Savills

Research article

Prime rental price forecasts

PRIME RENTAL SHORT-TERM DRIVERS

The balance between supply and demand has been the key driver in the rental market over the past few years. And this is still expected to be the case as we look forward.

In the prime market, the pace of rental growth has slowed significantly over the past two years, as the market rebalanced. Demand returned to more seasonal patterns. Meanwhile, supply increased from the acute shortages of 2021 and 2022, albeit remaining low in an historic context.

Looking forward, we expect increased regulation from the upcoming Renters’ Rights Bill and the additional 2% Stamp Duty Land Tax (SDLT) surcharge to result in further upward pressure on rents, as supply continues to be limited. Our client survey suggested that landlords’ confidence has declined over the past 12 months and appetite for future investment remains muted. However, plans to dispose of property are much more varied and will depend on individual landlords’ circumstances.

Over the longer term, the capacity for growth will be somewhat limited by the effect of the burst of rental growth seen prior to the recent slowdown and corresponding affordability constraints amongst certain groups of tenants. These typically have less of an impact in the prime rental markets than in the mainstream, meaning the supply and demand imbalance will likely continue to be the main driving factor behind further rental growth.


PRIME CENTRAL LONDON

The prime central London rental market is expected to see a number of specific factors shape the supply/ demand dynamic, alongside more generic, market-wide circumstances. We expect a shift towards renting from both international career re-locators and ‘non-doms’ given changes to the tax environment, which are set to compound the effect of the high stamp duty liability associated with buying.

We anticipate that there may be some increased supply from ‘non-doms’ property entering the rental market in certain parts of prime central London, as some of those affected change their tax residency. This may, in part, temper the underlying effect of constrained supply, though future investment is likely to remain limited as a result of the increased SDLT on additional homes and rental reform.

The Renters’ Rights Bill does not apply to properties with an annual rent of in excess of £100,000. Therefore, higher value homes in central locations are likely to see slightly less upward pressure on rents, with potentially fewer supply constraints.

OUTER PRIME LONDON

Across outer prime London, we expect supply constraints to be more keenly felt, though an improving interest rate environment may ease some pressure on those mortgaged landlords.

We anticipate domestic, needs-based demand to remain robust, supplemented by international career-relocators with an increased preference to rent and a wider search area. The more domestic and needs-based demand is likely to see affordability pinch sooner than the highest value or more central locations, thus limiting the potential for further significant increases.

PRIME REGIONAL

Across the prime regional market, we also expect supply constraints to be driven by the new SDLT surcharge and abolition of the Assured Shorthold Tenancy (AST) agreement. Increased Energy Performance Certificate (EPC) requirements add to this, especially in more rural locations.

Domestic, needs-based demand is likely to remain robust along with traditional migration from urban locations, but may be tempered by increased accessibility to home ownership as interest rates fall. And overall, prime regional rental markets have experienced the strongest growth over the past few years, which constrains the capacity for further significant increases.
 
The more domestic and needs-based demand, particularly in regional urban hubs, will also likely see affordability hit sooner than other parts of the prime market. Here, supply is also likely to be somewhat less constrained as future investment remains more buoyant.


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