Residential rents fall in central London as stock continues to rise

Prime Central London rents fell by 1.8% during the third quarter of the year, with more stock from ‘forced landlords’ coming onto the market, according to the Knight Frank Prime London Rental Index.

This fall outpaces the decline seen in the second quarter, when rents dropped by 0.5%, rents are now 1.7% higher than a year ago.

Capital values are falling more rapidly than rents, consequently yields in central London are continuing to rise, now standing at 4.2%, compared to 3.9% a year ago.

There is evidence that the amount of new stock coming to the market has peaked and we believe rents should plateau, possibly rising in 2009 if demand remains at record levels.

Liam Bailey, head of residential research, Knight Frank commented: “Rents in prime central London fell by 1.8% over the past three months. This is a larger drop than in the previous quarter, when rents fell only marginally, by 0.5%, and as a result annual growth has now decreased to 1.7%. Rents have finally begun to decline in prime outer London, also falling by 1.8% over the past quarter.

“Not all of the capital has been equally affected. Rents for houses in the most exclusive central areas have remained static over the past six months, a result of both scarcity and the demand from very highly paid financial specialists drafted in from overseas to manage the crisis in the City.

“However, the main cause of the falls in most markets is the number of ‘forced landlords’ who have opted to rent out their primary residence – either because they cannot sell at the price they deem appropriate, or are waiting for the market to turn. As a consequence, the quality and quantity of rental stock has noticeably increased over the past few months, increasing the choice for tenants and driving down rents. They have been joined by a number of developers who are choosing to let out their unsold properties.

“This unprecedented level of supply partly obscures the fact that tenant demand is also at historically high levels, with the rental market offering an ideal place for potential buyers who are deterred by falling prices in the sales market or difficulties with obtaining mortgages. Consequently, the number of new tenancies agreed so far this year is 25% higher than in 2007.

“There is evidence that the amount of new stock coming onto the market has peaked, however. Given the problems in the sales market, we anticipate that demand will remain strong. Consequently, rents are unlikely to fall any faster over the next three months. They could begin to rise next year, as demand begins to exceed supply, although the ability of tenants to pay higher rents will clearly depend on wider economic factors.

“Yields are already beginning to rise for rental property in prime central London – and now stand at 4.2%, the highest for 18 months – and prime outer London will follow. We expect rapid growth over the next year, as prices continue to fall and rents begin to rise.

“Owning a property purely for rental income – rather than house price growth – will become far more viable. We expect to see increasing interest from investors, including institutions and funds, as 2009 progresses.”

Tim Hyatt, head of UK lettings, Knight Frank, commented: “All Knight Frank offices in London are reporting historically high levels of stock, demand and transactions, but a two-tier market is emerging. For flats priced at under £1,500, there is very strong demand, mainly from the corporate market. Above this level, however, activity is weaker, with both individuals and corporate tenants becoming more cost-conscious. As a result, some prime property is staying on the market for some time before a letting in achieved.

“However, there are a number of very large deals taking place at the very top end of the market, a result of the number of highly paid financial specialists who have been bought in to help ailing City institutions.

“There is still a large amount of stock on the market, and tenants have a great deal of choice. More than ever, landlords need to pay attention to their advisors when considering appropriate rental levels or offers.”