Buy to let property investment still provides good returns for landlords in the capital

Buy to let landlords in the prime London rentals market have continued to see quarterly price growth in the three months to the end of September 2011.

But for a second quarter growth has not kept pace with underlying house price growth, says Savills in its latest prime London index.

Prime London capital values rose by 1.1 percent in the quarter, itself a slowdown from 3.2 percent growth in the previous three months, while rents rose by an average of just 0.4 percent compared to 1.8 percent in the second quarter.

Annual prime London price growth now stands at 8.5 percent compared to 7.3 percent rental growth.

“Conditions in the prime London rental market are still favouring landlords,” said Yolande Barnes, director of Savills residential research. “But the fact that house prices have outpaced rental growth means yields remain suppressed, so the advantage is good occupancy levels rather than income growth.

“The balance of supply and demand is showing that supply coming on to the rental market is below average for this time of year. We had anticipated that by this stage in the market we would be seeing accidental landlords, those unable to sell and so forced to rent their property, bringing stock to the market. A robust prime London sales market has, to date, meant this has not been the case.”

Corporate demand for family homes has dropped off. Savills say this is particularly noticeable in south west London where house rental prices dropped 0.7 percent in the third quarter.

Jane Ingram, head of lettings at Savills, said: “Typically, the prime London family house market is fuelled by corporately-funded families who would rent a four-bed house, but we are increasingly seeing them downsizing to three-bed properties with their budget cut from £2,000 per week to £1,200 per week.

“The lettings market is definitely responding to the current economic uncertainty and the corporate-geared market always suffers most at such times and rents are coming off by around 5 percent. Companies are sitting on their hands and relocation demand is therefore coming in at the lower end of prime, with budgets below £1,000 per week.”

International student demand has kept the flats market in Prime Central London very busy in recent months, with an average budget of £1,000 per week, although rents of £7,000 per week are not unheard of with much of the demand coming from the Middle East and Asia.

Ingram added: “For landlords prepared to take in a student this can be a very good let. International tenants don’t have a credit history here so pay a year in advance.
“Whilst seasonal slowdown is expected as this time of the year, there is no doubt the economy is having an effect on the corporate driven market.”