Source: Savills Research
Rates of annual falls across the prime rental markets of the capital have slowed, as supply levels become more balanced
Price growth summary
Despite prime rents across London falling by 1.0% over the third quarter of 2017, rates of annual falls have slowed, most noticeably in the most expensive markets in central London. Here, demand and supply are becoming more aligned, particularly for super prime properties (£4,000+ per week). A key driver is the rising number of high net worth individuals choosing to rent rather than buy as a consequence of high stamp duty purchasing costs.
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FIGURE 1Prime London by region Despite prime rents falling, the rates of annual falls have slowed across London
Active market
Although rents have been falling marginally for eight consecutive quarters, the prime rental market in London remains active, defying some of the economic uncertainty surrounding the UK’s decision to leave the EU.
Strong demand continues to come from needs-based tenants, who are particularly driven by the space and quality of accommodation they can get for their money, rather than limiting their search to a specific geographical area.
This is also true for corporate relocators who want to stretch what they can get with their allocated budget. As such, prime zone 2 to four locations such as Clapham and Richmond have become more attractive.
Small more in demand
Less expensive properties in the market below £500 per week have witnessed smaller annual rental falls than more expensive properties.
Likewise, smaller properties of one and two bedrooms have performed better than larger properties on both a quarterly and annual basis.
This is not a recent trend. During the past five years, demand from affluent households – who either prefer to rent or are unable to raise a deposit to purchase – have supported rents.
Over this period, prime rents for one-bedroom properties have held their own, displaying growth of 3.6%.
By contrast, larger homes with six or more bedrooms (for which demand is much more discretionary) have seen falls of 13.6%.
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FIGURE 2Growth pattern Smaller properties with one and two bedrooms have performed better than larger properties
Source: Savills Research
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FIGURE 3Prime London rental values Despite rents falling over the last quarter, annual falls have slowed
Source: Savills Research
Outlook
Looking ahead, we expect that the prime rental market in London will continue to face headwinds. Although there are early signs that the amount of secondhand rental stock coming to the market is easing, there still remains a significant supply imbalance which we expect will suppress rental growth over the short to medium term.
For landlords, pricing remains key. They must remain realistic to maintain demand for their property and prevent the risk of long void periods. With tenants increasingly widening their search areas to seek best value, landlords will need to make sure their property is of the best quality to attract demand.
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*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