Agency warns on landlords’ and tenants’ differing rent expectations

Prime London rental values ticked up 0.3% over the first three months of 2024, according to Savills, as the market continues to slip back into a seasonal pattern. 

While on an annual basis the rate of rental growth has slowed for six successive quarter to 3.2% in Q1, rents still remain significantly higher (18%) than before the pandemic.

Similarly, values increased by 0.9% on the quarter across prime regions, while annual growth slowed to 4.0%. Here, rents remain extremely resilient and are still 24% higher than in March 2020.

“Rental growth picked up slightly on the quarter, however, affordability pressures and increased stock mean rental growth has settled at a much lower level compared with the last three years. But rents remain at a record high, and the prospect of falling mortgage rates is expected to ease some of the financial burden on landlords. Rental growth continues to exceed capital value growth, meaning that yields have improved across the sector, which will support continued investment” comments Jessica Tomlinson, research analyst at Savills.

“In London, houses are now outperforming flats, signalling that the flats market maybe hitting an affordability ceiling, while tenants searching for houses typically have slightly more leeway when it comes to budget. Also, a stronger sales market has constrained the number of houses to rent across the capital, particularly across west and north west London.”

But as the market readjusts to a steadier pace of growth, Savills says differences in landlord and tenant expectations have widened. 

While Savills letting agents broadly agreed (60%) that tenants expectations on rental prices had reduced over the three months to March, just 25% believed that landlords thought the same. Rather, half of agents (50%) agreed that landlords expectations on rents had continued to increase over the past three months. 

“A shift in market conditions has caused the gap between landlord and tenant expectations to widen. With more choice, tenants are more commonly bidding below asking price on multiple properties. Greater consensus on pricing will be all the more vital in the coming months as the majority of agents across London and the country agree that stock will increase further over the course of the year” continues Tomlinson. 

“With ease of commuting firmly back on prospective tenants’ wish lists for, regional towns and cities and London commuter belt locations – including Chester (3.9%), Birmingham (3.0%), Cobham (2.0%) and Weybridge (2.0%) – were the strongest performers on the quarter.”

Generally, urban areas continue to outperform their surrounding areas. Overall regional towns and cities grew by 8.2% on the year (vs. 2.3% growth in surrounding areas), followed by built-up areas in London’s commuter belt (3.9% vs. 1.5% for more rural commuter belt locations). 

Landlords in these areas are most likely to be experiencing an uplift in yields, as rental growth has now significantly outperformed capital value growth over a four year period, Savills notes.