London rents back to pre-crisis levels driven by families and foreign demand

Rents in prime central London are back to 2007 levels, after recording a rise driven by the family housing market during the second quarter of 2014, according to lettings index by a leading property consultancy.

According to Savills Prime Locations Lettings Index, rents are up on average 1.4 per cent in the second quarter of this year, compared to 0.6 per cent in 213, outperforming underlying house price growth for the first time since September 2010.

Depending on location, growth has been driven by the family housing market, rising corporate relocation budgets and ongoing demand from singles and sharers in markets such as the east of City hot spots of Wapping and Canary Wharf, which have outperformed all prime London locations, rising 3.1 per cent year to date.

Rents in core prime central London locations have grown by 1.8 per cent over the past quarter and by 2.9 per cent year to date, following -1.9 per cent falls in 2013. The return of the family market saw rents for central London houses rising by 3.4 per cent in the second quarter, with international occupiers now accounting for three-quarters of all tenants.

Yields in these core central locations such as Mayfair, Kensington and Chelsea, currently average 2.9 per cent, with investors most motivated by capital value growth and a secure store of wealth. Yields vary and are highest for properties worth less than £2 million, though rarely exceed 4 per cent.

In contrast, income return is much more of a consideration for investors in the lower value Canary Wharf and Wapping markets which have more in common with the UK mainstream market, delivering an average gross yield of 4.3 per cent for a typical two-bed property worth around £700,000, rising to 5.1 per cent for a one bed.  Investor and owner-occupier demand has pushed east of City capital values up by 10.1 per cent in the year to date, compared to just 2.5 per cent for prime central London.