Financial News

Landlords with rental properties in prime central London have seen their return slip below 4 per cent for the first time in nearly two years, according to the latest data from Knight Frank, the estate agent.

The group said the average gross yield in prime central London dropped to 3.79 per cent in June, from a peak of 4.17 per cent in September. Yields have been eroded in recent months as oversupply in the lettings market has caused rents to fall, while property prices have started to recover.

Knight Frank said rents in central London fell 1.9 per cent in the second quarter, while values in the area rose 3.7 per cent. "Weak rental performance and stronger sales activity and pricing have combined to put downward pressure on prime market residential yields," said Liam Bailey, head of residential research at Knight Frank.

Other agents said average yields had yet to dip below 4 per cent but had nonetheless fallen. Savills (LSE: SVS.L - news) , for example, calculated that average gross yields on prime London properties were 4.3 per cent in the second quarter, compared with 4.5 per cent in the first.

The squeeze on yields comes after a turbulent 12 months for landlords. Strong demand for rental accommodation boosted their returns at the start of last year but, as house prices fell and homeowners decided not to sell their properties, a glut of supply hit the rental market.

Knight Frank said that while the number of agreed tenancies has risen 15-30 per cent across central London, stock levels have increased much more dramatically, by 100-200 per cent in some cases. The result has been that rents across London have fallen around 20 per cent in the past year, with expensive properties in desirable areas being hit the hardest.

But the Royal Institution of Chartered Surveyors (Rics) warned the trend was not just limited to London. "Yields have been falling across the board," said Simon Rubinsohn, chief economist. "In the first part of the year, 10 per cent more surveyors thought rents were going up rather than down but in the second quarter, that number went negative. More are now seeing rents go down."

Agents have advised investors to be realistic about returns. "People might have expected that yields would hold stronger but that hasn't happened," said Jane Ingram, head of lettings at Savills. "In some cases, people are getting very good yields but not in the prime London market."

There have been some recent signs that rents are now stabilising. Agents said the oversupply had eased, with properties letting faster in the last couple of months.