The private rented sector has been particularly turbulent over the last five years. Supply and demand dynamics have shifted, creating significant swings in rental growth. But in the prime markets, a unique set of factors are at play. This makes the pace of growth over the next five years somewhat different to that of the wider mainstream market.

Drivers of rental value

Landlords have faced challenges in the prime markets since the tax changes of 2016. Higher interest rates over the last few years have further squeezed those with mortgage debt, as has the higher stamp duty surcharge for additional homes that was applied in October 2024.

Now, an increase in income tax rates of two pence in the pound will come into force for individual landlords from April 2027. And for some, the High Value Council Tax Surcharge on properties valued above £2 million in England will also apply from April 2028.

Against this backdrop, the implementation of the Renters’ Rights Act and the prospect of higher minimum energy-efficiency standards will act as a deterrent for some. But, the impact is dependent upon how stock is held.

In prime central London, much of the rental stock is owned by large estates or long term international investors. Many of these are better able to weather additional legislative and regulatory changes, therefore limiting stock shortages. Here, a higher proportion of stock also sits outside the Renters’ Rights Act threshold (above £100,000 annual rent). This said, we do expect some stock to be transferred into the short term lettings market.

By contrast, in the more domestic outer prime London and prime regional markets, a higher proportion of properties are held by smaller buy-to-let owners and accidental landlords who will more likely be impacted by upcoming changes. As a result, these prime markets are more at risk of ongoing and increasing stock constraints in the short term.  

Our recent landlord survey suggests landlords will take time to decide how to react and will review their options in response to changing market conditions in both the sales and lettings markets. Accidental landlords, those with a larger mortgage or a smaller portfolio will be most impacted; so they will likely be more inclined to review their position. And those who are looking to strategically reinvest will look to focus on higher yielding properties to minimise risk. 

As a result, the prime markets outside of central London will face a more prolonged period of constrained supply and larger, wealthier landlords will increasingly become the bedrock of supply; given their ability to better absorb the regulatory and fiscal changes.

Meanwhile, on the demand side, high transactional costs associated with a house purchase will also continue to displace some demand from the sales market, particularly given short term forecasts for price growth are relatively limited. Non-doms tax changes are likely to compound this effect across the most central locations. 

The downside risks

Although supply constraints will drive much of the rental growth over the next few years, there are factors which will temper the rate of increases.

Many of those looking to sell will only act when conditions materially improve in the sales market. And from an affordability perspective, the rental growth of the past five years will limit the capacity for further rent increases. 

The road back to normality

In the round, we expect the availability of rental stock in the prime markets to remain constrained over the short and medium term.

Therefore, we are forecasting prime rental growth to remain at similar levels to last year throughout 2026 with an uptick in growth once the Renters’ Rights Act and other taxation changes come into force. We expect outer prime London and the regional markets to be the most impacted.

From 2029 onwards, we are forecasting growth to revert closer to historic norms, similar to that of the 2010s as the capacity for above average growth becomes exhausted.