Residential lettings market update Q1 2023

Rents continue to rise strongly across the UK as demand flows back into city centres where supply is tight.

Rents will continue to rise this year, but at a slower rate than the last 12-18 months. Our quarterly update examines the latest trends in the UK, London and prime London lettings markets.

Key highlights:

• UK, London and prime London rents have risen strongly over the last 12 months as demand surged back into city centres
• Rents will continue to rise in 2023 albeit at a more modest rate
• There will be continued pressure on the supply of rental property as mortgage rates rise, and the potential introduction of new energy efficiency rules in 2025

UK overview

The opening up of city centre life last year as the pandemic receded prompted a strong return of demand into city rental markets, which led to a surge in asking rents. Students and office workers who spent time in lockdown elsewhere came back to the market, and international demand also returned. This came as the supply of rental property was under pressure, as many short-term lets, which had come into the mainstream rental market during lockdowns, left the market once more. As a result, the average uplift in rents for new lets agreed was 12.1% at the end of last year, according to data from Zoopla, the property portal.

The official data for average UK rent rises (see chart below) also factors in rents agreed with tenants who are staying put in their property, rather than moving into a new property. In these cases, the adjustment in rents is likely to be smaller than that in the open market as landlords factor in the benefits of a tenant with whom they already have a good relationship and no void period. As a result, the ONS is reporting annual rental growth at just over 4%, but it still represents a significant uplift over the last few months.

The upward pressure on rents is likely to continue this year. The demand for rental properties remains strong, and the potential market of renters is only expanding thanks to recent house price increases and rising mortgage rates – meaning some first-time buyers having to save for longer to buy their first home. At the same time, the supply of homes for rent is coming under pressure as increased legislation and tax changes for buy-to-let landlords has changed the economics for some. This imbalance between supply and demand will continue to put upward pressure on rents. In addition, rising mortgage rates are also affecting landlords who don’t own outright, and so in some cases rents will need to rise to make the financials viable.

In addition, proposed new EPC rules coming into force in 2025 – meaning new tenancies cannot be agreed unless the property is rated as C or above – will mean some landlords with more traditional properties that have lower ratings will have to consider whether to actively invest money in their property to upgrade it.

However, the double-digit growth in asking rents seen in 2022 is not sustainable over the medium-term, as there are affordability limits. As such, we are forecasting that rental growth will continue this year, but the rise will be in the mid-single digits. 

London focus

Nowhere has the influx of rental demand been more evident than in London, with the average annual uplift in rents for new lets agreed at +17% in London, according to Zoopla. To put this rise in context however, it is worth remembering that during the beginning and middle of the pandemic, there were double-digit declines in rents in the capital, especially in the central boroughs.

Agents continue to report strong levels of demand in the London rental market, with the net balance of tenant demand in London at around +25 in the three months to December, according to the latest rental market survey from RICS. Any positive figure signals a rise, while a negative figure indicates a decline. The higher the number the stronger the growth. This rise in tenant demand is not being matched by supply of rental properties which remained unchanged, with a 0 reading.

Prime London

Agents also report that demand for rental property in prime London remained elevated throughout January this year, signalling that the strong growth in rents registered in the prime London market over the last year will continue, although as the data below shows, the annual change peaked in summer last year. We are forecasting rents in the central prime London market to rise by +5% this year.