London’s prime rental markets of London saw annual growth of 1.4% on the back of strong demand for one and two bedroom flats over the past three months in particular, new research shows.
Similar rental growth of 1.3% has been seen for prime properties in the commuter zone, however a significant value gap remains, with the average pound per square foot less than half of that in prime London, according to the report from Savills.
In London, strong demand for smaller properties resulted in the highest quarterly rental growth in prime central London, prime North London and East of City locations, albeit from different tenant groups.
‘As is typical at this time of year, when the University year begins, wealthy international students drove the demand most evidently in prime central London due to the proximity of world class universities,’ said Lucian Cook, director of residential research as Savills.
‘In contrast, young professional sharers or couples are drawn to less expensive prime locations such as Canary Wharf, Wapping or Islington. This reflects the fact both areas provide easy access to the financial services centres of Canary Wharf and the City, as well as the emerging tech centres in East London,’ he pointed out.
‘As a result of a younger generation driving prime rental growth, landlords may have to be prepared to adapt to their changing requirements. Being able to compete with new build developments which provide on-site facilities such as a concierge will become increasingly important, particularly in PCL and in the East of City where our data shows the largest proportions of renters under the age of 29 choose to locate,’ he added.
Among 30 to 60 year olds, Hampstead and St John's Wood in the North West and areas such as Fulham and Richmond in the South West have more appeal. Although rental growth here has been weaker over the past year than in the student/sharer markets, families continue to be attracted to the stock on offer and relative value for money achievable, particularly in the South West where the average pound per square foot is just £29, the lowest across all prime London.
The research also shows that across London's commuter belt, the strongest annual growth was seen in the outer commuter zone, with average rents rising 2.5%. Cambridge, Farnham and Winchester, all particular favourites with families, saw the highest growth, due to their popularity for schooling and easy access to London.
Regardless of location, since the peak of the prime rental market in 2008, three bed properties have seen the strongest growth with average rental values across the prime commuter zone 3% above their peak.
However, over the past three months, one and two bed properties have seen the strongest growth, at 1.3%. This has been driven partly by young sharers unable to afford to buy, but the most significant factor is young professionals relocating for work as the economic recovery outside of London continues to strengthen.
‘As demand for rental properties continues to grow due to affordability constraints in the housing market, our forecast for rental growth over the next five years is strong. The strengthening UK economic recovery and expanding emerging sectors such as technology and telecommunications will continue to underpin demand for prime rental property,’ said Cook.
‘A potential risk to the sector is the level of new stock being brought to the market by overseas investors attracted by the strong capital growth seen in prime London since the downturn rather than rental yield. In locations of high supply we expect rents to come under pressure, with a potential dampening effect on rental growth across the wider prime rental market despite a broader and deeper pool of tenants,’ he explained.
‘In the commuter zone, stock levels will be dependent on the sentiment of accidental landlords who have found themselves renting out their homes for longer than they would have originally expected, but who are increasingly looking to sell as the sales market strengthens. However, some may decide to continue renting out their property as capital value growth in prime commuter zone locations is forecast to overtake London over the next five years,’ he concluded.