowed and the stock available outweighed demand. In this market 28% of landlords are letting for reasons other than investment some 13% higher than the average across the whole prime London market. This reflects a reluctance among those moving to the country to sell their London home in the current market.

However, growth earlier in the year by corporate tenants looking for value beyond the central London market means that annual growth remains positive at 2.3%.

The seasonal nature of the market in North West London (mostly around Hampstead and St John’s Wood) resulted in the greatest falls over the quarter with rents falling -3.7%.

Due to its dependence on the family market, values have been affected by properties which were not let before the start of the school term. In the prime North West the average length of tenancy has increased from 354 days in 2009 to 454 days in 2012, as landlords have sought to mitigate against the volatility of the market by securing tenants for longer terms.

Lower corporate budgets have affected high-end rents in the East of City as prices fell by -0.9% over the quarter. However, activity for one and two bedroom flats from the corporate sector remains strong which in turn continues to attract overseas investors to the area.

Outside the capital

In the South East, rental levels fell back slightly during the fourth quarter (-2.7%), partly due to a seasonal fall in applicant levels. However, rents have increased by 1.6% over the year given demand from people renting before committing to a house purchase in the commuter zone.

These improved rental values have encouraged some ‘accidental landlords’ to continue letting their properties for longer than they had intended. Here the mid market rental stock continues to perform most strongly given a sustained increase in demand from young professionals, who pre-credit crunch may have been homeowners, but whose aspirations are hindered by the need for sizeable deposits.

Over the last four years, levels of international tenants have remained consistent at around 25%. However, in contrast to central London, there has been a significant increase in those employed in the financial sector, rising from 53% of international tenants in 2009 to 62% in 2012 suggesting they are increasingly prepared to consider rental stock in commuter locations.

View our video overview for the Spotlight on Prime Rental Markets