Average rents in prime central London increased by just 1% in the year leading to October, marking the lowest rate of growth since July 2021. In comparison, prime outer London saw a more modest rise of 2%, a sharp decline from the 8.3% increase observed in the same period last year. This slowdown in rental growth across both areas reflects broader changes in the market dynamics.
Knight Frank attributes the lower rental value growth to the rising supply of rental properties, which has been a significant factor since the pandemic. With many homeowners taking advantage of the stamp duty holiday, which lasted for 14 months, the sales market was particularly active. As a result, many owners opted to sell their properties, reducing the available stock for rental and leading to an increase in supply in the rental market.
The effects of this shift are also visible in the rental listings data. According to Rightmove, the number of rental listings in both prime central and outer London has surged in the year up to October, with figures showing a 21% increase compared to the previous 12-month period. This rise in rental listings has contributed to a more competitive market, with landlords offering a greater variety of rental options.
The influx of properties on the market has also led to a recalibration of rental prices, as landlords adjust their expectations and renters have more options to choose from. While rents have continued to rise in some areas, the pace of growth has slowed down, signalling a more stabilised rental market in these prime locations.
The dynamics in both prime central and outer London highlight the ongoing adjustments in the property market. Rising supply, coupled with shifting demand, is likely to continue influencing rental growth trends, with the long-term impact of the pandemic and changing economic conditions still playing a crucial role in shaping the future of the London rental sector.
Just as rents in the London rental market begin to show signs of calming down, the introduction of the Renter’s Rights Bill in Parliament could unintentionally cause them to rise again, primarily due to a reduction in the supply of rental properties. The Bill is set to include several proposals aimed at shifting the balance of power from landlords to tenants. These changes would make it more difficult for landlords to evict tenants, which may increase the financial risks associated with rental income. For landlords, this added uncertainty could prompt them to raise rents to mitigate the potential for longer void periods or non-payment of rent. In addition to this, a series of tougher green regulations are being rolled out, placing even greater strain on landlords to meet new environmental standards for their properties. Together, these factors could create a perfect storm, leading to higher rental prices in an already strained market.
As the rental market faces these significant regulatory shifts, the recent Budget could introduce further changes that impact the financial calculations for landlords, adding even more complexity to their decision-making processes. Property agencies have described the Budget as presenting mixed messages from a tax perspective, leaving many landlords uncertain about what to expect in the near future.
On the one hand, the Budget saw an increase in stamp duty for second homes, which rose from 3% to 5%. This higher entry cost for landlords looking to purchase additional properties has the potential to discourage investment in the rental market, further exacerbating the supply issues already looming. When combined with the Renter’s Rights Bill, which makes it more difficult for landlords to evict tenants, the increased stamp duty represents a double blow for landlords. With higher costs to enter the market and an uncertain future surrounding tenant turnover, it’s likely that landlords will be compelled to pass on these increased expenses to tenants in the form of higher rents. This would reduce the availability of affordable rental properties in the market, contributing to the growing concern about rental affordability across London and the wider UK.
Conversely, there was some positive news for landlords in the Budget, particularly concerning capital gains tax (CGT). The rate of CGT for residential property remained unchanged, offering a degree of stability for landlords who may be considering selling their properties in the near future. Without an increase in CGT, landlords can still count on a predictable tax environment when it comes to selling. This stability in exit costs is an important consideration for many landlords looking to liquidate their assets or move their investment portfolio around. For those landlords who may be feeling the pressure from rising costs and uncertain regulations, the unchanged CGT rate offers some relief, helping to balance out the higher costs associated with stamp duty and new legislative changes.
Despite the increases in stamp duty for second homes, many property experts believe that the unchanged CGT rate will have a positive impact on the market overall. With the stability in CGT, landlords may find that the tax burden on their investments remains manageable, allowing them to continue operating without having to make drastic changes. The higher stamp duty, while raising initial costs, is not expected to have the same long-term impact as the stability in CGT. As a result, while landlords face higher upfront costs when acquiring additional properties, they can take comfort in the knowledge that their exit costs remain predictable, allowing for more strategic planning in the years to come.
Looking ahead, however, landlords will still have to navigate the broader economic and regulatory changes that are taking place in the property market. The combination of the Renter’s Rights Bill, tougher environmental regulations, and increased stamp duty could present significant challenges for landlords, particularly those with smaller portfolios or those who are unable to quickly adapt to changing market conditions. This ongoing uncertainty is likely to have a lasting impact on the rental market, particularly in prime areas like central London, where high demand and limited supply continue to drive rental prices higher.
Ultimately, landlords will need to assess the risks and rewards of staying in the rental market under these new conditions. While the unchanged CGT offers some relief, the long-term effects of higher stamp duty, the shifting regulatory environment, and the potential for further increases in rent could make some landlords reconsider their investments. The London rental market, in particular, may continue to face pressure as landlords weigh their options, and it will be important for both landlords and tenants to stay informed about these developments to understand how they may affect the market in the months and years to come.
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