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Prime rents continue to increase, despite tenant’s affordability constraints and an easing in acute stock shortages
Jessica Tomlinson, Associate, Savills Residential Research
Rents continued to rise across all prime rental markets over the second quarter of this year.
Across London, rental values increased by +1.4% in the three months to the end of June, essentially on par with Q1. Annual rental growth, which was well into double-digit territory in the middle of last year, has moderated to +6.7%, but, on average, rents for prime properties in the capital are still +15.9% higher than at the beginning of the pandemic in March 2020.
Meanwhile, in the prime markets outside of London, quarterly growth picked up in the three months to June, as average rents rose by +2.5%. This brings average annual rental growth back to +5.3% and leaves rents almost +21.8% above where they were in March 2020.
There have been some improvements to levels of rental supply in the capital over recent months. Savills available stock in June was 14% higher than at the same time last year, but still remains significantly below (-25%) pre-pandemic levels.
Despite this improvement, there are hotspots which remain chronically undersupplied. Here, rental growth has significantly outperformed the wider prime market. In particular, areas of South West London, including Wandsworth, Clapham and Battersea, all recorded average quarterly growth of over +4.0% over three months to June. Rents across North West London also picked up over the second quarter, as good quality housing stock remains in short supply.
And across the market as a whole, it seems a lack of stock is continuing to outweigh the mounting pressures on tenants' household finances.
Generally smaller, lower-value properties continue to experience strongest rental growth, with strong competition among needs-based tenants as occupational demand shifts towards renting in the face of higher mortgage costs. In prime central London, properties with lower weekly rents have outperformed the more discretionary markets above £4,000 per week. And beyond central London, growth for properties with a rental value below £500 per week still approaches double digits; standing at +9.4% in the year to June. By comparison, those properties over £2,000 per week, rents are +5.5% higher.
Outside of the capital, prime properties in an urban setting have experienced the strongest rental growth as tenants increasingly prioritise connectivity and accessibility. In these markets, rents increased by an average of +4.4% over the second quarter and are +8.6% higher than a year ago. Prime properties in the cities of Edinburgh, Birmingham, Reading and Manchester all saw substantial rental growth in the quarter.
Smaller properties in central locations with modern amenities are typically in the most demand reflecting a trend seen more widely across the prime regional rental markets. By contrast, demand for larger family homes has eased back a little across some locations as tenants have become more discerning and budget conscious.
In the prime suburban and commuter markets, rents for properties with one or two bedrooms increased by 6.5% over the year to June, whereas those with five beds or more grew by 4.3%. This said, the best-in-class prime properties in the most desirable locations remain sought after and can still attract a premium. In particular, demand for large country homes remains robust; coming from a range of tenants, including domestic, international and corporate relocations.
London’s prime gross yields have increased over the last three years and are significantly above pre-pandemic levels, as rental growth has consistently outpaced capital value growth during this period.
Across all regions, the increase in yield has been greater for flats than houses. Typically smaller properties have continued to experience the strongest rental growth but have remained price sensitive from a sales perspective.
Moving forward, regulatory and financial pressures are likely to further limit activity from mortgaged investors. But, the higher yields on offer could provide an opportunity for some and are expected to continue to underpin demand from cash investors. We expect activity to focus on smaller properties where income returns are highest, with an increased emphasis on stock selection, given the variation in yields on offer.
Whilst we have seen some improvements to the levels of available stock over recent months, the imbalance between supply and demand remains significant and will take time to unwind. Indeed, in June, the Savills average number of new applicants per available property across our national network was 6.6. In June 2019, that was 2.8. We therefore expect this imbalance to continue to drive rental growth in the short term, especially as we enter the typically busy summer market.
However, this is against a backdrop of high inflation, increased cost of living and pressures on both household finances and corporate budgets. And even in the less price-sensitive prime market, rising rents will hit up against an affordability ceiling in the coming months, and that will begin to constrain rental growth.
Impending regulatory pressures, finance viability and the level of debt exposure of mortgage buy-to-let landlords will be key moving forward. We are likely to see very different impacts on smaller, more indebted landlords and those larger investors with less exposure to mortgage debt, who are better placed to capitalise on future rental growth. However, it is likely to mean supply of available rental stock remains tight, keeping pressure on rents.
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