The London lettings market recovered in the second quarter of 2004 to display its first positive (0.5%) annual growth since 2001, according to Knight Frank’s London lettings index.

Rentals increased in June, up 0.7% on the previous month, which combined with additional monthly increases in May and April to produce a quarterly rise of 1.1%

Yields reverse
downward trend

Rental reductions and rising property prices have meant yields have dropped from 7.8% in 1999 to 5.0% this quarter. However, with rental growth outpacing capital price growth, yields have recovered from the beginning of 2004 (see chart 3 below). If tenant demand continues to recover, yields are likely to increase over the next 6 months.

Middle Eastern tenants staying away

The number of tenants from the Middle East fell to less than 1% of tenants last quarter from a previous proportion of 2%. Those from the Far East also declined, from 6% to 4.3% whilst the number of tenants from the rest of the world, including Russia saw the biggest increase, making up 9.1% of London tenants.

Tim Hyatt, head of lettings at Knight Frank, comments: “The new and more positive trend in lettings this year which is reflected in rising applicant levels, viewings and offers has been mainly driven by a recovery in the corporate sector. This is in marked contrast to the patchy tenant demand in the market at the beginning of last year.”

“As the base rate increases, renting becomes more affordable relative to buying, providing further impetus to the lettings market. Reinforcing this trend, there is an increasing perception that short term capital growth prospects are minimal which is encouraging a small, but increasing, proportion of those who have sold to rent, if only a temporary arrangement. The sub-market for family homes had seen sales by landlords, which is now leading to a shortage of such stock.”

“All our London offices reported higher tenant demand in June than in March. The gap between asking and achieved rents has narrowed recently as landlords’ bargaining position continues to strengthen. We anticipate 12-month rental growth in Prime London will rise from 0.5% in June, to 2% at the end of 2004.”

“Gross rental yields also look set to improve over the next six months. As ever, a shrewd and realistic investor who is prepared to look at the lettings market on a longer term basis will substantially enhance the chances of successfully letting their property.”