Prime rents picked up over the first quarter of 2024 in line with typical seasonal trends, but affordability pressures and increased stock means growth has settled at a lower level compared to the last few years.
Jessica Tomlinson, Associate Director, Savills Residential Research
Over the first quarter of 2024, rents for prime properties rose across both London and the regional markets, confirming the return to seasonality we sensed at the end of last year. However, given the significant change in market conditions over the past six months, the rate of growth was slower than at this point a year ago.
Across prime London rents increased by 0.3% over the first three months of the year, an uptick from the marginal falls (-0.1%) in Q4 2023 but less than a third of the growth seen a year earlier (1.4%). As such, annual growth reduced to 3.2%, marking the sixth successive quarter of slowing annual growth since the peak back in September 2022. In the regional markets, prime rents increased by a more significant 0.9% in the quarter, but annual growth slowed to 4.0%.
The prime markets now look to have settled at a steadier rate of growth as a result of shifting market conditions, with annual growth now firmly below the figures recorded over the past two years. However, rents still remain significantly above March 2020, up 17.7% in London and a substantial 23.9% higher across the regional markets.
Over the recent past, smaller, lower-value properties have generally experienced the strongest rental increases, fuelled by needs-based tenants and a limited supply of available stock. However, over the first quarter of 2024, across the more domestic outer prime London region, rents for prime houses increased by 0.5%, compared to flats where they remained flat.
In the more discretionary prime central London market, rents for prime properties costing over £4,000 per week increased by 0.7% in the first quarter, whereas rental values for those worth less than £1,000 a week only grew by 0.3%. Across the regional markets, flats continued to outperform over the first three months of the year, up 1.2% compared to 0.8% for houses. Despite this continued trend, the gap between flats and houses has somewhat narrowed.
This shift in performance suggests rental affordability is starting to feature in the prime markets as it has across the wider mainstream markets. As headline wage growth has eased, the ceiling at which tenants are able, or willing, to pay has come much more into focus, despite the more flexible nature of prime tenants’ budgets.
Despite the market settling at a steadier pace of growth, the gap between landlord and tenant expectations on rents has widened. The majority of Savills agents (60%) agreed tenants’ expectations on value had reduced over the past three months. As a result of gradual stock increases, there are generally fewer new applicants per available property, meaning tenants have more choice, can look at multiple locations and seem to be more attuned to the changes in market conditions.
However, half of agents reported that landlords’ expectations on rents continued to be positive over the last three months. Although landlords with debt may have been squeezed as a result of higher mortgage costs, the prospects of mortgage rate cuts should ease some of the financial burden. And higher gross yields as a result of record rental growth over the past three years should support continued investment in the sector. It will be vital to align expectations as much as possible moving forward and it is likely those landlords who adjust to changing conditions will secure the best tenancies and minimise voids.
Across the prime rental market, acute stock shortages have continued to ease. As such, we expect rents to continue to increase over 2024. However, the rate of growth will likely be at more subdued levels than we have seen in the past few years, given affordability constraints. As seasonality has returned, the majority of this growth is expected to be focused around the traditional busy summer market before tailing off in the second half of the year.
Despite financial pressures and upcoming changes in regulation, there hasn’t been the exodus of private investors that some envisaged. Therefore the prospect of a further significant surge in rents as a result of a pronounced shortage in available supply is limited. However, substantial downward pressure on rents is equally unlikely. Current strong gross yields will support continued investment in the sector but there are few signs that investor landlords will flood into the market and therefore available stock is likely to remain somewhat limited.
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