Source: Savills Research
Third quarter growth slows in prime London rental markets.
Summary
■ Across prime London as a whole rental growth remained flat in the third quarter of 2015, leaving annual rental growth at just 1.2%.
■ Continued demand from young professionals who are relocating to London for employment has driven up the rental values of smaller, less expensive properties.
■ High levels of new build property coming to the market simultaneously could lead to rents coming under pressure. However, over the medium term we believe this level of supply will be met with relative demand.
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TABLE 1Prime rental movements to Q3 2015
Rental growth remained flat in the third quarter of 2015 in the prime residential markets of London, leaving annual growth at just 1.2%.
Across the capital as a whole smaller, less expensive properties have seen the greatest annual rental growth. Properties with a weekly rent of less than £500 have seen a rental growth of 3.8% annually, compared to a 1.7% rise in properties priced between £500 and £1,000 per week and a 0.1% increase for properties priced over £1,000 per week.
Similarly, studios to four bedroom homes in prime London have experienced rental growth over the past year, whilst five and six bedroom properties have seen small falls in average rental values.
This trend of smaller, less expensive properties experiencing more growth stems from continued demand from young professional couples who are relocating to London for employment.
Corporate Demand
According to Savills data, 46% of tenants in the prime London lettings market are renting due to employment relocation. However, Savills data has found that the average weekly budget given to an employee relocating to London has fallen. This year the average budget is £800 per week to date, down from £890 per week in 2014.
These shrinking corporate budgets and evolving tenant profiles have caused the focus of demand to shift away from traditional townhouses in prime central London to flats in wider prime areas.
In terms of location, the prime north and east London rental market – consisting of Canary Wharf, Wapping and Islington – has had the biggest annual rent rise, up by 4.5%. This area continues to witness demand from those who are unable or unwilling to buy. The nearby employment opportunities play an essential part for the rental market of the north and east, given the proximity to the City and Canary Wharf, two of the main business districts of London.
Outlook
Over the next five years the London economy is forecast to continue strengthening, which will underpin demand for prime rental property over the medium term as more people move to London for employment opportunities.
In particular, the scientific and technology sector is forecast to have the largest amount of growth over the next ten years. This means that areas of prime London, such as Islington, where a high proportion of tenants employed in this sector already live, will continue to see strong demand for rental property.
High numbers of new build properties brought to the market simultaneously could lead to rents coming under pressure, in the future. This is more likely at the top end of the rental market, where there is a larger number of luxury flats being built.
However, over the medium term, we believe that as the supply of rental properties increases, it will be met with demand resulting in an active prime London rental market.
Yields
Significant variation
Yields across prime London vary significantly, ranging from an average prime gross yield of 4.4% for a flat in Canary Wharf to 2.9% for a house in more central prime areas.
Focusing on prime south west London, both yields and annual rental growth vary depending on the size of property. Annual rental growth for smaller, one bed properties delivering the highest income yields for investors is driven by demand from young professionals and sharers in the area. By contrast, larger properties with over five bedrooms have shown falls in rental value over the last year and also have lower gross yields.
