Knight Frank has issued a warning about the increasing pressure to reduce rents in prime London postcodes due to a combination of growing supply and demand returning to usual levels.

According to the latest data from Knight Frank, rental value growth in prime central London (PCL) has slowed, falling to 3.5% over the year to June. This trend is also seen in prime outer London (POL), where the growth rate has declined slightly to 3.6% during the same period. 

The agency notes that the increase in the availability of rental properties, coupled with a normalisation of demand following a period of heightened activity, is contributing to a cooling in the rental market. This change is resulting in landlords facing more competition, leading to downward pressure on rental values in these high-demand areas.

Knight Frank’s analysis highlights that as the market adjusts, landlords may need to reassess their rental strategies to align with current market conditions. This might involve being more flexible on rental prices or enhancing the appeal of their properties to attract tenants.

The data underscores a notable shift in the rental landscape of London’s prime areas, reflecting broader market dynamics and signaling potential challenges for landlords accustomed to previously higher growth rates in rental values.

In both prime central London (PCL) and prime outer London (POL), the growth in rental values has reached its lowest levels since July 2021. This decline follows a period during the pandemic when the long-let market was overwhelmed with properties that were previously available for short lets. During that time, many landlords shifted their properties to long-term rentals, leading to a temporary surge in supply that has now significantly impacted rental values. The market is still adjusting to this influx of former short-let properties.

According to Rightmove data, the number of new rental listings in both PCL and POL in May was 12% below the five-year average, when excluding the anomalies of 2020. This decline in new listings is notable given that it reflects a consistent trend across both central and outer prime areas. The reduced availability of new rental properties indicates that many landlords may still be cautious about entering the market or that there is a lingering effect from the earlier oversupply of rental units during the pandemic.

However, while the overall number of new rental listings has decreased, there has been a notable increase in the availability of high-end rental properties. For rental properties priced above £1,000 per week, listings surged by 39% compared to previous periods. This rise suggests that the luxury rental market remains active, possibly driven by a different set of dynamics than the broader market. High-net-worth individuals and affluent renters may still be seeking premium properties, contributing to the higher listing numbers in this segment.

The contrasting trends in the broader rental market versus the luxury sector highlight the complexity of the current rental landscape in London. While the general market faces downward pressure on rents due to a combination of reduced demand and lingering supply issues, the high-end market seems to be experiencing growth. This divergence underscores the varied responses within different segments of the rental market and suggests that the recovery and future trends may be uneven across different property types and price ranges.

The London rental market is navigating a challenging period of adjustment. Landlords and tenants alike are adapting to changes brought on by the pandemic and its aftermath. The data indicates a mixed picture: while there are fewer new listings overall, high-end properties are seeing increased activity. Understanding these trends is crucial for stakeholders in the property market as they make decisions about rental pricing, investment strategies, and market positioning in the evolving post-pandemic environment.

According to David Mumby, head of prime central London lettings at Knight Frank, nearly all tenancies agreed in the last month have been settled below the asking rent or required a rent reduction. He notes that “it certainly feels like peak pricing has now passed.” This trend suggests that landlords are increasingly having to adjust their expectations to secure tenants in the current market, which is characterized by more competitive rental pricing and less willingness from tenants to pay premium rates.

Knight Frank also points out that property owners with higher-priced rentals often have more flexibility and have been able to shift from selling to letting their properties. This trend is particularly evident because property prices in the sales market have either remained stagnant or declined. As a result, these owners find it more advantageous to let their properties rather than sell them at less favorable prices, thereby contributing to the increased availability of rental properties.

The shift from sales to lettings among high-end property owners reflects broader market dynamics where rental income provides a more stable return compared to the uncertain sales market. This shift not only increases the supply of high-end rental properties but also adds downward pressure on rental prices, as landlords compete to attract tenants. Consequently, renters may find more negotiable rates and a wider selection of premium properties available for lease.

In addition to pricing adjustments, the overall rental market is experiencing changes in tenant expectations and preferences. Many renters are looking for more value and are less inclined to meet high asking prices, especially as economic uncertainties persist. This has led to a more tenant-friendly market where landlords must be willing to negotiate on rents and offer more competitive terms to secure leases.

Overall, the current trends in the London rental market indicate a period of transition where landlords must adapt to changing market conditions. With rental prices softening and a shift from sales to lettings among high-end property owners, both landlords and tenants are navigating a landscape that demands more flexibility and realistic pricing. These adjustments are shaping the rental market dynamics as it moves past the peak pricing experienced in recent years. 

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