Central London rents are traditionally determined bydemand from foreign corporate tenants renting property in high value premiumareas. Increased demand and the presence of  frustrated sellers or so called ‘accidentallandlords’ renting out their properties only because they could not sell itwhen there was such an opportunity are the main reasons why rents have beengradually increasing since the beginning of 2010 and steeply in 2011.

Price increase has been particularly noticeable inlocations where elite property is in high demand, both from British andinternational clients.  This tendency canbe clearly seen with regards to premium property of East London (Wapping andCanary Wharf) with rents up 4.3 per cent in the quarter and 13.4 percent yearon year and North London (Islington and Hampstead) with rents up 3.6 per centin the quarter and 16.1 per cent year on year which is 15 per cent above theformer peak level of the rent.  Much ofthis growth can be explained by the lack of premium property in London.

Rents for premium property in central London have alsoincreased - although less sharply. On average they went up by 2.9 per cent inthe quarter and by almost 6 per cent comparing to the last year figures, remaining4.5 per cent below peak levels.  Exceptions are St John’s Wood and Regent’s Park where annual growth haspassed 10 per cent in the quarter. Rents in these areas are now 15 per centabove 2007 peak levels, although the number of transaction is extremely low.

Yields increase forecast

During the economic downturn, increase of rentscontinued till 2008, leading to the increase of rental yields as compared to the,then falling, capital values.  Average yieldfrom premium rental property in London increased from 3.6% in December 2007 to4% in December 2008.  After this, capitalvalues went up while rents were falling, which led to stabilizing the yields to3.7%.  According to Savills, soon yields willslowly start to increase, as the rate of rental growth exceeds capital growthin 2011.

In general, Savills market strength indicator for thepremium London property remains positive. Limited supply continues to be a problem, although a shortage ofproperty in the central area is not so apparent (which explains the relativelyslower growth in the property market in central London).  More investor landlords are offering newrental properties which will boost the supply of premium property in centralLondon in such key locations as Mayfair. 

The head of Savills residential research YolandeBarnes comments: “In November 2010 we stated that the supply of rental propertyin excusive locations was good. Rent increases seen this year support ourforecast that rent growth in London will make up 8.0 per cent”.

Southwest London will outdoother regions

Savills market strengths indicators applied to Londonproperty point to a continuous rental growth in 2011, although the rate ofgrowth may slow down in some areas.  Thehighest rental growth this year is expected to be in premium property ofsouthwest London (Fulham, Putney, Wandsworth, Richmond) as in these areasdemand significantly exceeds the supply.

“Rental growth can be seen not only at premiumproperty markets. Demand for rental property in the country as a whole canincrease, as there are more buyers who cannot afford buying a property,” saysBarnes.  “According to our forecasts, theprivate rented sector as a whole will continue to increase.”

Jane Ingram, Head ofLettings at Savills summarizes:

"London continues to bethe center of international attention. Due to a constant demand from foreigntenants we do not foresee any significant changes in the supply. It mightincrease slightly, as many landlords who do not live in their houses all yearround could choose to rent out their properties".