The highly competitive rental market in London has led to a decrease in new lets as tenants choose to renew their current leases instead of moving to new properties.

According to a report from JLL’s residential research team, the number of new lets in the first quarter of 2023 was the lowest since the start of the pandemic, with a decline of 3.3% compared to a relatively quiet fourth quarter of 2022, and a significant drop of 17% compared to the same period last year.

The trend of tenants renewing leases rather than moving has been ongoing, resulting in lower volumes of new lets throughout 2022. The number of new lets in the year to March 2023 was down by 36% annually and 44% lower than the five-year first quarter average from 2018 to 2022.

Rental stock across prime central london (PCL) has been impacted by the lack of new lets, with fewer rental properties reaching the market as tenants choose to stay put. However, there has been a slight increase in stock compared to the lows of 2022, with the number of properties available to let at the end of the first quarter of 2023 being 8.6% higher than the same period in 2022, although still 54% lower than the five-year first quarter average.

Despite the lower number of new lets, rents in London have seen a slight increase, rising by 0.5% quarter-on-quarter in the first quarter of 2023, following a 0.5% fall in the previous quarter. However, the annual rate of growth has slowed down from the double-digit highs experienced earlier in 2022, partly due to the stronger market conditions in 2022 compared to the recovering market in 2021.

The JLL Prime Central London Index recorded a 5.5% annual increase in achieved rents in the first quarter of 2023, with rents now 8.7% higher than the pre-pandemic levels in the first quarter of 2020. The highest growth in achieved rents is still concentrated in lower price bands, with properties rented for under £1,000 per week experiencing an average rental value increase of 9.3% annually, while those with rental values over £3,000 per week only increased by 2%.

However, the more balanced market has provided tenants with more negotiation power, as average discounts off initial asking rents have increased to 5.2% in the first quarter of 2023, the highest since the second quarter of 2021, but still below the average of 8.2% observed from 2017 to 2020.

Meanwhile, the number of properties sold in London’s prime property market in the first quarter of 2023 was 20.7% lower than the volumes recorded in Q1 2022, with quarterly falls similar at 22.2%, according to JLL’s residential research team. However, taking a longer-term view, Q1 2023 recorded more sales than any first quarter between 2017 and 2020, indicating a shift in market dynamics.

PCL has traditionally attracted a higher proportion of cash purchasers, which would usually make them less susceptible to the impact of higher interest rates. However, the rapid rise in interest rates since Q3 2022 has had an effect, particularly at the upper end of the market, where more expensive properties have seen lower annual falls. 

Uncertainty surrounding the UK economy and housing market has also impacted the prime market, with greater discretion among prime purchasers becoming evident earlier.

Changes in prices and activity were apparent in Q1 2023, with the JLL Prime Central London Index showing a 1.3% fall compared to the previous quarter, and achieved prices 4.3% lower than Q1 2022. 

Flats have been more affected by uncertainty over rates, with the difference between annual change in prices of flats and houses widening in Q1 2023. Houses experienced more modest falls of 2.4% compared to the same quarter in 2022, while flats saw a 4.8% fall in values over the same period.

Vendors are looking ahead to the spring market with a steady stream of new listings, as the number of homes on the market at the end of Q1 2023 was 8.2% higher than the same point a year ago and 4.3% higher than the 2022 year-end. 

However, average discounts achieved off initial asking prices edged up to 8.3% in Q1 2023, the highest recorded since early 2021. 

According to JLL, the uncertainty in the market and changing dynamics in the prime property sector highlight the need for sellers to be mindful of pricing strategies to attract buyers in the current environment.