The first eight months of 2021 saw the divergence of last year’s rental market start to unwind. Rents began to recover in cities, with a return to annual growth in markets such as Manchester, Birmingham and Edinburgh. And while London rents were lower in August 2021 than in 2020, the capital saw the second-fastest monthly rental growth after Northern Ireland (see below).

Students and young workers are returning to cities, pushing up tenant demand, while rental supply is falling. UK Finance data suggests landlords redeemed 56,500 buy-to-let mortgages in the year to July 2021. And analysis of Zoopla listings shows 8% of properties listed for sale in Q3 2021 had been rented out in the past three years, more than double the proportion in 2019. The RICS September survey recorded the largest-ever gap between tenant demand and rental supply.

Mortgage data shows the stock of buy-to-let properties is growing far slower than before. As interest rates rise over the next five years, we’ll see further pressure on mortgaged landlords, many of whom face a far less generous tax environment than when they first bought. This creates a gap in the market, which we expect Build to Rent (BtR) will grow to fill.

BtR homes make up a tiny proportion of the broader rental market – under 2% of all homes for rent. But this subsector is growing quickly. There are just under 64,000 BtR homes complete and let, with a further 42,000 homes under construction and 99,500 homes in planning. The total pipeline has grown elevenfold in the past decade.

With a diverse list of entrants spanning Goldman Sachs, Transport for London, and John Lewis & Partners, there is no shortfall of ambition. Citra, Lloyds Bank’s new BtR arm, has announced it wants to build a portfolio of 50,000 homes, more than three quarters the size of the current total BtR stock.

Recently, we have seen investors turn their attention to building suburban houses for rent, diversifying a sector dominated by urban apartments: 90% of operational BtR homes are flats. As the sector continues to grow, diversify and mature, we can expect investor partnerships with housebuilders to support a rising share of housing delivery across the UK.

Beyond a rent rebound in 2022, we expect rents to resume their long-term correlation with income growth. That means we expect UK rents to rise by 19.9% over the next five years, in line with expectations for incomes. In London we expect rental growth in 2022 will regain much of the ground lost in 2020, boosting the five-year outlook. There, we expect rents to be 22.2% higher at the end of 2026 than where they are today.

We predict that rents in London and other cities will continue to recover through 2022. More than half of Savills lettings agents said proximity to transport links was one of tenants’ top three priorities when choosing their next rental property, according to our Q3 2021 agent survey.