Across prime London, rental growth continues to set new records as a result of four consecutive quarters of stellar increases. Stock shortages and high demand has kept intense competition up in the capital despite an increasingly difficult economic backdrop.Jessica Tomlinson, Associate - Residential Research
Rental growth for prime properties in London reached 14.0% in the year to September 2022 - the highest growth since Savills index records began in 1979. Rents increased by 3.3% in the three months to the end of September. This is the fourth successive quarter where growth has exceeded 3%.
In the capital, levels of homes available to rent remain at record low levels. Not only does this underpin strong rental growth, but it also drives applicants to look further afield. Indeed, 62% of Savills London agents reported that at least half of their new applicants are searching across multiple locations.
Against this backdrop, there has been a significant surge in student demand across London’s prime rental markets, with many returning to the capital after deferring their studies during the pandemic. When asked where demand was coming from, almost half (48%) of our Savills London agents ranked students top. However, the more traditional demand from young professionals was still ranked first by almost a third of those agents (31%), suggesting a balance of demand across a range of tenant groups.
North West London was the top-performing area in London, largely driven by rental increases in Maida Vale, Little Venice, Primrose Hill and St John’s Wood. These markets, along with those in North and East London (a band from Islington to Canary Wharf), particularly benefited from the increase in affluent students looking for prime rental accommodation.
Across prime central London rents increased by a lesser, but nonetheless robust, 3.4% in the quarter, only marginally below the 3.7% in Q2. This has resulted in net rental growth of 4.1% over the past five years - the first positive reading over such a period since March 2016.
This growth reflects the fact that two-thirds of our agents also reported an increase in international demand which has historically been a key component of demand in this market.
The third quarter of 2022 marks the first signs of a slowdown across the prime commuter belt. After a period of significant increases, quarterly growth slipped to 0.9%, the first time growth has been below 1% since Q4 2020. As such, annual growth simmered at 7.2% but on average rents are still a significant 16.5% higher than March 2020.
Across the commuter belt families have continued to provide the bulk of demand, with the majority of agents (some 71%) ranking it as the most important source of prospective tenants. This has been supplemented by strong demand from young professionals and those who have been unable to buy.
However, in this market the balance between supply and demand has shown some signs of easing and, as a result, the rate of rental growth has begun to slow.
As tenants have focused more on the ease of the commute to the capital’s employment markets and the proximity to urban amenities, we have seen a rebalancing in the rental growth for urban and suburban homes as opposed to rural and village properties. Rental values of city homes rose by +1.4% in the third quarter versus 0.4% seen across more rural locations. Meanwhile, prime properties in the most affluent commuter towns have seen an annual rental growth of 8.5%.
Sunningdale (+4.5%), Cobham (+4.2%) and Winchester (+3.0%) were among the strongest performers. Here, huge constraints in available stock are keeping sustained upward pressure on values despite increased costs of living.
Although rents for houses have still grown the most since the start of the pandemic, the gap with flats is starting to narrow significantly as demand among young professionals, sharers, students, and international tenants looking for a “lock up and leave” has returned at pace.
Rents for flats in prime London rose by 3.7% during the third quarter, with annual growth reaching 15.5%. By contrast rents for houses increased 2.7% and by 12.0% annually.
And it is a similar story across the prime commuter belt where rents for flats are up by 1.7% over the third quarter compared to 0.8% for houses, with annual growth now on par at 7.2%.
The cost of living is yet to have a significant impact on the budgets of tenants across prime London, with the majority of agents (55%) saying budgets have remained the same. However, across the commuter belt, 43% of agents reported budgets had started to decrease over the past three months (up from 23% in Q2).
Energy costs in particular, have also been at the forefront of many tenants minds, with the majority of agents in the commuter belt (79%) agreeing that the energy efficiency of a property has risen up on the agenda over the past three months (vs. 59% of agents in London).
Although the prime markets should be more insulated against the cost of living pressures than the mainstream market, we expect the uncertain economic outlook to temper rental growth over the rest of this year and into 2023.
However, the imbalance between supply and demand is likely to continue to be the overriding factor that determines the direction of rental movements. Current stock shortages are so acute that we expect to see further, albeit more modest, rental growth in the short term.
Over the medium term, much will depend on the extent to which higher interest rates translate into a weaker sales market that results in more stock coming from accidental Landlords. At the same time, those higher interest rates will put more financial pressure on mortgaged buy-to-let Landlords, which is likely to mean levels of available stock remain constrained for some time to come.