Prime London rents tipped to rise 14% over five years

The dominant market drivers of prime rents of the past year are likely to continue to influence the market over the next 12 to 24 months, say Savills.

Weak employment forecasts for the financial and insurance services sector are likely to temper rental growth for prime central London property.

Much stronger employment growth in the professional, technological, media and communications sectors are likely to underpin demand in other prime and upper mainstream markets.

Accordingly, rental growth across London and the South East as a whole is likely to be relatively strong. Notwithstanding measures to boost homeownership, employment driven demand is likely to be supplemented by demand from those unable or unwilling to enter the world of homeownership; at the bottom of the market pressures on housing benefit will put a cap on rents.

A Savills spokesman said: "In the mainstream markets supply is likely to remain constrained, but less so in the more valuable markets where new activity is concentrated and international investors are particularly active. We therefore expect that rental growth prospects in the prime markets of central London are likely to be more suppressed in the short-term than we have previously anticipated.

"However we do not believe that this will be a barrier to investment in markets, where the motivation for investment has been more weighted to capital growth as opposed to income returns."

In central London gross income yields currently average 3.2%, yet investors still account for one in five buyers of second hand stock. Since 1979, real (inflation adjusted) capital growth has averaged 4.9% per annum on an annualised basis.

That figure in part reflects the very strong growth in capital values in the period since 2005 (even accounting for the 2008 downturn). Whilst we expect lower capital growth over the next five years, we still expect this market to outperform the UK mainstream market and deliver competitive total returns.

Within the context of the prime markets, the East of City markets are far more of an income play. Whilst gross yields in central London vary and tend to be higher for property worth less than £2million, our analysis suggests that they rarely exceed 4%.

By contrast, the markets of Canary Wharf and Docklands, that have far more in common with the UK mainstream market, deliver an average yield of 4.3% for the typical two bedroom property worth in the order of £700,000, a figure which rises to 5.1% for a one bedroom