Savills launches the Q4 prime lettings index
Prime London rental market:
- Prime rents across London ended 2022 +10.9% up on the year – lower than the +13.8% annual growth in Q3
- Quarterly growth slowed to 0.7% - but this marks the second strongest Q4 growth for over 10 years, only surpassed by Q4 2021
- Smaller properties at lower price points are outperforming – driven by competition from young professionals and corporate relocation
- Central London locations with the greatest remaining capacity for growth – North and East London and Prime Central London – performed the best
- Savills forecasts prime London rental growth to slow to +5.0% over 2023 and +3.0% by the end of 2024
Prime commuter belt:
- Growth slowed to +0.4% on the quarter, and +5.6% on the year, as the imbalance between supply and demand starts to ease
- Savills forecasts average +3.0% rental growth in 2023 – before returning to historic norms, with growth expected to increase by an average of 8.8% by the end of 2027
- Smaller properties now outperforming larger family homes that were most popular during the pandemic
Prime rental growth in London ended 2022 up +10.9% on the year, according to Savills prime lettings index, as tenant demand continues to significantly outweigh supply.
On the quarter, growth has softened to +0.7%, down from +3.1% the quarter prior. However, Q4 2022 marks the second strongest quarterly growth seen in December for over 10 years , only surpassed by growth seen in December 2021.
This has brought total rental growth since the start of the pandemic to +12.5%.
“The slowdown in growth seen over the past three months is typical of seasonal changes, and comes off the back of an incredibly strong year. Despite this, the growth seen over the last quarter of the year remains well above a typical Q4, evidence that the market is continuing to defy the wider economic slowdown as well as increased short-term pressures on household incomes,” comments Jessica Tomlinson, research analyst at Savills.
“The ongoing imbalance between demand and supply is expected to continue to drive rental growth. However, the sheer scale of rental growth over the past two years does somewhat limit the capacity for further significant increases, and over time we expect to see the balance between supply and demand gradually restored.”
Smaller properties outperform larger homes
On the quarter, central London and North & East London locations with the greatest remaining capacity for growth performed the best. Namely, Marylebone (+3.4%), Earls Court (+2.6%) and Islington (+2.2%). While locations which had been the most popular over the last two years and have seen the greatest levels of growth – including Barnes (+0.4%), Wimbledon (+0.1%) and Clapham (+0.1%) – have seen the greatest slowdown in rates of growth on the quarter.
From a price perspective, smaller properties at lower price bands are outperforming larger, more expensive rental homes (+0.8% growth for properties let sub £2,000 pw, vs. +0. 3% for those let £2,000+).
“Rental properties at the top end of the market are dictated largely by discretionary spending. The market is certainly less frantic that it was during the middle of 2022, and now prime tenants feel they can bide their time to see how the next couple of months play out which is translating into slightly slower levels of growth,” continues Savills’ Jessica Tomlinson.
“However, our agents agree that young professionals and corporate demand continue to make up the bulk of demand, and we can expect these ‘needs-based’ tenants to continue to drive up competition in the early part of 2023.”
While Savills predicts continued competition for prime rental properties in 2023, as supply and demand slowly rebalances, previous high levels of rental growth will limit the capacity for further significant increases. The firm therefore projects growth to slow to an average of +5.0% over 2023 across prime London, and to achieve net +13.6% growth in the five-years to 2027.
Prime commuter belt
Across the prime commuter belt, quarterly growth has slowed to +0.4%, but is still up +5.6% on the year.
More than half of Savills commuter belt lettings agents reported that stock levels have increased over the past three months, with some citing new listings from more accidental landlords who have been unable to sell, while a third report that tenants have reduced budgets in response to a higher cost of living, causing growth to ease.
Despite this, stock still remains low in a historical context, which will keep pressure on rents over the short-term. Savills has forecast average rental increases of +3.0% over 2023 and then +2.0% by the end of 2024.
“The second half of 2022 has shown signs that the commute belt rental market that is returning to more normal levels of growth, after an exceptional couple of years. Over the long term, Savills forecasts that rental growth across the commuter belt will return to historic norms and to increase by an average of +8.8% by the end of 2027,” says Savills’ Jessica Tomlinson.
“In a sign that pandemic lifestyle choices are here to stay, outer commuter locations furthest from London have outperformed over the past three-months, including Winchester (+2.8%), Summertown (+2.7%) Farnham and Henley (+1.5%), as tenants prioritise a better work/life balance. However, like in London, smaller properties are typically proving more robust (+0.8% growth for 1-3 bed homes, vs. 0.1% for 5+ beds).”
Prime rental market outlook 2023-2027
|
|
Mar-20 to Dec-22 |
2023 forecast |
2024 forecast |
2025 forecast |
2026 forecast |
2027 forecast |
5 years to 2027 forecast |
|
Prime London |
12.5% |
5.0% |
3.0% |
2.0% |
1.5% |
1.5% |
13.6% |
|
Prime Commuter Belt |
17.0% |
3.0% |
2.0% |
1.5% |
1.0% |
1.0% |
8.8% |
Source: Savills Research
Note: These forecasts apply to average rental values in the second hand market. New build rents may not move at the same rate.