Rental value growth springs back from depths of pandemic
October 2021 PCL lettings index: 145.0October 2021 POL lettings index: 155.5
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In a similar way to the sales market, rental value growth in prime areas of London climbed to multi-year highs in October.
While a gradual recovery is underway in the sales market following six years of political and economic uncertainty, rents are rising as steeply as they were falling at the start of the year.
The flood of short-let properties onto the long-let market has dried up as lockdown restrictions have eased. At the same time, a number of owners attempted to sell during the stamp duty holiday, further driving down supply. Meanwhile demand has surged, triggered by the re-opening of universities and offices.
As a result, average quarterly rental value growth in prime central London was 4.2% in the three months to October. It is the highest figure since March 2011, a time when the rental market was shaking off the effects of the global financial crisis.
In prime outer London, average rental value growth was 3.8% in October, the highest figure since September 2007, just before the GFC struck.
The largest gains over the three-month period were in areas popular with office workers and students, including Canary Wharf (+7%), Wapping (+6.8%), Aldgate (+5.8%), Islington (+7.1%) and King’s Cross (+7.4%).
The annual decline in rental values in prime central London narrowed to -3.7% in October after bottoming out at -14.3% in March this year.
In prime outer London, the decline was -1.8% in the 12 months to October after reaching a low of -11.7% in February.
However, the annual change for houses in prime central London is back in positive territory for the first time since the pandemic struck. While rental values for flats fell -5.9% in the year to October, average rents for houses rose 1.4% as a result of increased demand for space and historically-low levels of supply in areas including Chelsea and Islington.
“It’s been an extraordinary period for the whole market in PCL,” said David Mumby, head of prime central London lettings at Knight Frank. “A good house on a garden square in Chelsea, Kensington or Notting Hill will have a queue of people looking at it.”
The lack of supply in the house market means more tenants are renewing tenancy agreements further ahead of time than normal.
“We have had multiple requests from tenants of family houses to renew from next summer because they have looked around and seen there is such limited choice,” said David. “It shows how renting has cemented itself as a lifestyle choice for many people.”
However, there are early signs that the shortage may be easing. “We are starting to see properties come back from the sales market as owners fail to achieve their asking price,” said David.
Overall, activity levels tailed off in October, which is to be expected given the seasonal nature of the lettings market. However the declines need to be put in context.
The number of new prospective tenants fell 23% between September and October. However, compared to 2019, which was a strong year for the lettings market, the figure in October was 68% higher than two years ago.
Similarly, the number of tenancies started fell by 32% from September but the figure in October was 23% higher than the same month two years ago.
We forecast that rental values will end the year flat before largely recouping their pandemic losses next year.