The chancellor’s November Budget is adding to rent pressures in prime London, despite wider measures aimed at curbing inflation.
Rental income tax for landlords is set to rise by 2%, a move expected to reduce supply as some landlords exit the market, driving rents higher.
In the year to November, average rents rose 1.8% in prime central London and 2.2% in prime outer London, the highest November readings in over a decade when adjusted for pandemic effects.
With limited new listings and the upcoming Renters’ Rights Act adding uncertainty, tenants face a tightening market and rising costs.
Tom Bill, head of UK residential research at Knight Frank, commented: “There were disinflationary measures in the Budget, including on energy costs and rail fares, but tenants must now be left wondering if their overall monthly outgoings will increase.
The economic rationale is simple. As the tax burden on landlords increases, more will sell, supply will fall, and rents will rise. For those landlords that remain in the sector, any extra costs may need to be passed on.”
Taking out the distortive effects of the pandemic, it was the highest November reading in PCL since 2014. On the same basis, rental value growth in November was last higher in POL in 2011.
Other changes on the horizon include the Renters Rights Act, which will create uncertainty around setting rents, repossessions and the sale process for landlords when it comes into effect in May.
“In the majority of cases, landlords are happy to manage the changes the Renters’ Rights Act is bringing, but further margin erosion from an already low base will drive them away from the sector,” said Gary Hall, head of lettings at Knight Frank. “Losing control of an asset that isn’t generating any return is far from a good investment, and one that will be sold quickly.”
The growing financial burden means more landlords are exploring the option of setting up a company.
That said, for those landlords staying in the sector, rental yields are increasing as a result of rising rents and price declines.
Rental value growth has been particularly strong in recent years, due to the pandemic and supply shortages. New rental listings in PCL and POL in the first ten months of this year were 9% below the five-year average, Rightmove data shows.
Average rents have risen 35% since November 2019 in prime central London, which compares to a figure of 2% over the preceding six years.
In POL, rental value growth of 33% over the same period compares to just 8% in the six years prior to Covid.
“Tenants were already feeling squeezed before the Renters Rights Act and this November’s Budget made the outlook tougher,” Bill added.
He also pointed to the Office for Budget Responsibility’s warning alongside the Budget: “This successive eroding of private landlord returns will likely reduce the supply of rental property over the longer run. This risks a steady long-term rise in rents if demand outstrips supply.”