Rental value growth continued to strengthen in September across prime central (PCL) and outer London (POL) says Knight Frank.
The annual increase in PCL was 1.8% in September, having risen from 0.6% in January. In POL, the figure increased to 2.1% from 1% over the same period.
The increase is largely down to tighter supply, which is the result of more landlords attempting to sell due to the prospect of the Renter’s Rights Bill and tougher green regulations.
The number of new lettings listings in PCL and POL in the year to August was 3% lower than the previous 12-month period, Rightmove data shows.
The Renters Rights Bill is designed to protect tenants but raises the risk of void periods and could make regaining possession of a property more onerous. Meanwhile, stricter green regulations mean that rented properties must have an EPC C rating by 2030, which will require more upfront investment.
Furthermore, a proposal was floated last month which may mean rental income is subject to National Insurance payments. If the idea is contained in the Budget, it could reduce supply further and may even prove to be inflationary as costs are passed on.
As a result of the uncertainty, we recently revised our rental forecasts marginally higher.
The government’s aim of making life easier for tenants through the introduction of the Renters Rights Bill has had the opposite effect as rents steadily climb in prime London markets.
If nothing else, it proves the law of unintended consequences is alive and well.
Meanwhile, there are signs that some prospective super-prime tenants (£5,000+ per week) are watching events unfold in the run up to the November Budget.
Tenant demand in higher brackets had been supported by uncertainty in the sales market due to the changing tax landscape. Scrapping the non dom rules, for example, meant some wealthy overseas individuals had kept their options open by renting.
The number of super-prime (£5,000+/week) tenancies agreed in the year to April was 21% higher than the previous 12 months, LonRes data shows. In August, there was an equivalent decline of 4%.
However, it’s a mixed picture and the market in the Home Counties remains buoyant. The number of super-prime tenancies started in the Home Counties in Q3 was the highest in four years, thanks to resilient demand in the sports and film sectors.
“Following a strong spring and early summer, demand began to flag in September in a way you wouldn’t normally expect,” said Tom Smith, head of super-prime lettings at Knight Frank.
“Activity had been buoyed by more subdued conditions in prime and super-prime sales markets due to higher rates of stamp duty and recent changes to non dom rules. However, it appears tenants are also now taking more of a wait-and-see approach as the Budget gets closer, which is something landlords will need to factor into asking rents.”
The lettings market is quicker to respond to events than the sales market, which makes it harder to read longer-term signals. For example, any hesitancy among tenants could quickly reverse following the Budget. And while global appetite for a London address is weaker than in recent years, history has proven its long-term resilience through electoral cycles and Budgets.
Tom Bill is head of residential research at Knight Frank
