Rental growth in prime London lettings markets pushes up yields for landlords

Annual rental value growth turned positive in the prime central London lettings market last year due to declining levels of stock, according to the latest analysis report.

Rents increased by 1.1% year on year in December and the growth means that yields for landlords have risen across the prime London market, says the report from real estate firm Knight Frank.

Indeed, the report reveals that the average gross yield in prime central London was 3.35%, the highest in more than six years, and in prime outer London it was 3.5%, the highest in almost four years

According to Ton Bill, head or London residential research at Knight Frank, the supply of rental properties has been curbed by a series of tax changes as landlords attempt to leave the sector.

He pointed out that the number of new lettings listings in prime central and prime outer London was 13% lower in 2018 compared to 2017, Rightmove data shows. Meanwhile, the overall number of listings declined by 21%.

As a result of falling supply, annual rental value growth of 1.1% was recorded in prime central London in December, while in prime outer London the decline moderated to a fall of 0.2% from a figure of a fall 4% at the start of 2018.

Bill believes that future legislative changes are likely to exacerbate this trend. ‘The tenant fee ban, which comes into effect in June this year, may further dissuade landlords from entering the sector or for current landlords it may mean that letting their property becomes a less cost effective exercise,’ he said.

‘Additionally, there is also the possibility that any extra costs absorbed by landlords as a result of the ban will lead to higher rents. There has also been speculation the government may introduce minimum three year tenancy periods, which could have a similarly dissuasive effect on landlords who may not want an effective lock-up period on their investment,’ he added.

However, despite this succession of legislative changes, the combination of strengthening rental values and declining sales values means that investment yields have risen in recent months.

An average gross yield of 3.35% in prime central London in December was the highest figure in almost seven years. Meanwhile, a gross yield of 3.5% in prime outer London was the highest in almost four years.

Indeed, total returns in prime central London outperformed a range of other asset classes in 2018. A decline of 1.2% was relatively modest compared to a 8.7% decline in the FTSE 100 total return index, or a 14% decline in the S&P GSCI world commodity index and a 70%+ fall in the value of Bitcoin.

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