The prime rental markets held firm, but change is imminent as the enactment of the Renters’ Rights Bill draws closer
Jessica Tomlinson, Associate Director, Savills Residential Research
Across prime central London (PCL), rents grew by 0.7% over the third quarter, the largest quarterly uptick since September 2023. This leaves values 0.8% higher than they were a year ago. Although London’s most central locations typically attract a greater proportion of discretionary tenants, over the last quarter, domestic demand fuelled rental growth. This was, in part, due to robust levels of corporate relocations, as enquiries over the third quarter were up 9% compared to the previous three months, as was the average budget.
Similar levels of growth (0.6%) were reached across London’s outer prime region. This represented a slowdown compared to the previous quarter, but rents still remain 2.4% higher than a year ago. North & East London was the top-performing sub-region. Here, demand from young professionals, coupled with stock shortages across locations such as Islington, drove competition amongst tenants. Elsewhere, West London was the only sub-region to see rents fall, down by 0.4% over the quarter. This marked the first quarterly decrease since December 2022.
Across the prime regional markets outside of London, rental growth was slightly lower, up by 0.2% in the quarter. Nevertheless, across regional towns and cities, rents were up by a more significant 1.9%. Here, strong seasonal demand from young professionals and international students supported values. However, new build completions brought additional high-specification stock to markets, such as Manchester and Birmingham, opening up choice for tenants. As such, the highest quality housing continued to command the largest premiums and attract the most interest.
Elsewhere, Edinburgh, one of the top-performing locations, saw prime rents increase by 4.2% over the third quarter. Here, rents have continued to be reset closer to market values, following the end of temporary legislative measures earlier this year. However, the Scottish Parliament recently voted in favour of the Housing (Scotland) Bill, which allows councils to impose rent controls. The Bill now states that in any designated rent control area, annual increases will be capped at CPI+1%, up to a maximum of 6%. This will undoubtedly shift market dynamics once again, although there will be exemptions, and it is expected to be introduced by 2027.
Over the third quarter, apartments proved more resilient across most parts of prime London and the regional markets. Across PCL, apartments increased by 1.1% in the quarter, whereas houses only increased by 0.2%. While in the regional markets, rents for apartments grew by 1.3% over Q3, but houses fell by -0.1% on average. This diverging trend has remained the case over much the past year.
While in outer prime London, apartments also outperformed houses (0.8% vs 0.3%), this was a reverse of the trend seen over the previous quarter. Here, seasonality played a more significant role, and demand for family housing was more muted over the summer than in Q2, in line with the school holidays. As such, locations such as Chiswick, Fulham, and Richmond were more keenly impacted, given the higher proportion of larger family housing stock.
Across prime London, gross yields have increased significantly over the past three years. Sustained rental growth has continued to outpace capital values in light of a weaker sales market. This has been particularly evident for smaller properties.
A one-bedroom property in outer prime London can now attract an average gross yield of 5.6%, significantly higher than in September 2019, when it sat at 4.4%. In PCL, the average prime gross yield for a one-bedroom property now sits at 4.5%.
Although not the only consideration when investing in prime London, higher gross yields do provide some confidence to those taking a longer-term view. The higher returns now on offer may also afford some respite for those with higher fixed costs.
The prime rental market remained stable over the third quarter, as rental growth continued. Nevertheless, landlord and tenant expectations on rents still remained mismatched. Savills agents reported a significant majority of tenants expected rents to fall over the past three months: 73% in the prime regions and 63% in outer London. In contrast, landlords remained optimistic on price, with 88% in outer London and 47% in prime regional locations anticipating rental growth. Aligning these expectations will be key over the remainder of the year.
While the Renters’ Rights Bill still sits in the final stages of scrutiny before becoming law, change is imminent. Ahead of this, it is likely landlords will hold firm or indeed increase rents to maintain market value. In some markets, landlords will be more concerned about securing reliable, high-quality tenants.
Moving forward, some landlords will continue to adopt a cautious approach to their portfolios given the upcoming regulation. While ongoing EPC requirements and rumours around levying National Insurance on profits add additional pressure. As such, we expect new supply to remain constrained across much of the prime market. However, a weaker sales market may see some landlords decide to hold firm on their investments, especially given strong gross yields, robust tenant demand, and a lower interest rate environment.
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Understanding the Renters’ Rights Bill
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