FTSE Volatility Cools Rental Growth

Falling corporate budgets and reduced international demand are cooling the top end of the prime central London rentals market, report Savills.

Related topics:  Specialist Lending
Millie Dyson
20th March 2012
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Prime central London has shown the strongest rental growth over the past twelve months, up 3.2 per cent, but in the past quarter rents rose by just 0.9 per cent. At the very top end, ultra prime values have slipped by 0.5 percent this year to date, reducing annual growth to just 1.4 per cent.  

Lucian Cook, director of Savills residential research, says:
 
"Economic jitters very quickly translate into reduced demand for big budget rental properties in a market where over two-thirds of tenants are employed in financial services. We have identified a clear link between FTSE volatility and rental values in central London and this pattern has been compounded by reduced corporate budgets."

Over the past few months, two factors have particularly impacted the prime central London market, says Savills.

First, there has been a noticeable reduction in international tenant numbers.  In the first half of 2011 tenants from North America and Western Europe accounted for 53 per cent of demand, but their share of market fell to just 40 per cent in the second half of the year.

Second, companies are increasingly relocating expat employees to smaller properties or awarding an accommodation allowance (rather than securing a company let, giving individuals the discretion to rent at a lower budget level. This has undoubtedly contributed to an X per cent increase in self-funded young tenants looking for smaller properties and means that well-located flats are now the hottest sector of the prime central London market, a dynamic that is driving high levels of investor interest.

Beyond prime central London performance has been patchy

The prime southwest has been the top performer, with values up 2.3 per cent in the quarter, correcting falls in 2011, leaving values just 0.4 per down year on year.

Jane Ingram, head of Savills lettings says:

"Demand from families and young professionals - including those displaced from prime central London by reduced budgets - has led to supply constraints which have underpinned values."

Stock levels are now 25 per cent down on the long term average.

By contrast, the prime rental markets of north and east London have cooled, with quarterly price movements of -0.4 per cent and 0.2 per cent respectively, though the mid term pattern is more mixed.

The Docklands and Wapping markets, traditionally heavily City dependent, were slow to recover post credit crunch but have now attracted a more diverse tenant base, leading to a 1.8 per cent uplift over the past year. This momentum, coupled with lower capital values, is now attracting investor buyers, particularly from Asia.

The north London markets centred on Islington and Hampstead have been particularly volatile and have seen the sharpest annual falls, down 5.6 per cent year on year. They are now characterised by less constrained stock levels and lower demand from corporate and private tenants.

Looking beyond London, the rental market of the South East of England (like the sales market) has been waiting for the London ripple. After six months of volatility and low demand rents have recovered 1.1 per cent in the first quarter of this year, but remain down 3.4 per cent year on year.

Cook concludes:

"In the short term the prime rental markets in London and the South East will be highly dependent on sentiment in London's financial and business services sector, though we expect values tol be underpinned by constrained stock levels, particularly in the core prime sector."
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