Demand Soars in the London Rental Market

Rental value growth in prime London markets slowed in November as the gap between supply and demand narrowed, according to Knight Frank.

The average increase in prime central London (PCL) was 17.4% over the last 12-month period, whilst there was a rise of 15.3% in the prime outer London (POL) area. Rents are now 22.1% above their pre-pandemic level in PCL and 20% in POL.

Tom Bill, head of UK residential research at Knight Frank, said: “Even though growth is slowing, there are few signs that life is getting easier for prospective tenants in the capital (London) due to stock levels that are down by about a third on the five-year average.”

“Demand has soared as offices and Universities have re-opened but supply has struggled to keep pace as owners took advantage of a resurgent sales market. Prospective landlords have also been put off by tax hikes in recent years and the prospect of further legislative changes, intensifying upward pressure on rents.”

Last month’s Autumn Statement could have been worse for landlords but the cut to the annual exemption for capital gains tax (CGT) means they will have to pay an extra £2,600 from April 2024 when they sell.

There was some speculation that the chancellor would align the rates of CGT and income tax, which would have been punitive for landlords given the top rate of income tax is 45%, but fortunately this did not happen.

“Perhaps the government is aware of the risk that it could be fighting the next election against the backdrop of rising rents and falling house prices,” Bill added. “There are some signs that supply is improving but this is primarily in higher-value markets, as we explored last month, and the chart below shows.”

Market valuation appraisals by agents for rental properties that were valued between £1,000 and £4,000 per week are 12% higher In November than January. For those properties below £1,000 per week, there has been a 35% decline, and the overall fall is 24%. Appraisals are a leading indicator of supply that is coming onto the market which indicates more higher value properties are in the pipeline.

The reason is that sellers of higher value properties are typically more discretionary and can be patient in the current period of mortgage market volatility by renting out their home.

For the wider market, Knight Frank believe that letting supply may not increase significantly until next spring, which is when more accidental landlords could be created.

Bill continued: “Higher mortgage costs have led to downwards price pressure in the sales market, which is likely to intensify from next year as mortgage offers made before September’s mini-Budget lapse.”

“If owners fail to achieve their asking price, they could explore the rental option in the same way as owners of higher-value properties have done this year.

“Provided the uncertainty doesn’t mean a larger wave of buyers become tenants, only then may we see meaningful downwards pressure on rents.”