Central London (CL) rental values are expected to end this year 15% higher, and Outer London (OL) rental values 12% higher. From a forecast of 3.5% earlier this year, there is an anticipated 6% total growth in both markets in 2023. But where are London rents expected to increase the most?
The rental market in London has grown exponentially since the previous decline caused by COVID-19 when fewer people could work in the city and demand dropped dramatically. As a result of post-pandemic demand, London’s rental prices have reached a staggering £553 a week – with many prospective tenants struggling to find places to rent. This has presented a prime opportunity for investors looking to enter or further invest in the buy-to-let (BTL) market.
Rental growth for sought-after properties in prime London locations was 14.0% from the beginning of the year to September 2022. This July – September, rents climbed by 3.3% – with the growth rate surpassing 3% for the fourth consecutive quarter.
Stephen Clark of Finbri bridging finance, explains, “The popularity of inner London properties continues to grow with more people returning to the city for work and investors are seeking out hot commuter locations for extending their buy-to-let portfolios. Commuting convenience and good amenity accessibility are still the top considerations for London’s BTL tenants. The opening of the Elizabeth line has also increased investment interest in those newly connected outer London regions.”
Why are rental values set to increase?
Demand for rental property is outstripping supply. Renters in London are facing higher costs as competition for properties drives up prices. Many people have been priced out of the housing market – unable to buy in London – and therefore relying on renting. According to Savills, there are currently 1.8 million people living in London renting their property from a private landlord, which is expected to grow to 2.4 million by 2025.
Increase in demand. As a result of continued uncertainty surrounding the housing market and the cost-of-living crisis, many are opting to rent rather than buy, resulting in an increase in demand for rental properties. One report as recently as July 2022 discovered that rental homes in London fell year-on-year by 38% whilst the number of tenant enquiries during the same time had increased by 60%. With competition for rental accommodation at an all-time high many prospective tenants are offering to pay more than the listed amount to secure the property.
Low availability. The recent number of listings available for rent in the capital has decreased by 18% year-on-year with an average of 29 renters competing for every new property in September.
Population growth. London’s population is continuing to grow, putting pressure on the city’s housing market. This is especially true for young people and families looking for more space. London’s population is currently 8.9 million and is set to reach 9.2 million by 2025, which will further increase demand for rental properties.
Property firm Savills forecasts that average rental values in premium London would increase by 12.0% in 2022 and 18.3% for the five years ending in 2026 (upgraded from 13.7% as anticipated in November 2021).
Which areas have had the most increase?
These are the locations that currently offer investors the highest rental returns, as well as capital growth potential. Rental values in these boroughs are expected to continue to rise, as demand for rental properties in London increases.
The best-performing areas in London are:
North West London. In particular, rental price increases in Maida Vale, Little Venice, Primrose Hill, and St. John’s Wood have seen a 6.1% growth over the past three months. Mainly due to an influx of students looking for property while attending university and younger professionals returning to the city following the pandemic aiming to find a higher-end rental property.
Central London. Rents have increased by 3.4% in central London. In particular with rental price increases in Westminster, the City of London, and Camden. This is particularly due to the rise in demand from young professionals working in these areas.
East London. In particular with rental price increases in Bethnal Green, Shoreditch, and Hackney. Due to the rise in demand from young creatives and families looking for more affordable property.
In what areas can high yields be achieved?
The most profitable boroughs in London, according to LiveYield data, are Barking & Dagenham, Newham, Bexley, and Hounslow.
- Barking & Dagenham. The highest-yielding borough in Greater London for real estate investors in London, with an average yearly yield of 5.5%. It is the least expensive borough of London, with an average property price of £336,126.
- Newham. The average yield is currently 4.9%, with an average property price of £407,474 – located in CL, near to London airport and the River Thames. The occupancy rate also sits at a high of 71%.
- Bexley. The average yield in Bexley is 4.8%, with an average property price of £352,845. It is located in the South East of London and has good transport links to Central London.
- Hounslow. With an average yield of 4.6%. The property prices are slightly higher than other boroughs on this list, at an average of £443,943. Hounslow is located in West London and has good transport links to Heathrow Airport.
In 2023, property prices in CL and OL are predicted to decrease by 3% and 4%, respectively. The expected increases in rental values present a prime opportunity for investors looking to enter the buy-to-let market. With demand for rental properties set to rise, there is the potential for solid returns on investment.
When it comes to determining investment opportunities in London, it’s important to do your research and consider the location carefully. Choosing an area that is predicted to see strong rental growth and have strong demand from tenants will offer the most potential for capital appreciation and high rental yields.
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