Prime London rental value forecasts increase as stock stays low
September 2022 PCL rental index: 196.8
September 2022 POL rental index: 199.6
2 minutes to read
Following a volatile reaction on financial markets to the government’s mini-Budget last month, the performance of the prime London rental market has become more closely linked to the sales market.
How is that the case?
It starts with the five-year swap rate, which is around 100 basis points higher than before the Chancellor got to his feet on 23 September, meaning many lenders have since increased their mortgage rates.
To reflect this new interest rate environment, we have revised our forecasts down for the next two years.
We expect prices to decline by 3% in prime central London (PCL) next year and by 4% in prime outer London (POL), unravelling one year of growth in both markets.
The key question for the lettings market is whether these more uncertain conditions create a larger number of new landlords or tenants.
On the one hand, the uncertainty will boost the supply of lettings properties. This will be the result of sales failing to exchange due to mortgage rate volatility and owners to deciding to let their property in the short-term after failing to achieve their asking price.
At the same time, a growing number of frustrated buyers will become tenants, particularly if they sense price declines will be short-lived.
The extent of this influx of buyers and sellers from the sales market will depend on where mortgage rates settle. The difference between 5% and 6% could potentially have a strong bearing on behaviour.
If a weaker sales market creates more landlords than tenants, this will put downwards pressure on prices – and vice versa.
That said, we would expect property markets in PCL to be more insulated from the impact of rising mortgage rates due to higher numbers of HNWI buyers and the return of international travel. The percentage of cash buyers in the first nine months of this year was 52% in PCL compared to 30% in POL.
For now, stock levels remain low by historical standards, with the number of new properties coming to the market down by around a third compared to the five-year average (excluding 2020), which has been the case for the last year.
Meanwhile, the number of new prospective tenants registering with Knight Frank across London in September was 68% above the five-year average.
As a result of this imbalance persisting for longer than anticipated, we have revised up our rental value forecasts for 2022 and 2023. We now expect rental values to end this year 15% higher in PCL and 12% in POL. We expect 6% growth in both markets next year, up from a forecast of 3.5% in July.
Rental values grew by 18.6% in the year to September in PCL, which has narrowed from 29.2% in April. In POL, growth was 15.4%, down from 23.5% in April.