Rents in prime London are expected to dip this year, but edge higher in the commuter belt due to the widening supply-demand imbalance in the local rental market, according to Savills.

Prime London rents fell by an average of 1.3% in the three months to the end of September, led by a 2.6% decline in north and east London, followed by a 2.3% drop in prime central London, as the market in the capital is adversely affected by travel restrictions and higher levels of new build stock.

Prime south west London, which runs from Battersea, through Clapham and Wandsworth, and west to Richmond and Wimbledon, was the only prime London market segment to witness rental growth in the quarter, thanks to higher demand for larger homes and gardens.

An unusually high turnover amongst tenants was reported, with some opting not to renew a tenancy, preferring to move to larger properties with more outdoor space.

Overall, eight in ten Savills agents in London reported increasing stock levels over the past six months, as a build-up of short-let properties that came to market during lockdown continues to take time to work through the market, together with completing new build, although there are signs that supply levels are now beginning to correct, albeit slowly.

“How long it takes to absorb the high supply levels, particularly of smaller one- and two-bedroom properties, will depend on the return to normal levels of demand from international students,” said Jessica Tomlinson.

“For now, we expect London to remain a tenant’s market over the remainder of this year and early part of next, before sustained rental growth returns to London and demand in the wider commuter belt and country locations eases back,” she added.

Across the extended London commuter belt of the south and east of England prime rents rose by an average 1.2% in the three months to the end of September – the highest quarterly growth in over five years, fuelled by a a combination of strong demand for larger properties and limited supply as some landlords withdraw from the market.

Tomlinson commented: “Large parts of the market are being driven by people looking to make real lifestyle changes as a result of Covid-19 and the experience of lockdown in particular.”

Savills has revised its five-year prime rental forecasts for the prime London markets to average 7.6% and the prime commuter belt 11.5% to reflect the changed market conditions in 2020.

Tomlinson continued: “It’s too early to know if this shift in mindset and behaviour is permanent, but we expect to see it carry over into early 2021 at least.

“At the same time, levels of international demand will likely remain suppressed while people are resistant to travel, perhaps until a vaccine becomes available, and this will continue to impact rents in the most central postcodes.”

Revised 5-year forecasts for prime rents:

Savills research Oct 2020