Affordability matters, even in luxury markets

Making sense of the latest trends in property and economics from around the globe
Written By:
Liam Bailey, Knight Frank
3 minutes to read

The return of workers to cities following the pandemic's rolling lockdowns triggered a remarkable period of growth in prime rental markets.

Prime rents are on average 27% above their Q1 2021 level across the basket of 15 key cities in our Prime Global Rental Index. The most significant growth occurred in five cities that have seen rents rise by more than 40% over the period, led by New York (57.1%) and London (56.5%).

The latest numbers looked a little more pedestrian. Our index, which we updated this morning, climbed 3.5% in the year through June, unchanged from the previous quarter. Even the luxury sector is subject to affordability constraints, and in most cities rental growth has moved closer to long-term trend levels. However, with the majority of markets still experiencing pressure from relatively strong demand set against limited supply – exacerbated by Covid-era development disruptions – upward pressure on rents is likely to support above-trend growth in the medium term.

A co-living boom?

The broader UK rental market is yet to cool. Average private rents climbed 8.6% in the year through July, the ONS said last week.

The UK market has distinct challenges. Landlords are passing higher mortgage costs onto tenants. Plus, the regulatory and tax environment has caused many to sell up, squeezing supply. Poor affordability in the sales market means the number of renters continues to swell.

There are few signs of a near-term reversal to these themes. The latest RICS survey suggests the supply of rental properties continues to deteriorate. Demand continues to rise, though at a slower rate than we've seen over the past twelve months.

All of this will support the growth of purpose-built rental sectors. In the latest edition of our Intelligence Talks podcast, out this morning, Anna Ward is joined by Knight Frank experts to discuss the likelihood of a co-living boom. They cover the investment landscape, government policies, demographic appeal, and future prospects of co-living compared to traditional student accommodation.

While we're here, a media report last week suggested the Mayor of London may be handed powers to impose rent controls. "This is not true", the government said on Thursday.

Buyer enquiries

The Bank of England's rate cut on August 1st gave many prospective home purchasers the clarity they have been waiting for.

Buyer enquiries climbed 19% in August compared to a year earlier, Rightmove said this morning. That follows an 11% annual increase in July.

Inflation figures published last week came in a little cooler than expectations. Financial markets moved closer to pricing in two further 0.25% cuts before the end of the year, which would support a continuing upswing in activity.

We've definitely moved into a new phase, but what can we learn from from the November 2021 - August 2023 period during which policymakers hike the base rate 14 times? Tom Bill has some answers.

The London office market

Following a soft start to 2024, the improving economic outlook supported a recovery in London office leasing activity during Q2. Lettings climbed 30.4% to hit 2.5m sq ft, according to Knight Frank's London Office Market Report, out last week.

Take-up remains below the long-term average due to subdued levels of second hand lettings. This is emphasised by the stellar performance of the best quality space. Last quarter, new and refurbished lettings were 1.6m sq ft, 51.4% higher than in Q1, 7.4% above the long-term average, and 64.7% of all transactions.

Investment transactions rose 35.6% to £1.8bn, and deals under offer increased by 69.4% to £1.5bn. Although this is 48.1% below the long-term quarterly average, it does represent the highest level of acquisitions since Q1 2023. In contrast to recent quarters, lot sizes above
£100m accounted for the largest share of volumes at 44.7%.

In other news...

This week’s Retail Note from Stephen Springham analyses the official retail sales figures for July from the ONS – although an improvement on the dire figures for June, they still don’t make for great reading.

Elsewhere - US housing crisis becomes a critical issue in the presidential election (FT).