As the rate of rental growth continues to slow across the prime markets, greater alignment on rental expectations will be essential, especially as the market faces changes from the upcoming Renters’ Rights Bill.
Jessica Tomlinson, Associate Director, Savills Residential Research
Across prime London, rents increased by 0.5% over the third quarter of the year. This is slightly down on the previous quarter, but it marks a more significant slowdown compared to the third quarter of last year (1.5%) and Q3 2022 (3.1%). As such, annual growth totalled 1.4% in the year to the end of September, the lowest level since September 2021. A gradual unwinding in the imbalance between supply and demand and ongoing affordability constraints have contributed to a slowing in the market.
Outside of the capital, prime rental values fell by -0.1% over the three months to the end of September, with annual growth reaching 1.8%. Although quarterly growth dipped marginally into negative territory, the prime rental markets have historically slowed over the second half of the year, in line with seasonality. Therefore, the third quarter further highlights the return to more typical trends, which we saw play out last year and the earlier part of this year.
Over the third quarter, smaller, lower-value properties proved more resilient across most parts of prime London and regional markets. This was a reversal of the trend seen over the previous quarter where larger, high-value houses started to outperform, as the affordability ceiling allowed some room for further increases. Whereas smaller, lower-value flats – which experienced the strongest increases over the recent past – were stretched closer to their limit.
Over the three months to the end of September, flats across the more domestic outer prime London area increased by 1.1%, whereas houses only increased by 0.3%. While in the regional markets, rents for flats grew by 1.2% over Q3, but houses fell by -0.5% on average.
This is in part due to the cyclical needs-based demand from students and young professionals which is typically felt in the third quarter of the year. Regional towns and cities also benefited from this increased demand, with rents increasing by 1.9% on average and university locations such as Birmingham, Reading and Manchester outperforming.
In contrast, the more discretionary, high-value prime central locations have been hit harder. Prime rents for flats across prime central London increased marginally by 0.3% over the three months to the end of September, while houses fell by -1.4% over the same period. This was also true across price bands and bedroom numbers, with those larger and more expensive properties feeling the most significant slowdown over the third quarter, as demand continued to ease back in line with seasonal norms.
As market conditions have shifted over the course of this year, so too have expectations of rental prices, albeit in opposite directions. Prime rental growth has slowed, as supply and demand have begun to normalise and some of the fraught urgency has worked its way out of the market. As a result, many tenants’ expectations on rents has shifted, now expecting them to fall, following a prolonged period of rental growth. When asked, 75% of Savills London agents agreed that tenants’ expected rents to fall over the past three months.
However, higher mortgage costs and upcoming changes to regulation have seen many landlords squeezed on their profit margin. And while mortgage rates have started to ease and the market has cooled, 61% of Savills London agents still reported that landlords’ expected rents to increase over the past three months. A gap also remains in the regional markets, though less stark.
Moving into the typically quieter fourth quarter, realistic expectations on price will be vital to securing deals. And those landlords who adjust will likely secure the best tenancies and minimise voids.
Over the remainder of this year, we expect rental growth to be more muted, in line with a regular winter slowdown, and as affordability constraints remain.
However, there is some uncertainty in the rental market. Labour’s Renters’ Rights Bill has now been introduced to parliament and seeks to abolish fixed-term tenancies and end Section 21 ‘no fault’ evictions. While both these policies were included in the Renters (Reform) Bill (as it was previously known), possible changes to EPC requirements and suggestions around Capital Gains Tax thresholds in the autumn Budget have caused more of a stir. Initially, we expect some shock to the market but this is likely to ease back once announcements are made and the outlook is clearer.
But for those landlords taking a longer-term view of their investment, there are other considerations. Mortgage rates are expected to continue their downward trajectory and given the prolonged period of rental growth, prime gross yields remain strong. And, as the bill will impact Assured Shorthold Tenancies, there are parts of the prime rental market, including some large, high-value houses and some prime central London locations, which will sit above the value threshold. Therefore, these parts of the market are likely less exposed to possible disruption from reform than the wider market.
Over the longer term, we expect supply to be limited as new policies work their way into the market. But ultimately, given the levels of rental growth over the past few years, moving forward, affordability will be a key determinate of how far the rental market can be stretched.
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Understanding the Renters (Reform) Bill
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