^{Source: Savills Research}

Across prime London, average rents fell -5.4% in the 12 months to March 2017. Further marginal softening of -0.4% in the first quarter of this year suggests they are still finding a level. The most significant falls were seen in the highest value prime central London markets, which were down -8.0% in the year.

Rents continue to come under pressure from the amount of stock being added to the market. New build completions, buy-to-let investors and accidental landlords alongside weakening demand from corporate tenants have combined to inflate stock levels.

Smaller, less expensive properties continue to outperform larger family homes. Although prime properties renting for less than £500 a week have seen annual falls, over the past five years, average rents for these properties have risen by 9.3%.

In comparison, at the top end of the market, properties renting for above £1,000 per week have seen rents fall back by -10.9% over the same period. These properties are particularly exposed to weakening demand from those employed in the finance industry who, since the referendum, have been more budget conscious, particularly at a senior level.

On the other hand, this declining level of demand will be offset from tenants who see an advantage to putting the money they would have spent on stamp duty into renting a trophy home instead.

But despite being much more price sensitive, the prime rental market has remained relatively active. London still retains its reputation as a global city underpinning demand, but increased choice means tenants are now primarily focused on finding value and ‘best in class’ properties.

This means that tenants are favouring new and newly refurbished stock over tired stock, even if heavily discounted, meaning that landlords need to invest to avoid voids.

OUTLOOK

A challenging market

The outlook for the prime market in London has its challenges. While we expect strong continued demand from young affluent households facing a significant deposit hurdle to buy their first home, the strength of the rental demand from other tenant groups will be more dependent on the outcome of the EU negotiations and London’s ability to remain a leading global financial centre.

Alongside this, the current supply imbalance is likely to suppress rental growth in the mid term. As such, we are forecasting small further rental falls in prime London in 2017 with marginal price growth in the following two years.

With this in mind, landlords in prime London will need to continue to remain realistic in their price expectations, whilst offering stock of the best quality to capture demand.

^{*NB: these forecasts apply to average rents in the second hand market. New build rents may not move at the same rate}

^{Source: Savills Research}