Despite uncertainty for some investors, the Prime Central London (PCL) rental market is performing more strongly than the sales sector, reports Knight Frank.

The number of tenancies started above £1,000 per week in PCL in the year to May was 7% higher than the previous 12 months, the agency’s data shows. Meanwhile, the number of sales above £2m fell 4% over the same period.

Non dom rules were scrapped in April, which has led to speculation about how many wealthy foreign investors will leave the country. Under the old regulations, individuals could live in the UK without paying tax on overseas income and gains. The new rules limit this to four years and mean their worldwide assets are subject to UK inheritance tax. As a result, countries like Italy, which operates a flat tax to ringfence overseas income, have become more attractive.

“The uptick experienced by the lettings market aligns with the political and economic backdrop that began unfolding from the middle of last year” says Tom Smith, head of super-prime lettings at Knight Frank. “The general election uncertainty, the prolonged period of speculation ahead of the Budget, and SDLT changes all increased demand in the lettings market and continue to do so.”

In the super-prime lettings market (£5,000+ per week), the uptick has been even more noticeable, with the number of tenancies agreed in PCL in the year to May rising by 15% compared to the previous 12 months.

“We have seen a good amount of prime lettings stock come across from the sales market after the owners failed to achieve their asking price” says David Mumby, head of prime central London lettings at Knight Frank. “That now includes areas like Notting Hill and Kensington where the sales market had been very strong.”

The increase in the number of tenancies started compares to an overall decline of 4% across the whole of London in all price brackets, as the chart shows. The wider decline is largely due to shrinking supply as landlords are put off by new legislation including the Renters Rights Bill.

Average rental values and prices are also moving in opposite directions. While prices in PCL fell by 2.2% in the year to May, rental values rose 0.9%.

However, most of the growth was skewed towards the higher-value end of the market. Between £500 and £1,500, average PCL rents increased 0.3% over the year. The equivalent figure was 1.9% above £1,500 per week.

Average rents in prime outer London rose 1.7%, which was also driven by the higher-value market. An increase of 0.3% between £500 and £1,500 per week compared to a rise of 1.3% above £1,500 per week.

In the super-prime price bracket, where pricing is less transparent due to the relatively low number of deals per year, rental values have experienced downwards pressure in recent months due to higher supply.