UK renters face record-breaking rent rises until 2025

The UK’s private rented sector (PRS) is set to experience unprecedented rent growth in the next few years because the pandemic has created a mismatch between supply and demand, according to a new report by Savills.

The real estate firm predicts that average rents will have increased by 9.5% by the end of 2023 – that’s lower than 2022’s year-on-year figure but higher than any other year on record.

This will leave rents up 26% since March 2020, when the first lockdown was imposed.

‘Homes to rent continue to be in significant short supply’

Emily Williams, a director in the Savills residential research team, said: “Homes to rent continue to be in significant short supply.

“The end of a series of national lockdowns sparked increased rental demand in mid-2021 that has consistently outstripped supply ever since.

“At the same time, the rising cost of debt has impacted the profitability of many mortgaged landlords.

“This, together with a changed tax and policy environment, is forcing an increasing number to sell their properties.”

Reaching an ‘affordability ceiling’ in 2025

Savill’s is also forecasting that rents will rise by another 6% next year, before reaching an ‘affordability ceiling’ in 2025, when income growth and inflation will catch up with rental growth.

The firm is also expecting that London will see a stronger recovery than the rest of the UK, as the economic outlook improves and the city attracts more workers and students.

Savill’s is predicting that London rents will increase by 7.5% this year, and by 8.5% in 2024, surpassing the UK average by the end of the forecast period.

However, the report notes that London’s rental growth will vary by location and property type, with outer zones and larger homes benefiting more from the shift to remote working and the demand for more space.

‘Competition for stock is tough’

Ms Williams said: “Competition for stock is tough, and tenants are having to bid upwards to secure a tenancy, supported – but only in part – by a strong growth in incomes, fuelling rents upwards in the short-to-medium term.

“It’s very difficult to see where an increase in rental supply will come from in the next couple of years.

“Higher borrowing costs will also keep would-be-buyers in the rental sector for longer, underpinning demand, and while some landlords will be able to transact in cash to avoid the higher cost of debt, this is unlikely to move the dial on supply.”

She adds: “Any significant increase in stock in the sector will be delayed until 2026 and beyond, when interest rates have fallen more substantially.”

Regions with the highest five-year growth potential

The report identifies the South East and South West as the regions with the highest five-year growth potential, as they have lower yields and more stock constraints than other areas.

Savills estimates that rents in these regions will rise by 28.5% and 27.5% respectively between 2020 and 2025.

The firm attributes the supply challenges in these regions to the struggles of private landlords who have been hit by tax changes, regulatory pressures and the pandemic.

In Scotland, it predicts that landlords leaving the sector will see supply fall and rents being pushed up – unless the Scottish government’s current consultation process on the cap offers a different solution.

The report also suggests that institutional landlords and the Build to Rent sector will play an increasingly important role in providing rental accommodation, but their influence will be limited by the debt market and the planning environment.

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