Tenants push back on rent increases as supply builds in upmarket London postcodes

Rental value growth in prime London postcodes has narrowed to levels last seen in the summer of 2021. Average rents in prime central London (PCL) grew by 4.9% in the year to April, while the figure was 4.4% in prime outer London (POL). The increases may be down but are still relatively high by historical standards.

It is largely the result of rising supply. An active sales market during the pandemic, particularly throughout a 14-month stamp duty holiday from July 2020, meant lettings stock fell as owners capitalised on buoyant conditions by selling.

LANDLORDS LEAVING

On top of that, landlords have also been leaving the sector in recent years due to proliferating red tape and tax. Those who haven’t sold up typically have preferred shorter tenancy lengths to leave themselves the flexibility to do so. While that is good news for tenants, the fact rental value growth has calmed down over the last six months is potentially another disincentive for landlords.

The Renters (Reform) Bill currently going through Parliament is adding to the mood of uncertainty. Any proposed changes by the Conservative Party could be expanded upon by Labour if they win power. Several months ahead of a general election, there are early signs that more landlords are considering a sale.

PRICES FLAT OR FALLING

The number of new lettings instructions across London was 4% lower in April compared to the same month last year while sales instructions were up by 16% over the same period. With prices either flat or falling across many prime London sales markets, these properties may revert to the lettings market if the asking price is not achieved.

Overall, lettings supply has grown in recent years, and new instructions were 11% higher over the first four months of this year than the same period two years ago, a time when rents were growing by over 20%. As a result, tenants are increasingly pushing back against the sort of large rent increases that have been common since then, either by re-negotiating or leaving at the end of the tenancy.

As rents continue to increase and sales values decline, gross average yields have risen. A figure of 4.24% in prime central London in April was the highest it has been since March 2007.

A LITTLE LACKLUSTRE

Meanwhile the seasonal spring bounce in the UK housing market looks a little lacklustre. Admittedly, the number of UK mortgage approvals hit an 18-month high in March but the figure has only inched higher in recent months and transaction volumes are still a quarter below their five year average.

The outlook isn’t exactly gloomy but neither does the warmer weather signal lift-off for the market.”

The outlook isn’t exactly gloomy but neither does the warmer weather signal lift-off for the market.

 The primary cause is stubborn services inflation, which means rate cut expectations have moved further into the distance since January. Money markets are currently pricing in between one and two cuts in 2024 and lenders have been forced to raise rates.

The close relationship between the cost of borrowing and demand in recent month is evident across the whole of London. The number of offers made was 14% below the five-year average (excluding 2020) in April, underlining how demand has weakened.

The better news is that supply has risen in recent months, which means it has a better chance of meeting demand when the latter eventually picks up.

The number of sales instructions in London in April was 21% higher than the five-year average (excluding 2020), having risen by 10% over the first four months of the year. As we saw in January, the market can turn quickly when mortgage rates begin to fall. If there is better news on inflation towards the summer and lending costs start to fall, buyers will need to remain alert from the comfort of their sunbeds.

Tom Bill is Head of UK Residential Research at Knight Frank