Yields are on the rise in London's prime rental market

The latest data indicates that Prime London rental values saw a modest increase of 0.3% in the first quarter of 2024. Despite this uptick, the rate of rental growth has slowed for six consecutive quarters, reaching 3.2% in Q1. Nonetheless, rents continue to stand substantially higher (18%) than pre-pandemic levels. Similarly, property values across prime regions rose by 0.9% during the quarter, although annual growth decelerated to 4.0%.

Tahera Zaman , International Investment Consultant at Victorstone notes that prime rental growth in London has stabilised, but there is a widening gap between tenant and landlord expectations.

Concerns about affordability

Tahera says, "While rental growth saw a slight uptick during the quarter, affordability pressures and a rise in available properties have led to rental growth stabilising at a significantly lower rate compared to the previous three years. Nevertheless, rents continue to reach record highs, and the anticipation of declining mortgage rates is anticipated to alleviate some of the financial strain on landlords."

She also added, "The ongoing trend of rental growth surpassing capital value growth indicates improved yields throughout the sector, bolstering ongoing investment."

In London, houses are currently demonstrating stronger performance compared to flats, with tenants seeking houses generally having a bit more flexibility in their budget.

However, as the market adapts to a more stable growth rate, disparities in landlord and tenant expectations have also become more pronounced.

Widening expectations

Tahera further remarks, "Shifting market dynamics have led to an expansion of the disparity between landlord and tenant expectations. With a wider selection of rental options available, tenants are increasingly offering bids below the asking price on multiple properties. Achieving greater alignment on pricing will become increasingly crucial in the upcoming months, as a majority of agents across London and the country anticipate further increases in available rental stock throughout the year."

Beyond the capital, commuting has provided a boost to both regional towns and cities, with urban areas consistently outperforming their surrounding regions. Overall, regional towns and cities experienced a growth rate of 8.2% over the year (compared to 2.3% growth in surrounding areas), followed by built-up areas in London's commuter belt, which saw a growth rate of 3.9% (compared to 1.5% in more rural commuter belt locations).

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