Spotlight: Prime Residential Rents – Q4 2021

Decade-high rental growth over the final quarter of 2021 as renters return to prime London


During the second half of 2021, there was a distinct shift in the prime rental markets. Prime London saw renewed demand, and the recovery in rental values accelerated rapidly. Rents across the capital increased by 3.3% during the final months of 2021, the highest quarterly growth in more than 10 years.

And despite the nature of tenant demand evolving as restrictions eased, a severe lack of stock has maintained upward pressure on rental values across London’s commuter belt.

Many lockdown trends continued to unwind over the final quarter of 2021. Tenants have generally refocused their search back to urban locations, rather than the more rural areas which were favoured throughout much of the pandemic. As such, towns and cities across London’s commuter belt experienced the strongest growth, along with the more central locations of the capital, close to work and transport links.

However, limited levels of stock look as if they will be the key driver for the pace of rental growth during the first half of 2022.

Data from the final quarter of 2021 shows just how quickly urban markets can bounce back as lockdown measures are eased and international travel opens up.

We’d therefore expect any slowdown as a result of renewed Covid-19 uncertainty to be relatively short-lived.

Decade-high growth in London recovery

Over the final three months of 2021, prime London rents experienced the strongest quarterly growth since June 2010. As lockdown rental trends continued to unwind and more tenants looked to return to the city centre, rental values increased by 3.3% in the final quarter and by 6.6% over 2021. This has resulted in rents recovering to pre-pandemic levels, with prime London rental values as a whole now 1.5% higher than March 2020.

Much of this recent growth has been led by the sustained recovery of the London flat market, given the return of demand from key tenant groups during the second half of 2021. London’s prime flats recorded growth of 4.1% over Q4 2021, again the highest level for more than 10 years. However, despite annual rental growth of 6.2%, rental values of these flats remained -1.3% below March 2020 at the end of the year.

By contrast, rental values of prime houses, which fell much less in the early stages of the pandemic, increased by 2.2% in the quarter, contributing to annual rental growth of 7.1%, and leaving rents 5.4% above March 2020 on average.

All geographical submarkets across the capital experienced positive quarterly and annual rental growth over the final three months of 2021, for the first time since the start of the pandemic.

During the course of the pandemic, South West London has consistently been the most robust market, playing well to increased demand for family homes offering more space. The region saw annual rental growth of 6.6% in 2021, pushing rents to 6.9% above pre-pandemic levels.

Prime central London also saw annual growth of 6.0%, although values still remain -1.2% below their pre-pandemic benchmark given its exposure to a fall in overseas demand as a result of constraints on international travel. Over the fourth quarter, almost two-thirds of our London agents reported an increase in international demand as travel reopened prior to the Omicron variant. This, together with more demand from corporate tenants, has supported a recovery in this part of London. That has fed through to prime North West London, led by locations such as Maida Vale, Little Venice and Primrose Hill, which offer a village feel in close proximity to central London.

However, the top performer during the final months of 2021 was the North and East region, with 6.4% quarterly growth leading to a 9.0% increase over 2021. Clerkenwell and Shoreditch in particular recorded annual increases of above 10%. However, Canary Wharf has seen a dramatic turnaround in fortunes and was the top performer (see below).

Remarkable turnaround for Canary Wharf

Canary Wharf has seen the biggest swing in rental values of all of London’s prime markets during the period of the pandemic. In a location heavily exposed to falls in office occupancy and supply dominated by smaller flats, the area was left with particularly high numbers of properties available to rent during – and in the immediate aftermath of – successive lockdowns. As a result, rental values fell away much more rapidly than in parts of the market that didn’t have as much competing supply from new developments and had more prized family housing to offer.

Yet Canary Wharf recorded rental growth of 13.2% in 2021 on the back of a pronounced bounce in the final quarter of the year. That reflected the return of demand from an increasingly diverse group of tenants, many expanding their search given the widespread lack of supply; that became an increasing feature of the market in the second half of the year.

All geographical submarkets across the capital experienced positive quarterly and annual rental growth over the final three months of 2021

Jessica Tomlinson, Analyst, Residential Research

Commuter belt growth and demand

Tenants are focusing on the amenities of urban locations

Throughout the majority of the pandemic, the prime rental market in the commuter belt has benefitted from an influx of demand from those looking for extra space. More recently, that has been supplemented by a rise in demand from accidental tenants unable to secure a property to buy. As a result, rents continued to rise in the final quarter of 2021, increasing by 2.0% to bring average annual rental growth to a previously unimaginable 8.1%.

In contrast to the early stages of the pandemic, much of the recent growth was led by urban locations, with tenants increasingly refocusing on amenities and connectivity. As a consequence, commuter belt cities (+8.9%) and towns (+8.5%) slightly outperformed villages (+7.4%) and rural (+6.7%) areas during 2021.

While the nature of demand has evolved, much as in London, a lack of stock is now the primary driver of rental growth. Indeed, a severe lack of rental properties drove significant rental growth in the last three months of 2021 in certain submarkets, most notably the family house markets of Weybridge and Cobham.

Against that context, just over half of Savills agents suggested the gap between landlord and tenant expectations had widened during the final quarter of 2021. According to our survey, 77% of Savills agents reported that landlords’ expectations had increased, whereas only 48% of agents reported an increase in expectations of tenants, which is to be expected in such a fast-paced market.


Assessing future rental value movements in London and the commuter belt

What has underpinned the recovery of rental values in London?

Savills agents reported increased demand from corporate relocators, students and young professionals during the final three months of 2021. These are all key tenant groups that were impacted most severely by the pandemic. Supply continues to be very constrained across London with most agents reporting stock has decreased over the final quarter of the year. Looking forward, 65% of Savills agents don’t expect the level of stock to change over the first three months of 2022. As a result, our London agents are reporting a widespread increase in rental expectations, albeit less so among tenants (55%) than landlords (85%).

What does that mean for prime rents in the capital going forward?

The pace at which the balance between supply and demand shifted over the latter half of 2021 suggests strong competition will remain a driving factor over the short term at least. We therefore expect to see rents continue to rise across prime London over 2022, supported by the strong wage growth that is currently being reported in a robust employment market. Longer term, the capacity for rental growth reflects where we were in the cycle prior to the pandemic. With rental falls of 9.9% across prime London in the five years to 2020, there remains significant capacity for growth despite the recent rebound. As such, over the five-year period to 2026, we are forecasting total growth of 13.7% across prime London.

How does the situation with prime London rents compare with the outlook for rental value movements in the commuter belt?

In the commuter belt, we anticipate more subdued growth over the coming years, following an increase in average rental values of more than 10% since the inception of the pandemic. We expect a shortage of stock to continue to put upward pressure on rental values over the first half of 2022.

However, more than three-quarters (76%) of Savills agents believe that stock will increase in the first three months of the new year. So, as demand eases back and stock levels begin to normalise, we expect growth to slow considerably over the latter half of 2022.

Furthermore, the recent growth over the pandemic does reduce the capacity for sustained rental growth over the next five years. However, this also needs to be considered against the context that rental values only increased marginally by 0.3% in the five years to 2020, which limits the prospect of future rental falls.

Additionally, we expect to see continued demand from a group of tenants who adopt a permanent hybrid working pattern, and accordingly, we are forecasting total rental growth of 5.6% over the five-year period to 2026.

That outlook is underpinned by the prospect of changes to minimum energy performance certificate requirements, which are expected to curb the amount of stock brought to the rental market by private landlords.


View our latest Q4 2021 updates here

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