Prime London’s rental growth has started to slow on an annual basis, according to the latest Savills prime lettings index, but a lack of stock continues to drive up rents, particularly across the South West and West, and amongst smaller properties.
Rents grew by 1.4% on the quarter (on par with Q1), and by 6.7% during the past year (down from 8.6% in Q1), leaving them 15.9% higher than in March 2020.
South West London hotspots – Wandsworth (6.6%), Clapham (5.1%) and Battersea (4.1%) – significantly outperformed on the quarter, bringing annual increases to 6.8%. This leaves rents over a fifth (21.5%) higher than pre-pandemic.
As a result, gross yields across South West London have pushed out to 3.8% on average and almost 4.5% for flats. However yields in North and East London (4.7%) are holding up strongest against the rising cost of debt.
| Q2 2023 | PCL | North West | South West | West | North and East |
| Quarterly growth, Q2 2023 | 0.8% | 1.3% | 2.6% | 1.7% | 0.7% |
| H1 2023 growth | 1.6% | 2.1% | 4.3% | 4.4% | 2.7% |
| Annual growth | 6.1% | 5.8% | 6.8% | 6.2% | 8.1% |
| Growth since Mar-20 | 12.2% | 15.7% | 21.5% | 15.8% | 13.5% |
Source: Savills prime London lettings index, Q2 2023
“Early signs that price growth is started to slow will come as welcome news to renters who have seen prices rocket since pandemic restrictions began to ease. Tenants in some locations are certainly still willing and able to pay a premium to secure a property, but stock is not as scarce as it was this this time last year, and only the highest quality homes can now expect multiple bids,” commented Jessica Tomlinson, research analyst at Savills.
“The majority of Savills London agents [70%] saw stock levels increase over the past three months which points to further slowing of growth, but there are still markets which remain chronically undersupplied. This correlates strongly with locations that are still experiencing very high levels of rental value growth.”
Towns and cities strongest performers across regional markets
Across UK prime regional markets, rents rose 2.5% on the quarter, pushing annual growth up to 5.3%, higher than the 5.0% recorded in Q1 2023.
Regional towns and cities saw the strongest rental growth (4.4% on the quarter, and 8.6% on the year), as the urban revival and back to the office trends continue. Edinburgh (5.9%), Birmingham (5.6%), Reading (4.1%) and Manchester (4.0%) saw the biggest increases in the quarter.
“Many tenants are now prioritising connectivity over space, reversing the trend that dominated the pandemic property market. In these locations the smallest properties (one or two beds) are seeing the highest rental growth, a trend we expect to see continue over the coming months, particularly as students return to University towns,” continues Savills’ Jessica Tomlinson.
Looking ahead across both markets
Despite impending rental reforms, the financial viability of their lettings portfolio appears a bigger consideration for landlords, according to a survey of Savills agents. Although the majority of Savills agents agree that a lack of stock is still currently having the biggest impact.
“Levels of debt exposure amongst mortgaged buy-to-let landlords will play a critical role in the future shape of the private rented sector. Prime rental markets, which tend to be dominated by cash investors, are likely to be less exposed and, at the same time, tenants’ budgets are less constrained.
“But, even in the less price sensitive prime market, rising rents will hit up against an affordability ceiling in the coming months and that will begin to constrain rental growth,” concludes Jessica Tomlinson.
According to Savills, three-quarters of agents agree that landlords’ expectations on rental values increased over the past three months versus only half of tenants, while just over a third of tenants expect rents to have decreased over the past three months.