How do we expect the rental market to perform over the next five years?
Given the significant increases in rents since 2020 and the well-reported imbalance between supply and demand, it is hard to see past these fundamentals when considering the future path of rents. But as we enter a new phase of the cycle, factors such as affordability, seasonality and regulatory change will all play a role moving forward.
Firstly the fundamentals
Across the prime rental market as a whole, there has been an overall undersupply of properties over the past few years. A positive sales market from 2020 to 2022 encouraged some accidental landlords to sell up. More recently, higher mortgage rates have undoubtably made life more difficult for smaller landlords carrying mortgage debt, further constraining levels of available stock.
But acute stock shortages now look to be easing. In December, the level of Savills available stock was 14% higher than December 2022 and 28% higher than the same month in 2021 (though still 17% down on December 2019). On the other side of the equation, new applicants have been gradually returning to more seasonal norms, after record highs in 2021 and 2022.
As a result, the number of applicants per Savills available property has fallen below the same month in 2022 and 2021. But because they remain above December 2019 we don’t expect rents to fall in 2024.
This said, rental growth prospects are likely to be curtailed. As interest rates come down, pressures will ease for those landlords with debt. And with historically more cash investment, stock shortages across the prime markets are likely to be less acute than in the mainstream.
The other factors
Affordability: Over the past year there has been increasing pressure on tenants' affordability given cost of living demands and record rental growth. Although the prime markets are somewhat insulated against these pressures, there is ultimately a ceiling that tenant and corporate relocators are willing to spend. Going into 2024 the capacity for tenants to offer significantly above asking rent is likely to be limited, especially given the prospect of slower employment growth and a weakening in wage growth.
Seasonality: Both activity levels and rental growth followed much more typical seasonality trends in the final quarter of 2023. As a result, we expect rental growth to be strongest in the first two quarters of 2024, with the usual slowdown over the second half of the year.
Regulation: The long-awaited Renters Reform Bill is progressing slowly through parliament, but represents the biggest change in Landlord and Tenant legislation for residential property since the Housing Act 1988. As and when it is finally enacted and the Assured Shorthold Tenancy is consigned to history, it is likely to put pressure on underlying rental supply in the lower and middle tiers of the prime market.
Capacity for growth: At the end of 2023, rents across prime London sat 17.4% above March 2020 with those in the regional markets 22.7% above the same benchmark. Ultimately, that will somewhat limit the capacity for further significant uplift. So, over the longer term, we expect growth to return to historical averages.
As such, we expect rents to continue to increase over 2024, although at a much more subdued rate than we have seen over the past few years. Given the return of seasonality, we also expect the majority of the growth to be concentrated in the first half of the year.
Longer term, as supply continues to normalise, we are forecasting a slight slowing in growth over 2025 before reverting to more historic norms over the remaining years to 2028. Over the five-year period, we anticipate prime London to slightly outperform the regional markets given prime renters in the capital may have some further financial capacity to withstand cost of living constraints, and overall prime London has increased less significantly since 2020.
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