London residential rents grow faster than sale prices

LONDON: The cost of market entry for first-time owner-occupiers is preventing many from buying their own home and so is boosting demand for rental property in London. A dearth of rental stock in many locations is pushing up rents and future prospects for rental growth are very strong, said real estate advisory Savills researchers.

Savills forecast that the private rented sector will account for one in five of all households by the end of 2016.

Mainstream rental growth has been particularly pronounced in Greater London where average residential rents rose by 16% in 2010.

The prime rentals market is also seeing strong price growth. Average prime London rents increased by 3.4% in the first three months of 2011 and by almost 12% in the past 12 months, the latest analysis of the Savills prime London rentals index shows.  

This growth shows no signs of slowing, and outpaces the 2.8% growth seen in 1Q11 of the underlying value of properties according to the latest analysis.

“This value dynamic will push out yields and attract investor interest, and there is clear evidence that investor buyers are already emerging from the shadows,” said Yolande Barnes, head of Savills residential research in a statement on May 11

“High rent rises are not confined to the prime market and, as more aspiring buyers are frozen out of home ownership, demand for private rented stock in the country as a whole can only grow,” said Barnes. “Our prognosis for the private rented sector as a whole remains extremely bullish.”

Jane Ingram, head of Lettings at Savills added: “London continues to have the international draw; we therefore don’t foresee that stock levels in the rentals market are going to change due to a continued demand from overseas tenants.

“We may see slightly more stock come to the market as those landlords who aren’t living here full time choose to rent out their properties.”

Corporate demand and City cash boost rents in North and East London
Central London rents are traditionally driven by demand from corporate tenants from overseas, which focuses on the high value prime areas and which has been on the increase since the recovery in the financial and business services sector in 2009. Rents have risen since the beginning of 2010 and steeply in 2011.

Price growth has been particularly pronounced in locations where renewed City confidence has translated into boosted demand for good rental property, both from domestic and international tenants. According to Savills, this has especially benefited prime East London (Wapping and Canary Wharf) — with rents up 4.3% in the quarter and 13.4% year-on-year — and North London (Islington and Hampstead) where an uplift of 3.6% in the quarter and 16.1% y-o-y has left values some 15% above their former peak levels. Much of this growth is due in no small part to low levels of good prime stock.

Prime central London values have also risen, albeit less sharply. Average values rose by 2.9% in the quarter and by just under 6% in the course of the last year, so remain 4.5% below peak levels.

Exceptions are St John’s Wood and Regent’s Park where annual growth has passed 10% in the quarter and values are now some 15% above their 2007 peak, though transaction volumes are extremely thin.

Yields boost forecast
During the downturn, rental growth continued to the middle of 2008, raising rental yields slightly against the then falling, capital values.
Average prime central London yields moved out from 3.6% in December 2007 to 4% in December 2008.

After this, as capital values rose while rents were still falling, yields stabilised, then started to move in again to 3.7%. Savills expects yields to move out slowly again as the rate of rental growth exceeds capital growth during 2011.

Overall, the prime London rental market remains positive. More investor landlords have been seen bringing new investment properties to the rental market, which will boost prime central London stock levels in key locations such as Mayfair.  

“In November 2010 we stated that the outlook for well-located private rented stock was good.

“The rises seen so far this year support our forecast for 8% growth this year in prime London,” said Barnes.

Prime London market strength indicators point to continued rental growth in 2011 although the rate of growth may slow in some markets.

The highest rental growth this year is expected in prime southwest London (Fulham, Putney, Wandsworth, Richmond) as stock levels here are particularly low and demand high.