Movements in rents of prime houses outside of London appear to be shifting back in line with pre-Covid levels as seasonality returns to the rental market
Katrina Fyfe, Analyst, Savills Residential Research
After a few years of historically high rental growth, we witnessed the return of more seasonal trends in the fourth quarter of 2023 in the prime markets.
For the first time since September 2019, prime rents across the regional markets slipped into negative territory. In the final three months of 2023 prime rents were down very marginally by -0.1%. As a result, annual growth has also slowed to 4.3% from 4.8% at the end of Q3. Despite a softening in rents during the fourth quarter, rents of prime homes in and beyond the commuter belt remained 22.7% above where they were in March 2020.
As ever, these headline movements hid a level of variation across different submarkets.
Movements in rental values of prime properties in regional towns and cities dipped into negative territory for the first time in four years. Rental values fell by -0.6% over the quarter, having risen by as much as 2.5% in the preceding three months. While annual growth remains at 7.3%. This is the first indication of affordability pressures and a shift in the balance between supply and demand curtailing further rental increases in these markets.
Rental values also eased back in both the Suburbs and the Cotswolds & wider South West over the last three months of 2023, suggesting a return to trends typical of a winter market.
In comparison, rents of prime homes in the inner and outer commuter zones rose by 0.3% and 0.6%, respectively, after falls in the previous quarter. This can be put down to a lack of supply of smaller, lower-value properties, in some cases coupled with an increase in demand from try-before-you-buy tenants, resulting from a weaker sales market.
Across the regional markets, rental values for one or two bed properties increased slightly by 0.3% in the quarter, whilst properties with five or more beds fell by -0.2%, meaning annual rental growth varied from 5.0% for the former to 2.4% for the latter.
Consequently the market for flats has continued to be stronger than houses, other than in certain prime suburban areas, as financial pressures continue to impact budgets.
However, across the board, quality of properties is becoming a bigger driver of rental performance, with tenants more able to distinguish between those properties which are best in class and those more run of the mill in a less frenetic market.
Typical of this time of year, stock levels have continued to rise over the final three months of the year. Roughly 57% of Savills agents reported an increase in available stock in the final quarter, with just under two thirds suggesting there will be an increase in the next three months.
This brings with it a sense that rents are shifting back towards a more seasonal market, as the supply and demand imbalance of the past few years eases.
Our agent survey suggests this has been accompanied by a narrowing in the gap between landlord and tenant rental expectations. Nonetheless, it will be those landlords who are able to adjust to changing market conditions who will let properties more quickly and minimise void periods in 2024.
An easing in the imbalance between supply and demand over recent months provides a strong indication of the prospects for rental values in the short term.
Many tenants have been pushed to the top end of their budgets and with wage growth set to slow, affordability pressures will likely be at play across the regional markets over 2024. That said, overall, we do still expect supply to remain constrained, albeit to a lesser degree than previous years.
And so, while we expect rents to continue to increase over the next 12 months, we anticipate that to be at a much more subdued rate than we have seen over the past years, with the majority of the growth concentrated in the first half of the year.
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