Following 18 months of decline, average rents in Prime Central London’s mainstream rental market, which comprises apartments with two bedrooms or fewer, grew 3% y-o-y in November to reach £573 ($1,036) a week. This follows the uptick in October, when rents rose 6.4% m-o-m and 5% y-o-y, and indicates the first signs of a turnaround, according to analysis by London Central Portfolio (LCP), a residential property adviser focusing on Prime Central London.

According to LCP, apartments with two bedrooms or fewer represent 87% of the rental market in Prime Central London and the increase in November has brought rents back to the March 2016 level, before the Additional Rate Stamp Duty was introduced. The ARSD resulted in a surge in rental stock as owners who struggled to sell chose to lease their properties, says LCP.

The trend has begun to reverse and the balance of supply and demand in the rental market has stabilised. “Not only have we seen falling numbers of available rental units, we have seen increases in transactions in the sales market,” says Naomi Heaton, CEO of LCP. The 9M2017 sales volume in Prime Central London reached 5,542, representing a 15% y-o-y increase.

In terms of prices, data for London also points to stabilisation, says LCP. Prices rose 8.3% y-o-y in 3Q2017 after the volatility over the last two years. “It is encouraging to see the market pick up,” says Heaton. “The return of higher-value buyers is also evidenced in Prime Central London, where LCP has seen a trebling of clients [buying homes] in prestigious areas such as Regent’s Park and Knightsbridge.”

While rents grew across all sectors of Prime Central London, demand for smaller properties continues to be the strongest, says LCP. Rents for studios have seen the strongest growth over the past year. The average weekly rent grew 7% y-o-y in November to reach £350.

“Tenants are looking for smaller properties as they seek central locations offering an easy commute to work or university at affordable prices,” says Heaton. “This is driving demand for small units.”

Tenants also continue to prefer newly renovated properties, says LCP. Within its portfolio, LCP has observed a 6.4% increase in rents for leases inked for such properties over the last 12 months. In comparison, rents are up just 1.2% for renewals from existing tenants.

Despite the growth in rents, there is still a mismatch in expectations between landlords and tenants, say LCP. Over the last three months, 44.2% of rental properties were let at a rent that is 5.7% lower on average than the landlords’ asking price.

“Landlords are pushing for higher rents as they seek to recoup the entry and running costs. However, tenants are still able to negotiate down current asking levels,” says Heaton. “If stock levels continue to decrease into 2018, we may well see this gap closing in the landlords’ favour as the tenants’ bargaining power diminishes.”