Over the past two years, rents have shown little growth across the prime residential markets. Rental growth in prime commuter locations, although not dramatic, has been higher than in prime London over this period. Average rents have risen by 4.7% in the commuter zones despite rental values experiencing a seasonal fall of -2.1% in the past three months. In comparison, London rents are up 1.2% over the same two year period.

Over the longer term, rental values in prime commuter locations are on average still -5.3% below their 2008 peak. However, in prime London, rental values are closer to their peak at just -1.7% below, which is a result of the relatively strong recovery in 2010. This was underpinned by a lack of available rental stock which is no longer evident.

Prime London

Rental values across prime London saw a marginal increase of 0.5% over 2013, continuing a period of lacklustre rental growth. This reflects an increase in available stock rather than falling demand. Consequently, the market remains active without landlords being able to dictate rental values.

This increase in competing supply has been particularly evident in central London, reflecting an increasing level of overseas investment. In 2013, 30% of landlords bringing stock to the market in prime central London were from overseas, compared to 19% in 2012.

We expect overseas investors to remain a force in the market, despite the recent announcement that capital gains tax will apply to non-resident investors. Particularly given that the tax will apply on future gains from April 2015.

This means that there will be no mass sell-off as foreigners look to crystallise past gains. It also seems unlikely that it will deter future overseas investors for whom the benefits of investment in London property are manifold.

In fact, even with capital gains tax, London still looks competitive on the international stage as Table 2 details.

Against this context, relocation budgets have fallen over the past year with the average budget in 2013 for a 2 bed and a 4 bed now -4.9% and -12.1% lower than in 2012 respectively.

Consequently, the largest rental falls have been seen in the higher value areas of prime central and prime north west London which achieve an average rent per square foot of £61 and £43 respectively.

Locations beyond the core central areas have seen stronger growth as tenants are looking for value and are increasingly willing to expand their search to locations they had not previously considered. The strongest rental growth over 2013 was seen by prime flats in the south west and the east of City.

Taken from
Spotlight: Prime Rental Markets - January 2014