Rising supply takes the pressure off prime global rents
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
An acute imbalance between supply and demand has fuelled a remarkable rise in prime global rents since the depths of the pandemic. Rental values climbed by an average 26% across the 15 cities tracked by our Prime Global Rental Index between Q1 2021 and the third quarter of last year.
The imbalance is now easing: rents have effectively flatlined since the third quarter. The annual growth rate fell to 3.7% during the year through March, the slowest rate of growth since Q2 2021, according to the latest edition of our index, out now.
That said, tenant requirements are still outpacing stock availability and rents are still climbing on an annual basis in 80% of our markets. Leading the pack is Sydney, with the strongest annual and quarterly growth at 17.3% and 4.5%, respectively. Demographic pressures from strong inward migration are helping to underpin rental growth across price bands, including the prime market segment.
London and Auckland vie for second place, with 5.6% growth apiece, although Auckland saw rents slip by 1.1% in the most recent quarter. Several other cities continue to see rental growth well above trend levels. Berlin, Miami, Monaco, LA, and Tokyo are all seeing growth at 4.5% or more.
Rent controls
London’s recent growth is in the spotlight, with the opposition Labour party discussing the potential for rent caps should they win the forthcoming general election. Despite raising the prospect of such a move in mid-May, the party is now busy rowing back from any sort of confirmation, with many commentators citing the poor performance of a similar policy in Scotland. That latest came from the FT's John Plender on Sunday.
A lot has been made of what appears to be a slip up by shadow chancellor Rachel Reeves. Moves to raise standards in the sector have cross-party support, and professional landlords and institutional investors will play a vital role in the process. Both groups have consistently made the point that rent controls would stem investment.
Anyway, Reeves made the comment during an interview with BBC Radio Essex, which doesn't appear to be online, but the comment itself falls a bit short of an endorsement of rent controls: "Where [rent controls have ] happened, it has not always delivered the results that people might want,” she said. “I think that should be up to local areas to decide. There may be the case for that in some local areas, but as a blanket approach, I’m not convinced by that.”
A party spokesman followed up: “As Rachel Reeves said, she does not believe rent controls are the right approach. While Labour believes action needs to be taken to address extortionate within-tenancy rent rises, rent controls are not national Labour Party policy as we remain mindful of the risk they could pose to the availability of rental properties and the harmful impacts any reduction in supply would have on renters."
Investors and developers will be watching carefully for more on this from Labour over the next few weeks.
New forecasts
Election campaigns generally have little impact on residential markets - see Friday's note - but the parties do have manifesto pledges that purchasers are weighing up.
The reform of non dom rules had been causing a degree of hesitation in prime markets since they were proposed in March. Under the old rules, individuals could be resident in the UK without being taxed on their worldwide income. Chancellor Jeremy Hunt set out plans to limit this period to four years although there were indications he was prepared to loosen the proposals. Not to be outflanked, Labour devised their own tougher rules, which are still to be fleshed out.
We began revisiting our forecasts before the election was called. For all of the context, I recommend the full update from Tom Bill, but the top lines are that we now expect prices in prime central London to fall by 1% this year, down from a rise of 1% predicted in January. We expect cumulative growth of 16.4% in the five years to 2028 as a long-overdue period of price inflation kicks in.
In the lettings market, the normalisation of supply and demand has happened more quickly than we expected in January, which means we have cut our 2024 forecasts for prime London rents. We now expect average rental value growth to be 2% in prime central London this year (versus 5.5% in January) and 2.5% in prime outer London (versus 4.5%).
A high-tech powerhouse
The Chinese economy had a huge first quarter. GDP surged 5.3% amid a recovery in manufacturing.
For all its problems, China's place as a world leader in high-tech manufacturing looks secure. The sector surged 6.1% during the quarter, driven by the production of 3D printing equipment, charging stations for electric vehicles and electronic components, which all rose 40% compared to a year earlier.
Those figures prompted the IMF to upgrade its economic forecasts yesterday. The group expects the economy to grow by 5% in 2024, pretty much meeting the nation's growth target of "around 5%", before it notches up another 4.5% growth in 2025. These reflect upward revisions of 0.4 percentage points for both years compared to the April projections.
Of course, these figures look relatively pedestrian compared to recent history and even for these figures, the IMF notes that the risks are tilted to the downside, "including from greater- or longer-than-expected property sector adjustment and increasing fragmentation pressures."
Three of China’s biggest cities have rolled out major easing for homebuyers over the past 24 hours. Shanghai, Shenzhen and Guangzhou slashed deposit requirements and allowed room for cheaper mortgages - see Bloomberg's report. Beijing is expected to follow.
In other news...
From our team - the M25 office market report, Christine Li on whether Chinese buyers will return to overseas property markets, and Philippa Goldstein on rising profits in London's hotels market.
Elsewhere - Labour hatches Norway-style plan to boost Britain’s coffers (Telegraph), Sunak proposes tax cuts for pensioners in new election pledge (Reuters), how politics might help Legal & General’s housebuilding sale (FT), a new generation of entrepreneurs fuels boom in Australian family offices (FT), shop price inflation drops to lowest level since November 2021 (Times), extreme heat will stifle US economy, according to a Fed study (Bloomberg), and finally, mortgage rates stuck at 7% force a rethink of the American home ownership dream (Bloomberg).