Prime Central London rents fell by 9.6 percent over the last three months of 2008 according to Knight Frank’s rental index, by far the largest drop since the company started publishing its quarterly figures in 1995.
Rents have now fallen for three consecutive quarters, by a total of 12 percent, taking rents back to the level last seen in March 2007.
Liam Bailey, head of residential research at Knight Frank said: “Prime residential rents in central London have fallen dramatically over the past three months. To put the figures in perspective, the drop of 2.1 percent recorded in September 2003 was the previous largest biggest decline on record in prime central London.
“While there has been an increased demand for rental property, the result of many people choosing to delay house purchase, this has been outweighed by the sheer amount of new stock coming onto the market, much of it from ‘forced landlords’ unable or unwilling to sell their property in the current market.
“This has combined with downward pressure on corporate and personal budgets, pessimism over the short-term future of the economy and mounting job losses in the key financial services sector to markedly drive down rents.
“Tightening budgets and reduced corporate expenditure also means that demand is strongest for properties at lower price points, which are overwhelmingly flats. Over the past quarter in prime central London, rents for properties priced at under £500 per week have fallen by only 2.4 percent, while those priced at over £1,500 per week have seen a of fall by 15 percent. Rents for houses, meanwhile, have dropped by 17 percent, compared to just 8 percent for flats.
“As a result, the owners of higher value properties, which are disproportionately houses, face either long void periods or a dramatic adjustment in their expectations of what rents may be achievable. However, there is some good news for landlords. Rents may be falling but base rates are at unprecedented levels, and those with tracker mortgages may find that their costs drop and margins increase.
“Prime central London yields remain at just over 4 percent, however far higher yields, in excess of 7 percent, are achievable on stressed sales and repossessions. The coming 12 months will offer an opportunity for the cash-rich acquisitive investor who can find a competitively priced property, particularly as borrowing and interest costs are dropping as base rates fall.
“It is also worth pointing out that rents saw a substantial amount of growth in 2007 and were still rising at the beginning of 2008. These dramatic falls have not yet completely eroded these gains. In prime central London rents are only 10.8 percent lower than a year ago and have only returned to early 2007 levels. In prime outer London, rents are 12.2 percent lower and have returned to late 2006 levels.”
Tim Hyatt, head of UK lettings, Knight Frank added: “It is not easy to tell clients that they need to drop the price of their property by at least 15 percent - if not 20 percent to 25 percent for larger properties - as we are in the early stages of a global recession. However, the reality is that we have up to three times as many properties on the market than this time last year.
“Nevertheless, we expect the lettings business to continue growing next year. Renting has become an acceptable medium-term option for many people and its flexibility will continue to appeal as the economic downturn continues. The changing climate will also make investment more appealing for rental returns alone.
“Landlords can be cautiously optimistic but need to be very flexible as they enter the New Year if they are to prosper in this difficult market.”
