Luxury-Home Rents in London Outstrip Prices as Vacancies Shrink

Luxury-home rents in central London rose twice as fast as purchase prices last month as a decline in the number of available properties fueled competition, Knight Frank LLP said.

The cost of leasing a house or apartment in the city’s most expensive neighborhoods climbed 16.3 percent from a year earlier, while sales prices rose 8.3 percent, the property broker said in separate reports today. This year, rents may increase by 5 percent to 10 percent, Knight Frank said.

The number of homes available to rent has shrunk by about 18 percent in the 12 months to April compared with the previous year, the company estimates, giving landlords more leverage over tenants. At the same time, the U.K. capital’s improved job market has added to demand for rental properties.

“We can be much tougher with tenants now because we know we can get a higher rent,” said Naomi Heaton, chief executive officer of London Central Property Ltd. Her company buys and manages 350 properties for investors in the boroughs of Kensington & Chelsea and Westminster valued at about 500 million pounds ($815 million).

LCP took about three weeks to find someone to lease a one- bedroom in the Knightsbridge district when it became vacant in February. The company used the opportunity to raise the rent by 18 percent, Heaton said.

Stucco-Fronted Home

The new tenant, an insurance brokerage she didn’t identify, agreed to pay 550 pounds ($897) a week for the stucco-fronted home on Ovington Square that will house one of its employees.

The average cost of renting a one-bedroom apartment owned by LCP’s customers or funds ranges from 450 pounds to 650 pounds a week, Heaton said. A two-bedroom property costs 650 pounds to 900 pounds.

“There’s a cut-off in interest for one- and two-bedroom properties costing more than 1,000 pounds a week,” she said.

Families tend to move to southwest London suburbs like Putney, Wandsworth and Clapham, which have a larger proportion of houses and good schools, she said.

Prime rents gained 0.4 percent in April from the previous month, bringing the increase since the market’s last low-point in June 2009 to 25 percent, Knight Frank said.

‘Not Enough Supply’

“There simply aren’t enough new units coming out of the ground to have anything other than a local impact in terms of depressing rental values,” said Liam Bailey, the firm’s head of residential research.

Prices have risen on an annual basis every month since November 2009, bringing the average value to 3.65 million pounds. Since February, they’ve gained less than 10 percent, compared with advances of as much as 21 percent last year.

A decline in the number of luxury homes for sale caused property transactions to fall by a third in the last 12 months compared with 2007, Knight Frank said.

“Limited stock means there are a large number of prospective buyers who are still locked out of owner-occupation and renting is their only alternative,” Bailey said.

April’s rental increase lifted the gross income from a prime residential property in central London to 3.8 percent of the purchase price from 3.3 percent in June 2010, the broker estimates.

Maximum Return

Most properties probably won’t generate a gross annual rental return of more than 3.8 percent, said Tim Hyatt, the head of residential leasing.

Investors buy prime London rental homes chiefly for the anticipated appreciation in property values, Heaton said.

The Ovington Square property her company acquired and manages for an investor was valued by an appraiser at 625,000 pounds in March, or 26 percent more than it cost to buy in October 2007, she said. The gains don’t include refurbishment costs.

Knight Frank compiles its luxury-homes indexes from estimated values for rents and prices of properties in the Mayfair, St. John’s Wood, Regent’s Park, Kensington, Notting Hill, Chelsea, Knightsbridge, Belgravia and South Bank neighborhoods of London.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net.

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net.

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