Landlords in Inner London have had to weather some big swings in the rental market over the last few years. Rents have been rising at a double-digit pace for 16 out of the last 18 months. However, some of this growth was initially a rebound from the 25% drop during the Covid-19 pandemic when some tenants fled the city and a wave of holiday lets flooded the rental market.
Today, the average cost of a home in Inner London stands at £3,140 per calendar month (pcm), marking a 19% or £506 pcm increase since January 2020. This increase, however, has not kept pace with the Great Britain average where rents have risen 33% since the onset of Covid-19.
October 2023 marked the second instance in the last 18 months where annual rental growth in Inner London dipped to single digits, with average rents recording a 9.7% year-on-year rise. Even so, tenant demand continues to outpace the number of homes coming onto the market, which will maintain pressure on rents.
While there were 12% fewer applicants looking to rent in Inner London last month compared to the same time two years ago, there were 20% fewer homes coming onto the market. The return of international students combined with people being pulled back to offices has supported demand for homes in some of London’s priciest neighbourhoods.
In recent years, rents in Inner London have increased at a faster rate than house prices. This shift has pushed gross yields to a nine-year high of 5.2% in 2023, up from 4.4% in 2019. To put it in perspective, this increase means an extra £8,000 a year in rental income on a typical £1 million buy-to-let.
Even though landlords in London are less likely to own their buy-to-let with a mortgage compared to elsewhere, this rental growth has provided some relief to those investors who have seen their mortgage costs rise significantly as a result of higher mortgage rates. And in some cases, these rent rises have been enough to convince investors to stay in the market. Consequently, the share of homes sold by London investors decreased from 19% in 2022 to 15% so far this year.
Looking ahead, while we anticipate that rental growth may slow down slightly, we still expect London rents to rise more than the rest of Great Britain over the next few years. Our forecast suggests that rents will rise by 8% across Greater London in 2024, followed by 4% growth in both 2025 and 2026. We also expect to see house prices return to growth in London next year as a new house price cycle dawns, which will add to landlords’ returns after a tumultuous few years.