The ripple effect

Tuesday 18th June 2013

A growing number of tenants are being drawn to the peripheries of prime central London in zones 2 and 3, according to Cluttons in its Residential Property Forecasts - Q2 2013.

Historically in Britain, residential property rents demonstrate a distinct spatial pattern over time, rising initially in a cyclical upswing in prime central London, then wider London and the south east, before spreading out over the rest of the country. This is known as the ripple effect.

A glance at the market in prime central London suggests that a mini boom is occurring which could eventually benefit homeowners across the capital.

With rent in prime London having increased by an average of 1.7% in Q1 2013, the firm reports that many tenants are being priced out of living in the heart of the capital and are looking for better value-for-money properties on the edge of London.

Areas like Clapham, Battersea and Wandsworth have seen a 53% rise in tenant demand, for example, while eastern areas, such as Isle of Dogs, Limehouse and Wapping, have seen a 41% quarterly rise in tenant demand. Average rents in the Isle of Dogs are currently £331 per week, less than a fifth of average rental values in Mayfair which are currently £1,744 per week.

This demonstrates that tenants are spreading their wings to focus on lower priced properties in zones 2 and 3, as they seek to minimise outgoings, particularly as stubborn inflation continues to erode real incomes.

Sue Foxley, head of research at Cluttons, says: "Supply is now creeping ahead of demand in prime Central London and this is driving tenants to seek out rent reductions at renewal. While some landlords are prepared to negotiate a lower rate or no increase to mitigate a void risk, RPI uplifts are being achieved, particularly for high demand properties such as well located two bedroom flats which suit couples and sharers alike. This is forcing a growing number of tenants to look further afield for cheaper accommodation. As a result we are seeing migration out to the periphery of prime Central London , to zones 2 and 3, where rents are significantly lower than the prime core."

Subdued rental growth is expected to persist this year, with increases of 3% expected, rising to 3.5% growth in 2014 and 4% in both 2015 and 2016, according to Cluttons.

The growing supply-demand is also expected to boost residential property prices in prime central London.

Values have increased by 2.3% in Q1, reaching a new historic high, with buyer demand expected to grow as cheaper debt finance becomes increasingly available. This growth in capital values is also driving buyers to fringe locations in search of better value for money.
Cluttons has upgraded its forecast slightly for house price growth in prime Central London to 5% this year, with increases of close to 4% per annum expected between 2014 and 2018.

This strong demand is expected to ripple out to other parts of London and the south east of England, once property prices further out of the city centre start to look increasingly attractive in relation to values in the prime market.

The prospect of capital growth is an attractive proposition for property investors and homeowners looking to one day move up or down the housing ladder. For a lot of people, property has become part of their investment strategy. With saving interest rates at a historic low and private sector pensions in a rather sorry state, many people are now relying on their homes to fund their retirement.


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