_Prime Central London Lettings Index: February 2018

Average rental values in prime central London fell 2.1% in the year to February.

This compares to a decline of -5.1% recorded in February last year and underlines how rental values are bottoming out. February also marked two years of annual rental value declines, showing that this process is happening slowly.

The prolonged nature of the adjustment in prime London rents is due to the high levels of supply introduced to the market in recent years, including during the period following the introduction of an additional 3% rate of stamp duty for landlords in April 2016.

As more landlords sense the sales market bottoming out in terms of pricing, increasing numbers are deciding to sell, which is curbing supply and putting upwards pressure on rental values.

There was a 6.4% fall in the number of new lettings properties placed on the market in the year to January 2018 compared to the previous 12-month period.

Meanwhile, over the same period, demand is rising. There was a 17.6% increase in the number of new prospective tenants looking for properties to rent, and  Knight Frank also agreed 11% more tenancies.

As new supply moderates and demand strengthens, we expect to see continued upwards pressure on rental values.

The number of viewings in the year to January 2018 was 14% higher than the previous 12 months, while the number of new prospective tenants registering was 18% up over the same period.

However, this data also shows a slightly weaker growth in demand for properties priced at between £1,000 and £5,000 per week. While there was a 20% increase in new tenant registrations for properties at below £1,000 and a 19% rise above £5,000 in the year to January, the increase was a more modest 8% in this middle price band.

Even within this middle price band, there has been a difference in performance, with average rents for properties let out for between £1,000 and £1,500 per week falling by 4.6% on an annual basis, compared to a 0.9% decline between £750 and £1,000 and a fall of 1.8% above £2,000 per week.

Meanwhile, February was also the month that a mood of complacency on global stock markets came to an end. While the volatility was in response to the prospect of rising interest rates, it also served as a reminder for landlords of the benefits of holding real estate.

Stocks, bonds and other asset classes are more volatile than property, which is less liquid, and will appeal to investors, as the below chart of total returns shows.