Rents on prime London properties could recover next year following recent sharp falls, predicts Savills Research.
Rents down 12%
Prime London rents have dropped significantly, suffering as a consequence of the financial crisis. Average rents of prime London homes have fallen 11.7% since June 2008, reports Savills.
Rental declines have been greatest in areas most popular with senior City workers. Prime homes’ rents in South West London – Putney, Barnes, Fulham, Wandsworth and Richmond – have fallen by 15.7% since March last year. In the Docklands and Canary Wharf area – where single person apartments have been in demand from the City – average rents have fallen by up to 20% from their 2007 peak.
Supply up, demand down
The fall in average rents is caused, to a large extent, by the increased supply of properties in the prime London market from people who have become ‘accidental landlords’ after becoming unable to sell their homes. A Primelocation survey found that stock levels rose 128% in prime central London in the year ending March.
Redundancies and reductions in bonuses have also cut demand for prime London properties. But rents at lower tiers of the prime London market have held-up better than those at the top end, says Savills, as corporates downsize their demands for properties.
Rents in mainstream prime properties have also been less affected than those in areas preferred by City workers. In the Northern district – St John’s Wood, Regent’s Park and Hampstead – rents fell by less than 5% from their peak.
Better news for landlords
But there is now better news for prime London landlords, who can expect rents to increase going forward as foreign investors take the opportunity to buy prime homes at lower prices.
Lucian Cook, director of Savills Research, says: “We are already starting to see properties switch back from the rental to the sales market as interest in the prime residential sales market picks up from equity rich and foreign buyers. This will help stabilise rental levels during 2010, followed by significant rental growth in 2011.”
But, warns Cook, rental recovery depends on the health of the financial services sector and its employment levels. The proportion of finance workers who rent prime London properties has fallen significantly. In the first half of last year, 47% of prime London tenants worked in the sector; but this fell to just 39% in the second half of 2008.
Other investments did worse
With a slow recovery predicted in financial services, it seems likely that it could be another half year before rentals begin to improve again. This means that total rental falls from peak to trough could be 17% before they begin to recover, says Savills. However, compared to negative returns so far of 22.1% in the commercial property sector and nearly 30% in equities, prime London properties have stood up reasonably well as investments.
Cook is now optimistic for landlords. “Less stock is coming to the market than previously,” he explains. “There are less forced landlords. As you get some stability coming to the market it will bring stability in terms of tenant demand. And our lettings agents are seeing some recovery in demand from the corporate sector.
“I suspect that while you will see some further falls in rental values, you may see some equilibrium between supply and demand.”