Tenants looking for housing that offers good connectivity are driving up rents, new research shows.
The rental hotspots in London are Wandsworth, Clapham and Battersea, while outside the capital Edinburgh, Reading and Manchester are on the list.
Prices have continued to rise in these areas due to a continued lack of available rental housing, combined with a so-called ‘urban revival’.
Here tenants look for homes in towns and cities with good ‘connectivity’, according to data from Savills real estate agents.
It is a reversal of the ‘race for space’ trend seen among homebuyers during the pandemic after several lockdowns.
Savills has identified some affluent areas outside London where rents have risen the most
In areas outside London, rents rose most in regional towns and cities, up 4.4 percent quarter-on-quarter and 8.6 percent year-on-year.
All in all, regional rents rose by 2.5 percent in the three months between April and June this year, compared to 1 percent in the previous quarter.
It means that the annual rental growth has increased to 5.3 percent, compared to 5 percent in the first three months of this year.
All areas selected by Savills for analysis are where Savills has a facility.
In both the capital and affluent regional locations, a lack of inventory continues to drive up rents
Savills expects smaller properties to see the strongest rental growth due to demand from need-based tenants and as students return to college towns.
Regional towns and cities are seeing the strongest growth outside London as urban resurgence follows the pandemic, while back to the office trends continue.
The biggest quarterly increases in these locations were Edinburgh, where rents rose by 5.9 percent, Birmingham by 5.6 percent, Reading by 4.1 percent and Manchester by 4 percent.
Jessica Tomlinson, from Savills, said: ‘Many tenants are now prioritizing connectivity over space, reversing the trend that has dominated the pandemic real estate market.
“In these locations, the smallest properties – one or two beds – are seeing the highest rental growth, a trend we expect to see continue in the coming months, especially as students return to college towns.”
According to Savills, rents are starting to fall year on year in some of the more expensive parts of London
Meanwhile, year-on-year rental growth is starting to slow in some of London’s most expensive areas.
However, as in the rest of the country, a lack of inventory continues to drive up rents, particularly in the southwest and west of the capital, and in smaller properties.
Savills said rents rose 1.4 percent in the second quarter — which is on par with the first three months of the year — at 6.7 percent a year, and are 15.9 percent higher than at the start of the year. pandemic in March 2020.
South West London hotspots include Wandsworth, where rents rose by 6.6 percent, Clapham by 5.1 percent and Battersea by 4.1 percent.
These areas significantly outperformed others this quarter, pushing annual increases to 6.8 percent, meaning rents rose by more than a fifth — by 21.5 percent — higher than before the pandemic.
As a result, gross yields in South West London average 3.8 per cent and nearly 4.5 per cent for apartments.
However, yields in north and east London – at 4.7 percent – are holding up the strongest against the rising cost of debt.
| 2nd quarter 2023 | PCL | North West | South West | West | North and East |
|---|---|---|---|---|---|
| Quarterly growth, Q2 2023 | 0.80% | 1.30% | 2.60% | 1.70% | 0.70% |
| H1 2023 growth | 1.60% | 2.10% | 4.30% | 4.40% | 2.70% |
| Annual growth | 6.10% | 5.80% | 6.80% | 6.20% | 8.10% |
| Growth since March 20 | 12.20% | 15.70% | 21.50% | 15.80% | 13.50% |
| Source: Savills |
Miss Tomlinson added: “The first signs that price growth is beginning to slow will be welcome news for tenants who have seen prices rise since pandemic restrictions began to ease.
“Tenants in some locations are certainly still willing and able to pay a premium to secure a home, but supply is not as scarce as it was at this time last year, and only the highest quality homes can now expect multiple bids.’
The majority of Savills’ London agents – 70 per cent – have seen inventory levels rise over the past three months, pointing to a further slowdown in growth, but there are still markets that remain chronically undersupplied.
‘This is strongly related to locations that still have a very high growth in rental value.’
Looking ahead in London and regional markets
Despite impending rent reforms, the financial viability of their rental portfolio appears to be a greater consideration for landlords, Savills said.
However, most Savills agents agree that a lack of stock still has the biggest impact right now.
Miss Tomlinson concluded: ‘Levels of debt exposure among rental mortgage lenders will play a critical role in the future shape of the private rental sector.
Prime rental markets, which are typically dominated by cash investors, are likely to be less vulnerable and, at the same time, tenant budgets are less constrained.
“But even in the less price-sensitive prime market, rising rents will hit an affordability ceiling in the coming months and that will begin to curb rental growth.”
Savills also suggested demand values for prime London housing remained “remarkably resilient”.
It comes after separate research from Savills found that despite rising concerns about rate hikes and heightened price sensitivity, demand values for prime London homes remained ‘remarkably resilient’ in the second quarter of this year.
Prices of property for sale in London’s main markets fell a marginal 0.2 percent in the quarter and 1 percent in the year, taking values 3.9 percent above pre-pandemic levels.
Prime central London held up better than outer prime London, indicating a growing divergence between cash and equity-rich buyers and other groups in their ability to transact, and between the absolute top of the market and segments with a lower value.
Cash buyers not exposed to rising interest rate concerns dominated demand in the second quarter.
According to Savills data, 71 per cent of prime deals this year were in central London and 35 per cent in suburbs.
Savills’ Frances McDonald explains: ‘The established prime markets most synonymous with equity-rich buyers are holding up the strongest in the mortgage market turbulence.
While London’s prime market continues to outperform expectations, the latest interest rate hikes are likely to strain buyers’ budgets and increase price sensitivity, particularly in the more domestic outer prime locations where more buyers rely on loans. Sellers will have to price pragmatically to match the buyer’s prevailing expectations.’
Uma Rajah, from CapitalRise, added: ‘Central London’s premier property market has once again proven why it has a reputation for being the most resilient parts of the UK property market.
It attracts a much higher proportion of cash buyers compared to the wider London or UK market in general, and it is not surprising that this proportion can increase at times like this when the cost of debt has risen after successive increases of the base rate we’ve seen recently.
“PCL buyers, sellers and investors are naturally more immune to rising mortgage costs, which is a key factor contributing to the resilience of this market niche.”