Large institutional investors or small individual landlords alike find London 
a very attractive market to invest in. 
As Figure 1 shows, levels of investment in prime properties across London has increased significantly since 2008. In H1 2014, investor buyers accounted for one in five buyers of second hand stock. However, their motives for investment and the returns which they seek vary 
by location.

In PCL gross income yields currently average 2.9% with investors most interested in capital value growth and a secure store of wealth. However, within PCL gross yields vary and tend to be higher for property worth less than £2m. Our analysis suggests that they rarely exceed 4.0%.

In contrast, in the east of City the income return is much more of a consideration. The markets of Canary Wharf and Wapping, which have far more in common with the UK mainstream market, deliver an average gross yield of 4.3% for a typical two bedroom property that is worth in the order of £700,000. This gross yield rises to 5.1% for a one bedroom property.

Will demand meet supply?

Although it is widely recognised that London has a shortage of homes being built, this is predominantly the case for the lower end of the market.

International investors have traditionally been interested in buying rental properties in established prime locations such as PCL and the east of City where the pipeline for new prime properties is much greater.

On the demand side, it is those relocating, whether for employment or lifestyle, who form the majority of tenants in the prime rental market (Graph 1). Only 6% of tenants are renting due to affordability constraints in the residential sales market. However, with the Bank of England announcing tighter mortgage lending and interest rate stress testing, difficulty meeting lending criteria is set to increase.

This comes on top of the significant hurdle of raising a deposit. As such, 
we may start to see an increase in people who are renting in the prime markets due to affordability constraints.

Although the supply pipeline in some prime markets is looking full, if demand from tenants meets supply, the potential for suppressed rental growth will be much lower. In prime central London widening international and occupational tenant demand will go some way to soaking up new stock.

The east of City will be able to cope with a increasing supply pipeline if the development stock matches demand in terms of type and price of those locked out of home ownership.

Taken from
Spotlight: Prime Rental Market - July 2014