Whilst demand remains strong, tenants' budgets are beginning to come under pressure with rising inflation and the increasing cost of living. As a result, we expect the gap between tenant and landlord expectations to widen in the short term with landlords who choose to price sensibly attracting the most interest
Frances McDonald, Director, Savills Residential Research
Demand for rental properties remains strong, but tenants are becoming more cautious and conscious of pricing. Prime rental values continued to increase across both London and commuter belt markets during the first three months of 2023. Rents are up by an average of 1.4% and 1.3%, respectively, lower than the 3.5% and 2.0% seen at this point last year.
Growth has slowed considerably across every London region, particularly across prime central and North West London, where rents rose by a modest 0.8%. The North and East, South West, and West London regions recorded rental growth of 1.9%, 1.7% and 1.8%, respectively.
This leaves annual rental growth at 8.7% on average across prime London, down from a peak of 13.8% in September of last year, when the well-established supply and demand imbalance was at its greatest.
For the commuter belt, rents grew by 4.8%, marking three years of consecutive increases, which now total 18.3%. The outer commuter region, the furthest from London, recorded the strongest rental growth of 6.7% over the past year, driven, in particular, by markets such as Cambridge, Farnham and Henley.
Smaller, lower-value properties have been the strongest performing over the last three months as needs-based, domestic tenants, such as families and young professionals, continue to compete for limited available stock at more manageable price points.
As a result, rents for homes in outer prime London worth less than £500 per week increased by 2.3% in the three months to March, whilst those costing more than £3,000 per week remained broadly flat (0.1%). And across the commuter belt, one- and two-bedroom properties saw rental growth of 1.0%, whilst those with five or more bedrooms rose by just 0.2%.
This trend is also evident in central London, where properties with up to three bedrooms have increased by an average of 1.1%, whereas those with four or more bedrooms, typically costing in excess of £4,000 per week, rose marginally by 0.3% during the first quarter.
Demand at the top end of London’s rental market tends to be much more discretionary, and since the market has become less frantic, pressure on pricing for these properties has eased.
Whilst average prime gross yields across London have risen significantly over the past three years, they remained steady during the first quarter of 2023. However, flats continued to see increasing returns as rental growth for these properties still outpaced capital value growth across all regions.
Looking forward, although regulatory and financial pressures is likely to limit activity from mortgaged investors, rising yields could underpin some additional demand from investors using cash. We expect this activity to be focussed on smaller properties, where returns are greatest.
Whilst demand remains strong, tenants' budgets are already coming under pressure with rising inflation and the increasing cost of living. As a result, we expect the gap between tenant and landlord expectations to widen in the short term, with landlords who choose to price sensibly, attracting the most interest and are the most likely to secure a tenancy.
On the supply side, almost a third (31%) of Savills commuter belt agents reported that stock had risen during the first three months of 2023, and 63% are expecting that levels will increase over the next three months. In London, only 23% of agents said stock levels had increased, and 43% anticipate they will rise in the three months to June.
Across Savills London offices, the number of new applicants per available property fell to 5.9 in February, down from a peak of 9.9 in September 2022. For the commuter belt, that number is currently 5.4, down from 7.7 in January 2022.
This is likely to further support a stabilisation in rents and see growth return to more historic norms.
Whilst we are expecting the continued imbalance between supply and demand to continue to drive rental growth in the short term, rising inflation, the increased cost of living and pressure on corporate budgets means we anticipate that the rate of rental growth is likely to slow further. Overall levels of growth during the past three years will also limit the capacity for further substantial rises.
Supply constraints are also likely to begin easing with additional stock coming to the market from opportunistic cash investors as well as accidental landlords, resulting from a weaker sales market.
Therefore, we are forecasting average rental growth across the prime commuter belt to slow to 3.0% during 2023, followed by a further 2.0% increase in 2024. In London, we expect prime rents to increase by an average of 5.0% this year and by 3.0% in 2024.
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For more information, please contact your nearest London office or arrange a market appraisal with one of our local experts.
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