Rental values in prime areas of London are now 9% higher than they were before the pandemic, as low supply and high demand produce an imbalanced market.
The number of market valuation appraisals (a leading indicator of supply) was 40% below the five-year average in April, while the number of new prospective tenants registering was 57% higher over the same period.
The disparity contributed to a 29.2% annual rise in rental values in prime central London (PCL) in April. The equivalent rise in prime outer London was 23.5%. The increases were magnified by the fact rents hit their low point during the pandemic in early 2021 due to a glut of short-let property on the long-let market. Supply has since become scarcer while demand has been extremely strong.
Gary Hall, head of lettings at Knight Frank, says: “The supply squeeze is only going to get worse over the summer. We will continue to see competitive bidding and supply will only improve when the sales market slows down and more owners decide to let out their property.”
For now, the extent of the rent rises is tempting some landlords back into the market.
Ahead of the introduction of a 3% stamp duty surcharge for landlords in April 2016, there was a spike in activity in the buy-to-let sector. Since then, demand has been in decline due to higher costs and fewer tax breaks as the government introduced measures to tackle housing affordability.
Andrew Groocock, regional head of sales for Knight Frank’s City, East and North region in London, comments: “The extent of the recent rent rises has started to compensate for some of the regulatory changes of the last few years. It’s increasingly driving activity in London’s apartment market.”
Meanwhile, the strong fundamentals of a growing and undersupplied rental market in the capital are attracting a growing amount of institutional capital.
More than £1.4 billion worth of deals were agreed in the final three months of 2021 in the UK build-to-rent sector, pushing year-end investment volumes to a record £4.3 billion. Annual spend was up 19% on 2020, the previous record year. Deal volumes were also up by nearly a third year-on-year.
Knight Frank forecast that rental values will increase by 17.1% over the next five years in the UK, as the lettings market is underpinned by these strong fundamentals. The equivalent figure is 22.7% in prime central London and 19.3% in prime outer London.
Underlining the strength of demand, the number of international corporate relocation enquires received by Knight Frank from prospective tenants in March reached its highest level since August 2019.
John Humphris, head of relocation and corporate services at Knight Frank, says: “Demand is hard to satisfy at the moment and it will only grow as summer approaches. If you own a good property at the moment, the chances are that it will be let before it even comes to the market.”