Lettings Market Updates, March 2023

After a brief slow down at the beginning of the year, the rental market in England is back in full force. Void periods between tenancies decreased in February and every region in the UK continues to see annual growth. Rents in the capital in February 2023 are 12.4% higher than in February 2022 according to HomeLet Rental Index. The most recent data shows that rents are rising to a four-month high. Historically, the high rental season runs in the summer months, therefore further rent increase is expected.

The pressure from tenants looking for London rental properties is still at all-time high, with a similar market picture in other big cities in the UK. Currently, we estimate that 10 potential tenants target each available property in the capital.

Demand & Supply

Strong demand in major UK cities is a huge incentive for private landlords wishing to remain in the UK housing market.

Following London’s retail, hospitality, and leisure industries return to pre-pandemic levels, the number of new lettings enquiries has increased sharply. Knight Frank reports that the number of new prospective tenants registering in the final quarter of 2022 was 30 percent above the five-year average.

At the same time, the overall supply of new homes to rent is declining and could not match the demand and long-term needs of Greater London. Following the slowdown in the construction industry, the supply-demand imbalance is likely to dominate the UK market long term. Department for Levelling Up, Housing and Communities reports the annualised number of new homes given planning permission on a quarterly basis were 55,000 new homes approved in London in the year to June 2022, down sharply from 66,580 the year before.

Also, the rental market supply is tempered by the higher borrowing costs in the UK, which is restricting future landlords looking at the buy-to-let mortgage options. With added taxes and rising maintenance costs, it is not surprising that 30% of private landlords in England and Wales plan to cut the size of their portfolio in 2023, according to the National Association of Professional Landlords. If materialises, this level of disinvestment will further reduce the available rental stock and will fuel more rent increases.

On the other hand, with high mortgage rates and the accompanying downward pressure on sale prices, we may see more owners opting to let their property instead of selling their assets.

The dynamic market conditions may also present better-financed landlords with some great opportunities when extending their property portfolios.

Rental growth by London Boroughs

Looking at the rental growth by London boroughs, Newham, Tower Hamlets, Westminster, Greenwich, and Lambeth are the top five London districts with the highest rate of rental increase in 2022. The newly built, energy-efficient homes to rent, improved connectivity (Elizabeth Line opening), and popularity amongst students and professionals are all factors that contributed to the rental growth in these areas. 

The latest research regarding Prime Central London letting market tells us that the supply in this segment remains below its historic levels. The area is recording a high level of tenants renewing leases leaving fewer rental properties to reach the market. Part of Prime Central London are Kensington & Chelsea and the City of Westminster; boroughs where more than 40% of rented properties are privately owned. One-third of demand is accredited to young professionals preferring long-term tenancies, but there is a growing wealthy international student population signing leases too.

Affordability

The average UK rent has increased 11.5% or £120 in the past year with London, Manchester and Glasgow seeing the biggest hikes. In December 2022, the UK average rent was £1,118.

The average London rent increase of 16.1% is the highest in the UK, according to Zoopla’s market report February 2023. The amount tenants pay currently is the highest in a decade.

For those staying put and renewing agreements, the pace of increase is slower. Data from the Office for National Statistics on all privately rented homes shows an average of 4.2%.

The main contribution to inflation and ‘the Cost-of-Living Crisis’ in the UK came from household energy costs, with bills around 90% above their level a year earlier. Real median wages in London are currently falling 1.5% year on year, in line with the national figure of around -1.4%.

According to data from tenant references collated by HomeLet, the rent on new tenancies in London accounted for an average of 34.9% of tenant incomes in October 2022, an increase from the rates of the previous year but still below the last peak of 36.7% in December 2020.

As the UK economy slows down with inflation reducing the consumers’ income and spending power, landlords will need to balance any rent rises with what London tenants can afford to pay. 

 CLICK HERE to get your London property valued.