London’s rental demand is being fuelled in part by a sharp improvement to affordability; with rents down -9.4%, affordability is running at a ten year high..
One year on since the housing market reopened and the Covid-led decline in rental demand for city centre housing is starting to bounce back, as the UK emerges from lockdown and affordability for renters improves. These are the latest findings from Zoopla, the UK’s leading property portal, in its quarterly Rental Market Report.
City centre rental markets finally revived
The impact of Covid was felt most acutely in the city centre rental markets of the UK’s major regional cities. Central Edinburgh, Leeds, Manchester and London were at the forefront of the rental slowdown, as offices remained closed and an extended hiatus in tourism took hold.
Stock moving over from short-term lets into the rental market, and more rental stock coming back to the market amid easing demand, led to a softening in rents in city centres, which are still down by 0.7% in Leeds, -1.1% in central Manchester, -3.2% in central Edinburgh and -9.9% in inner London. However, the city centre downturn is starting to reverse as the economy opens up, workers start to return to their offices, leisure activities restart, and renters return in search of a rental bargain and restoration of their social life. Renter demand is up 26% in central Edinburgh, 12% in central Leeds, 7% in inner London and 5% in central Manchester in the month since Easter – and is starting to absorb the supply surplus that characterised the market over the past year.
London’s rental affordability reaches ten year high
Rental declines in London bottomed out in February of this year, down -10% year on year, with overall London rents now running at -9.4%. Average monthly rents are now at the same level as they were in December 2013. The fall in rents in London over the past year has resulted in rents being at their most affordable for ten years. Average rents now account for 42% of an average single-earner income in London, down from 49% in March 2020, and a peak of 53% in Q4 2016 Average rents in the City of London, Kensington and Chelsea, and Westminster, are running at their lowest for a decade, with the average monthly rent in Westminster at £2,259 – down from a high of £2,617 in February last year.
Many of London’s renters are looking to future-proof current rental affordability, locking in cost savings for as long as possible, with agents reporting an increased number of longer-than-average tenancies (in excess of 12 months) being agreed. Regional rents rising 3% year on year – but affordability remains unchanged The rental market outside of London paints a starkly different picture, with rents rising at 3% year on year, signalling the highest level of growth in four and half years. Despite rent rises, average affordability remains broadly unchanged as wages rebound from the dip recorded last summer, keeping pace with rental growth.
Rents are rising fastest in the North East (+5.5%) and the South West (+5.3%) year on year – the strongest rate of growth in a decade in these regions amid increased demand and constrained supply. However, the North East remains one of the most affordable regions in the country, with average rents absorbing 21% of the income of the average single earner (pre-pandemic, compared to the UK average of 32%.
Northern towns of Wigan and Barnsley are seeing some of the highest rental growth in the country, at 8%, with Rochdale at 7.8%; this outperforms average annual rental growth in these towns of around 1.5% between 2011 and 2019 by some margin.
Current rental performance is being driven by a 59% uptick in demand for rental properties in the 28 days to the end of April, compared to the average demand recorded across the ‘normal’ markets of 2017 -19. In the first quarter of the year, demand for rental property outside of London was 32% higher than the same period last year.
Gráinne Gilmore, Head of Research, Zoopla, comments: “Elevated levels of demand in the wider UK market, amid constrained supply, will continue to underpin rental growth this year. The increased availability of mortgages for those with lower deposits may result in more people leaving the sector to buy their first home through 2021, but the wider economic uncertainty will limit this trend. At the same time, the opening up of the economy and the slow return to ‘business as usual’ as the vaccine rolls out means demand will continue to build over the summer as more people move to rent their first property – although, as ever, this will be dependent on the economy opening up in line with the planned timetable.
Demand will continue to rise in city centres as offices start to re-open and this, coupled with increased affordability levels in many cases, will start to counter the negative pressure on rents seen over the last 12 months. In London, where rents are down 9.4% on the year, a modest reversal in rental declines has begun, but it will be a slow build back to pre-pandemic levels in inner London. The recovery will be uneven and we expect new or recently refurbished properties to attract higher levels of demand in H2.”