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London Rental Market Sees Shift as Tenant Resistance Grows

The dynamics of the rental market in prime London postcodes are shifting, with tenants increasingly resistant to high rent hikes, influenced by growing property availability and changes in market conditions.

Landlord Challenges and Market Responses
Knight Frank’s Tom Bill highlights that “with prices either flat or falling across many prime London sales markets, these properties may revert to the lettings market if the asking price is not achieved.” This suggests a potential increase in rental stock should properties fail to sell at desired prices, impacting overall rental value growth which, as noted, has “narrowed to levels last seen in the summer of 2021.”

The rental market’s growth rate has indeed slowed, with prime central London seeing an annual increase of 4.9%, while prime outer London marked a 4.4% rise. This slowdown is partly attributed to the influx of properties on the market, a trend spurred by an active sales market during the pandemic, notably during the 14-month stamp duty holiday which saw a significant number of properties being sold rather than rented.

Regulation and Market Uncertainty
The rental sector’s landscape is further complicated by regulatory changes. The introduction of the Renters (Reform) Bill has seeded uncertainty, potentially affecting landlord decisions ahead of the general election. The bill’s progression through Parliament and its implications depending on the election outcome could lead landlords to alter their investment strategies, with “early signs that more landlords are considering a sale,” as the market adjusts to the regulatory climate.

Economic Factors and Market Outlook
Economic factors also play a crucial role in shaping the property market. The report notes a “little lacklustre” spring bounce in the UK housing market, despite mortgage approvals hitting an 18-month high. However, persistent services inflation and the resulting shifts in rate cut expectations have kept the market subdued. The close relationship between borrowing costs and demand continues to influence London’s market, with the number of offers remaining below average.

As the market awaits more favorable economic news, potentially leading to decreased lending costs, the landscape could shift rapidly, much like it did earlier in the year. If lending costs decrease and inflation concerns ease, the market might see an uptick in activity, suggesting that buyers “will need to remain alert from the comfort of their sunbeds” as opportunities could arise with changing financial conditions.

Overall, the London rental and sales markets are navigating through a period of adjustment, driven by both economic conditions and regulatory changes, with landlords and tenants recalibrating their strategies in response.