Rental growth in prime regional markets has started to show signs of slowing, following runaway growth that has governed the past three years, according to Savills latest prime lettings index (Q3).
Prime regional rental prices grew by 0.6% in Q3, down from 2.6% in Q2. On an annual basis, rental values remain 4.7% higher than they were the same time last year – which falls short of the annual growth in the mainstream market – at 10.5%, according to Zoopla.
The return-to-work movement and affordability issues in the sales market has kept growth in prime London markets, albeit at a slower pace, with rents up 1.7% on the quarter (vs. 3% in Q3 2022). But annual growth has fallen to 5.4% – the lowest in two years of exceptional growth.
“More stock coming to the market, against steadying demand, is causing the regional rental market to fall back into a seasonal pattern, with rental values starting to simmer over the past three months. But it still leaves prime rents outside of the capital a significant 22.7% above where they were at the start of the pandemic,” comments Jessica Tomlinson, research analyst at Savills.
“As a result, the gap between landlords and tenants expectations in these regional markets has widened. Our regional agents reported a third of tenants now expect to pay up to 5% less for their rental home, vs just 18% of landlords. While in London, more than half of landlords are still expecting 5-10% rental increases, whereas a third of tenants only expect to pay up to 5% more. ”
Manchester (4.1%), Birmingham (3.1%) and Edinburgh (2.6%) city markets made up three of the top five locations for quarterly rental growth of prime housing stock in UK regions – outperforming commuter locations (-0.2%).
At the same time, quarterly rental growth picked up in Prime Central London (1.8% up from 0.8% in Q2), and North and East London (1.8% up from 0.7% in Q2); locations which saw weaker growth during the pandemic, and still some capacity for further growth.
“Rental growth in regional cities and central London locations comes as markets continue to rebalance away from leafy green locations synonymous with larger property that were most popular during the pandemic, back towards urban dwellings with good proximity to transport and employment hubs,” continues Jessica Tomlinson.
“This in part has caused flats to outperform houses on the quarter, both in London (2% vs 1.3%) and across regional rental markets (2.6% vs 0.0%). Strong competition from needs-based tenants combined with successive rises to interest rates have kept some would-be first-time buyers in the rental market, pushing up prices of smaller properties.”
As a result we have seen yields for flats in North and East London surpass 5% for the first time since March 2014 when Savills records began. ”
Tougher financial pressures for landlords have meant available stock still remains a key issue, although this is become more varied by location and property type.
“Debt exposure of mortgaged buy-to-let landlords will play a critical role in the future shape of the private rented sector as viability remains a significant issue for landlords with higher levels of debt With fewer properties available landlords will continue to favour affluent tenants and those in more secure employment,” concludes Jessica Tomlinson.
London prime lettings index, Q3
| Q3 2023 | PCL | North West | South West | West | North and East |
| Quarterly growth | 1.8% | 1.7% | 1.3% | 2.3% | 1.8% |
| Annual growth | 4.4% | 4.1% | 6.4% | 6.8% | 5.5% |
| Growth since Mar-20 | 14.0% | 17.6% | 23.0% | 19.2% | 15.6% |
Source: Savills prime London lettings index, Q3 2023
Regional prime lettings index, Q3
| Q3 2023 | Suburban | Inner Commuter | Outer Commuter | Regional towns & cities | Cotswolds & South West | All Regional Offices |
| Quarterly growth | 0.2% | -0.4% | -0.3% | 2.4% | 1.7% | 0.6% |
| Annual growth | 4.1% | 3.4% | 5.3% | 8.8% | 4.6% | 4.7% |
| Growth since Mar-20 | 20.4% | 23.1% | 23.0% | 26.4% | 24.2% | 22.7% |
Source: Savills prime regional lettings Index, Q3 2023
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