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London Property Market 27 February 2015

London Prime Residential Lettings Report - Winter 2014-15

Prime rental growth accelerated to 1.6% in final quarter of the year.

Nick Barnes - Head of research

Report Highlights

  • Fall in activity in Q4, but 2014 saw an improvement in the prime London lettings market
  • Prime rental growth accelerated to 1.6% in final quarter of the year
  • Prime yields edged upwards to 3.1% at quarter end
  • Forecast prime London rental growth of 4% in 2015

Supply & demand

2014 marked a turnaround in the fortunes of the prime London residential lettings market following a lengthy period of stagnation. The number of new applicants registered rose by 13% and agreed lets also increased, albeit by only a little under 1%. Available stock reduced by 13%, largely as a result of a number of landlords selling properties to take advantage of prices at or close to the peak. However, the final quarter of the year was disappointing with new instructions and tenant demand significantly lower than in the previous quarter, to some extent due to the seasonal impact.

Survey evidence suggests that the majority of tenants aspire to home ownership but affordability issues preclude this becoming a reality for many years ahead. Even with lenders currently offering record low fixed interest rates on short to medium term mortgages, the deposit required is typically beyond those first time buyers without parental support or other outside help. This implies that the privately rented sector in London will grow at least proportionately in line with the projected strong population growth in the capital. Nonetheless, affordability is becoming as much of an issue for many in the lettings market, including the prime segment where tenants are increasingly prepared to compromise on location in order to economise on rent.

Affordability in the private rented sector is of course heavily affected by the prevailing labour market conditions. The acceleration in growth of London's economy in 2014 was accompanied by an increase in the labour force, including new employees moving to London. Overall resident employment in the capital rose by 1.8% to the end of November last year and average earnings finally grew in real terms in September for the first time in five years, albeit this was more to do with a drop in consumer price inflation than across the board pay increases. Nonetheless, the Morgan McKinley Employment Monitor reveals that the number of new financial services jobs created in 2014 was 11.1% up on the previous year, while the average salary increase was 18% higher than in 2013.

However, the UK services economy experienced a loss of momentum towards the end of 2014, with both activity and new business rising at their weakest rates in over a year-and-a-half. The December monthly Markit/CIPS business activity index registered a fall to 55.8, down from November's figure of 58.6 and the slowest rate of increase for 20 months. This was reflected in the number of registered applicants, viewings and new tenancies agreed which declined in each of the last three months of the year and indicates clearly the importance of the corporate segment to the prime lettings market in London.

Budgets for corporate relocation packages remained depressed and value for money was still at the forefront of tenant thinking. Studios and one and two bedroom apartments generally let more quickly while families seeking rented accommodation were prepared to move further away from the more expensive central locations to get an appropriate property at the "right" rent.

The further reduction in available stock was principally the result of new instructions falling at a faster rate than new tenants. A number of landlords continued to sell long held properties to maximise their capital gains in a slowing sales market, while tighter mortgage regulations made it more difficult for many landlords to obtain credit.

The length of tenancy agreements has risen over the past few years, with 2 year and even 3 year terms increasingly common. Longer tenancies have proved especially popular with families where the major earner is in secure longer term employment and the family requires a place to live without the potential disruption that a typical length AST contract can cause. Some of these contracts will include a tenant option to break at 6 months, but no equivalent landlord option.

The renewals market broadly mirrored that of new lets in the final quarter of last year. Overall renewal numbers fell as the quarter progressed although terminations, including early terminations, reduced by an even greater amount.

Rental growth

With available stock reducing more quickly than tenant demand, rental growth accelerated in Q4, and the Chestertons Prime London Residential Rental Index recorded growth of 1.6%. Rental increases on renewed tenancies averaged slightly higher at 2% over the quarter.

As usual, there were noticeable variations between submarkets, however the differences were not clear cut between the core central locations and those further out as was the case for much of last year. Hampstead (+9.0%) and East Sheen (+8.7%) recorded the strongest growth over the quarter while Camden (-6.1%) and Knightsbridge & Belgravia (-2.0%) experienced the sharpest decline in rental values.

The average weekly rent in the Chestertons Prime Rental Index moved up to £931 at the end of December. St John's Wood (£1,889/week) maintained its position as the submarket with the highest average rent, and widened the gap between second placed Knightsbridge/Belgravia (£1,810/week).

"Rental growth accelerated in Q4, and the Chestertons Prime London Residential Rental Index recorded growth of 1.6%. "