The latest forecast for the UK lettings market this year is that there will be a four per cent rise in rent on average and, over the next five years, a substantial 17.1 per cent increase.
Oliver Knight, head of residential development research at Knight Frank, says: “At a national level, the rental market is being shaped by a deepening supply and demand imbalance.
“The number of properties available to rent during Q1 2022 was more than a third lower than the five-year average pre-pandemic. At the same time, demand from tenants has continued to rise. The RICS residential survey reported that tenant demand rose to its highest level since 1999 in January, while new landlord instructions remained in decline.
“In part, the supply shortfall reflects the fact some landlords have left the sector because of tax and regulatory changes in the last few years, a trend we don’t expect to reverse. We forecast a shortage of rental homes relative to demand will be a key factor underpinning rental growth in all regions in 2022, notwithstanding the fact that short-term inflationary pressures will, inevitably, act as a brake on larger rises as household finances are stretched.”
Current forecasts from Oxford Economics suggest inflation will end 2022 at 7.0 per cent, with lower figures in the years ahead to 2026.6.
Knight continues: “In later years, supply will remain tight, but we are forecasting that earnings growth will act as the main driver behind rents, resuming a long-term relationship and supported by a robust outlook for the employment market. There is scope for stronger rental growth in areas of the country where rents are relatively more affordable, particularly in the North and Midlands.
“The prospect of further regulatory reforms towards the end of our forecast period, largely around minimum energy efficiency standards, have the potential to limit supply from mortgaged landlords further.”
Specifically with regard to prime London, Knight Frank’s Tom Bill adds:“The rental market in London and the Home Counties continues to be marked by high demand and low supply, which we forecast will produce growth of eight per cent in prime central London this year.
“Very strong annual growth in the early months of 2022 reflects how far rents fell in the first half of 2021 as short-let property flooded the long-let market.
“Supply subsequently dried up as staycation rules were relaxed while demand grew as offices and universities re-opened. The resulting imbalance is working its way through the system slowly, maintaining strong upwards pressure on rental values this year.
“We believe that rental value growth will normalise from next year and we expect increases of below four per cent in prime central London from 2023, producing cumulative growth of 22.7 per cent [by 2026].”