Knight Frank is raising alarms about the rental market in prime London locations, citing growing pressure to reduce rents due to a surge in property supply and a return to normal demand levels. As the market readjusts, the firm has observed significant changes in rental value growth in these prestigious areas. This shift in dynamics reflects a broader trend of recalibrating rental values in response to the evolving balance between supply and demand.
Recent data from Knight Frank indicates that rental value growth in prime central London (PCL) has slowed to 3.5% in the year leading up to June. This figure represents a notable decline and highlights the increasing challenges faced by landlords in maintaining previous rent levels. In prime outer London (POL), a similar trend is evident, with rental value growth falling to 3.6% over the same period. This reduction underscores a cooling in the rental market that had previously seen robust growth.
The current growth rates are the lowest recorded since July 2021, a time when the rental market was heavily influenced by an influx of short-let properties transitioning to long-term rentals due to the pandemic. This influx temporarily inflated the supply side of the market, creating an imbalance that now appears to be correcting itself. The gradual decline in rental value growth indicates that the market is moving towards a more sustainable equilibrium, with supply and demand beginning to align more closely.
Landlords in these prime London areas are now experiencing increased competition as the number of available rental properties rises. This competitive environment is putting downward pressure on rents, compelling property owners to reassess their pricing strategies to attract and retain tenants. The adjustment reflects a broader trend where the rental market is moving away from the extraordinary conditions witnessed during the height of the pandemic and settling into a new normal.
For tenants, this shift may bring some relief in the form of more stable or even reduced rents, particularly in high-demand areas where rental costs had previously soared. However, for landlords, the challenge will be to navigate this evolving landscape, balancing the need to remain competitive while also managing property income effectively. The rental market in prime London postcodes is at a pivotal juncture, with the interplay between supply and demand likely to dictate future trends and outcomes.
Recent data from Rightmove indicates that new lettings listings in both prime central London (PCL) and prime outer London (POL) were 12% below the five-year average (excluding 2020) for May. This drop reflects a tightening in the availability of rental properties in these high-demand areas. However, properties listed for rents above £1,000 per week bucked the trend, showing a notable increase of 39%.
David Mumby, head of prime central London lettings at Knight Frank, observes that almost all tenancies agreed in the last month have been below the asking rent or have required a rent reduction. According to Mumby, “It certainly feels like peak pricing has now passed,” indicating a shift in the rental market dynamics where high rent expectations are no longer being met.
Knight Frank attributes this trend to a more cautious approach from property owners, particularly those with higher-priced rentals. Owners in this segment have been able to pivot between the sales and lettings markets as needed, especially in response to stagnant or declining property prices in the sales market. This flexibility has allowed them to avoid selling in a flat market and instead opt for renting out their properties.
The change in market conditions is prompting owners to reassess their strategies, as they are now more willing to accept lower rents to secure tenancies. This is a departure from the previous period when high rents were more readily achievable, indicating a cooling in the rental market. The ability to switch from sales to lettings has provided some resilience to owners, but it has also contributed to an overall increase in available rental properties, adding to the pressure to lower rents.
For tenants, this shift may present opportunities to negotiate better rental terms or find properties that were previously out of reach. The reduced number of new lettings listings, coupled with the increase in higher-rent property availability, suggests a realignment in the rental market. This rebalancing is leading to a more tenant-friendly environment, where price reductions and more competitive offers are becoming more common.
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