London property rents increased steadily in 2010

Residential rents in central London increased by 2.2% in the final quarter of 2010 and are now 19% higher than they were at their bottom point in the middle of 2009, a new report reveals.

Central London rents rose by a total of 16% during 2010 and are now just 5% below their peak level of March 2008 before the impact of the global credit crunch, according to the latest Knight Frank London Lettings Index.

Rents in the £1,500 per week segment have seen the steepest increase, up 21% during 2010, whereas the £500 to £1,500 per week bracket rose by 12.3% over the same period, the index also shows.

The strongest areas in central London were Knightsbridge and Mayfair, with each seeing an annual rental growth in 2010 of above 20%.

The main driver in the London rental market for the last 18 months has been thin supply meeting strong demand, according to Liam Bailey, Knight Frank’s head of residential research.

‘The volume of available rental properties across the year was 20% lower than in 2009 and, even more strikingly, down by 36% compared to 2008. Set against this reduced supply was the fact that the volume of prospective tenants fell only marginally, by 1%, compared to 2009, but actually rose by 10% compared to 2008,’ he said.

There are two main reasons why the rental market seen such demand from tenants, according to Bailey. ‘Firstly employment conditions in central London are much healthier than they were in 2009. Morgan McKinley, the City recruiter, noted that the number of new positions advertised in the central London financial and business services sector rose by 9% in November 2010 compared to November 2009,’ he said.

‘Secondly, in addition to the strength of London’s employment market, the fact that the sales market is still struggling to create stable growth in the number of deals means that many prospective buyers are still locked out of owner occupation and have to consider rental as the alternative. While central London sales are outperforming the UK market, even there sales volumes in 2010 were 36% lower than in 2007,’ he explained.

He also pointed out that with landlord investments delivering 3.5% yields, together with capital growth of 10.3% in 2010, more investment buyers are likely to be drawn into the market. ‘Indeed, there has been a steady growth of demand for property from investors over the past 18 months. But outside of the new-build sector there are few opportunities for new entrants to convert their interest into purchases,’ said Bailey.

He believes that the level of rents in London points to the ongoing structural imbalance in London’s housing stock, with limited choice pushing rents close to record levels. ‘Whereas housing costs for owners on variable rate mortgages have reduced by 50% and even more since 2008 due to ultra-low interest rates, for tenants they are only lower by 5% from their March 2008 peak,’ he added.