Small falls were seen in prime central and north London rents, driven by a weakening of economic indicators and the employment outlook in the financial and business services, according to latest analysis from real estate adviser, Savills.
Prime central London rents fell by -0.4 per cent in the third quarter, taking annual growth to -1.2 per cent, while in core prime north London locations, Islington and Hampstead, rents fell by -1.5 per cent in the quarter and -4.1 per cent year on year.
This means that rents have significantly underperformed underlying house prices, which rose 5.5 per cent year on year in prime central London and 4.1 per cent in prime north London, suppressing yields to 3.6 and 3.8 per cent respectively.
Table - Weaker economic and jobs outlook suppress prime London rents in Q3 2012
By contrast, prime south west London (in a broad band that runs from Battersea through Wandsworth and Fulham, to Wimbledon, Richmond and Barnes) saw rents rise in the quarter and year on year, up 0.4 per cent and 1.8 per cent respectively. There is evidence of corporate demand – particularly for family homes – shifting into these locations from prime central London, on the back of reduced accommodation budgets.
Financial and business services tenants now account for 67 per cent of demand in prime south west London, up from 59 per cent three years ago. By contrast, in prime central London they are down from 76 to 68 per cent. Demand from European tenants has also risen sharply over recent months and now accounts for almost a third of tenants in south west London.
The first signs of an uplift in corporate tenant demand in Wapping and Canary Wharf allowed rents to rise marginally, up 0.3 per cent in the third quarter and 0.8 per cent year on year. Similarly, an increase in tenants from London renting before committing to buy in the prime suburbs has given the prime South East a slight lift.
Tenants looking to pay less for space
“Tenants and buyers are increasingly cautious,” says Savills research analyst, Sophie Chick. “Constrained budgets means tenants are increasingly aware of the cost of space, a trend we believe will continue.”
New analysis of average annual rents per square foot shows a huge divergence across the city. The prime central London average now stands at £63 a year, rising to £109 for the top 10% of properties. In prime south west London the average is just £28. (This equates to an average for a 2,000 square foot property would be £126,000 a year in prime central London and £56,000 in prime south west London.)
For investors, the rent achievable on a price per square foot basis is important. Savills research has found that a significant premium is achievable for larger properties in prime central London, where properties with 5 bedrooms or more command rents of £70-75 per square foot, compared to just £50-55 for one or two beds. Both yield around 3-3.5 per cent gross.
By contrast, in prime south west London, demand from young professionals and sharers means one and two bedroom flats command the highest prices, at around £29 per square foot, with yields of 4.0 per cent or more. A similar, though more pronounced pattern is being seen in the prime north and east London regions, where properties with 5+ bedrooms average £26 per square foot and yield 3.0-3.5 per cent, while one and two bed properties can generate £34 per square foot and yield just over 5.0 per cent – the highest in the capital.
