Buy to let property investors need to choose carefully in central London as rent yields fall below 4%

Average gross yields in prime central London property have fallen below 4% for the first time since September 2007 due to declining rents and rising property values.

Property investors looking to add to their London residential rental portfolios need to pick their acquisitions carefully and plan further ahead, according to the latest report from property consultants Knight Frank.

Its Prime London Investment Index for June 2009 shows that average yields fell to 3.79%. It also shows that residential rents in central London fell 1.9% in the three months to June 2009, but prices actually rose by 3.7% putting downward pressure on yields.

A reduction in the volume of new lets suggests a further significant decline in rental values is unlikely. It has been the more expensive properties which have borne the brunt of the rental falls with rents on properties costing up to £500 per week falling only 11.3% over the past year, and those costing over £1,500 per week falling by 27.3% over the same period.

‘During the first half of 2008 yields improved as the rental market held its ground while the sales market was hit hard by falling prices. As we moved into 2009 the reverse situation has occurred with rents under pressure from rapid supply growth and only modest growth in tenant demand,’ explained Liam Bailey, head of Knight Frank residential research.

Overall falling rents have resulted from a dramatic growth in the volume of available stock as homeowners decided to keep surplus property rather than sell into a difficult market over the past 12 months. While the volume of tenancies agreed has risen by anything between 15% and 30% across central London, stock levels in some cases have risen by 100% to 200%.

Chelsea and Kensington have been particularly affected with rental falls of over 26% in each area. Only the City, with a rental decline of 9.7% over the past year, has been partially protected from the downturn. The City benefits from a high proportion of lower-priced properties that have been better performers during the downturn.

Bailey expects the summer to be characterised by continuing tough negotiations for landlords but the traditional busy September market could see the beginning of rental increases in some areas as demand from new employees and their families comes into the market.

‘Investors are having to work very carefully at stock-picking, they are having to commit much more equity to purchases than they were doing 18 months ago and they are planning for longer-term more sustainable returns,’ he concluded.

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