PCL rental growth hits three year high – Knight Frank

Prime central London rental values nudged up by 0.2% in January, says Knight Frank, marking an eleven-month run without a fall and taking annual growth to a three-year high of +3.4%.

Rental yields, as a result, climbed to their highest point in 17 months, at 2.94%, with more vigorous corporate demand and sales market faffing driving things along.

Activity levels are also rising across the board, with the agency recording increases of at least 20% in new prospective tenants, viewing and agreed tenancies through Q4 2014.

Despite all the upward mobility, KF notes that “there is a degree of downwards pressure on rents while inflation remains low, which some landlords are taking on board.”

Knight Frank PCL rental market - Feb 2015

Here’s Knight Frank’s Head of London Residential Research Tom Bill with the detail:

Rental values in prime central London have spent 11 of the last 12 months in positive territory, benefitting from a prolonged period of political uncertainty surrounding the sales market and growing corporate demand.

Rental values rose 0.2% in January, which took the annual increase to 3.4%, the highest rate in three years.

As May’s general election approaches, some activity has moved from the sales to the rentals market as buyers await the outcome and more clarity on the likelihood of further property taxation.

However, the shift has only had a limited impact and the lettings market is also benefitting from stronger corporate demand. Budgets are not as high as before the financial crisis but the spending power of many senior executives, in the form of share options, has improved as the stock market recovers.

The number of new prospective tenants rose 24% in the final quarter of 2014 compared to the same period in the previous year. Meanwhile, the number of tenancies started and viewings in the final three months of last year each rose by more than a fifth compared to 2013, as figure 2 shows.

However, there is still a degree of caution in the market. There is a lack of stock in some areas as potential landlords hesitate over the wider political uncertainties caused by the election. Meanwhile, record low mortgage rates and the fact stamp duty has been reduced for sales below £937,500 will have prevented some from moving from the sales to the lettings market.

A degree of downwards pressure on rents is also expected while inflation remains low. The Retail Price Index fell to 1.6% in December, its lowest level since 2009 and the aftermath of the collapse of Lehman Brothers.

Rises during rent reviews have historically been between 3% and 8%, however some tenants are seeking lower increases given the macro-economic backdrop, something landlords are taking on board rather than risk a void period given the rental market recovery is not yet in full swing.

Rental yields continued their steady climb, rising to 2.94%, the highest level in 17 months.

Knight Frank PCL rental market map