London Rental Growth to Slow Down but Regional Markets Less Affected - Zoopla
Zoopla has recently released its Rental Market Report for this month, and it offers some insights into how the UK rental market might behave in 2024.
A chronic supply-demand imbalance has been the ‘defining feature of the private rental market for three years’, according to Zoopla. The ongoing undersupply of rental properties has helped propel average rents sky-high in this timeframe, with UK rents rising by a third, or £3360 a year.
These steep increases have made property investing an attractive investment strategy. UK rents have risen 9.7% last year and 11.9% the year before.
Clearly, this rapid pace of growth isn’t sustainable, and Zoopla predicts a slowdown in 2024.
However, the average UK rent will continue to increase without any planned measures to address the mismatch between supply and demand.
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Why is Rental Demand so High in the UK?
According to Zoopla, there are four main reasons for the unprecedented rental demand observed in the UK market since 2020. These are:
- Pandemic restrictions are being lifted in 2021, allowing for the reopening of the economy and international travel.
- Good employment growth and a strong labour market.
- Higher mortgage rates from autumn 2022 onwards, making home ownership pricier.
- Record levels of immigration and high numbers of overseas students.
While the effects of some of these are wearing off somewhat – the pandemic effect, for example – UK rental demand is still 32% above the 5-year average. Even demand in London, which is down 20% year-on-year, is still above the 5-year average. It’s no wonder that buy-to-let properties in London remains a popular choice in the UK.
There has been a frenzy of rental growth in 2023, with double-digit percentage increases in year-on-year growth occurring several months out of the year. The highest average rent in the UK can be found in London, which is £2,174 per month according to the HomeLet Rental Index.
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Biggest Rental Growth Slowdown to Hit London
Inner London has by far the most expensive average rent in the country, but rental growth has slowed more in the capital than anywhere else, from 17% a year ago to 9% this year. This slowdown hasn’t hit regional cities to the same extent, where renters can still afford increases based on average earnings.
A recent property forecast by Zoopla predicts rental growth in London will slow to about 2% next year, as renters cannot afford further price hikes to the already soaring costs of renting in the capital. There has been some evidence of resistance to the growing rents in London, suggesting many are being priced out of the area. Some Londoners are being drawn to commuter towns, making buy-to-let property in Plymouth, for example, more popular.
But outside of London, there will be more substantial growth of around 5-8% in 2024. The lower rent and cheaper cost of living means there is room for more rental growth in regional markets next year.
But rental growth doesn’t make up the whole story. With so many factors to consider, it’s difficult to find the best place to buy a buy-to-let.
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Where is the Best UK Area to Target for Good Rental Income?
Many property investors are drawn to London because of the capital’s prestigious reputation, stable property market, high rents and consistent demand.
However, London property investments have lost their lustre in the eyes of many investors due to high property prices that make it difficult to get a worthwhile return on investment. Rental yields are notoriously low in London despite the high rent that London properties can command.
With the aforementioned sky-high London rents and high cost of living that those living in the capital have to contend with, many have moved out of London and sought a more affordable lifestyle in the North.
Rental yields in the North of England are much higher than in the South, and with the currently sluggish property market, rental growth is outpacing capital appreciation. This means there could be more potential for a good deal on high-yielding property in an in-demand city, for example, buy-to-let properties in Manchester. There are also fewer major cities to consider in the North, such as buy-to-let in Preston.
