Rents dropped 5% in London, but the rest of the UK showed 1.7% rental growth in 2020

Rents have dropped in the capital as Covid-19 creates a two-speed market ..

With England still in the grip of a second lockdown and restrictions in place across the rest of the UK, our latest Rental Market Report reveals Covid-19 has led to a two-speed market according to a report published by leading property portal Zoopla. The report shows that despite challenges caused by the impact of the pandemic in 2020, the wider UK rental market (excluding London) is resilient and has shown 1.7% annual growth in rents.

Average rents in London, however, have fallen by 5.2% over the last 12 months, reaching levels last seen in 2014.

Average UK rents outside London climbed by 0.7% in the three months to September, taking the annual growth rate to 1.7%. The report reveals a positive picture across most cities. Belfast and Newcastle both recorded annual rental growth of 3.5%, followed by Bristol at 3.1%. Sheffield and Glasgow followed closely behind. However, London sits at the other end of the spectrum, with rents falling by 3.2% over the last quarter to September. It’ll take the annual fall to 5.2% by the end of December.

This two-speed market is set to be entrenched during the second lockdown in England which started in early November and is due to lift on 2 December – although an extension hasn’t been ruled out. Scotland has a five-tier restriction system in place and Wales recently emerged from a two-week “firebreak” lockdown.

What is driving rental growth?

A mismatch between tenant demand and the number of rental homes on the market is underpinning rental growth. While renter appetite to move home has leveled off since early summer when the first lockdown ended, it’s still 20% higher than this time last year.

Stricter lending as a result of the pandemic is forcing many aspiring first-time buyers to put their home-ownership plans on hold and remain in the rental market for longer, supporting overall demand.

With universities remaining open despite the impact of Covid-19, the annual influx of students to college in the autumn will also have boosted rental demand.

Against this backdrop, the number of homes available to rent has been constrained, with investment levels dropping since the 3% stamp duty surcharge was introduced in 2016 for those buying an additional home.

What’s the regional picture like?

The strongest rental growth is in the North East, where annual rental growth is up 3.2% in the year to September. In the North East, rental demand was 54% higher in the three months to September than the average in previous years, while supply is down 9% compared to the typical levels seen in the same three months over the past three years.

Rental growth is in positive territory in all other UK regions outside London, except Scotland and the West Midlands which have other factors affecting the dynamics of the market.

In Edinburgh, a 1.6% annual fall in rents reflects muted tourism and the shift from short-lets to long-lets, while the Aberdeen market has been affected by the North Sea energy industry.

Manchester and Birmingham have just dipped into negative territory, at -0.1% and -0.5% respectively. There are larger annual rental declines in Coventry (down 2.5%) and Reading (down 1.8%) as some cities are hit by the impact of people working from home.

What about London?

The pandemic has had a major impact on London’s rental market, with rental falls reflecting changing work and commute patterns as well as muted tourism. Like any housing market, London’s is very localised.

The move towards working from home has particularly hit central London, where rental properties normally used by workers for part of the week are coming back to the market.

On top of this, restricted tourism during the summer and autumn has impacted the short-term rental market, with many landlords now offering long-term rentals instead.

However, rental demand is stronger in outer London boroughs where rentals tend to offer more space for the money and are more likely to come with gardens.

What’s the outlook for the months ahead?

The two-speed rental market in the UK is here to stay for the coming months, with restrictions set to exacerbate some of the trends that have emerged from previous lockdowns.

And moving into next year, the supply of rental homes in large cities could catch up with demand, limiting the scope for further rental growth.

However, earnings growth is expected to pick up again in 2021, which could pave the way for rents to increase, especially if office working becomes the norm again.

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