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Rents dropped 5% in London, but the rest of the UK showed 1.7% rental growth in 2020

Rents outside London have grown this year but they’ve dropped in the capital as Covid-19 creates a two-speed market, according to our latest Rental Market Report.

Guest Author
Words by: Annabel Dixon

Contributor

With England now in the grip of a second lockdown and restrictions in place across the rest of the UK, our latest Rental Market Report reveals Covid-19 has led to a two-speed market.

Our report shows that despite challenges caused by the impact of the pandemic in 2020, the wider UK rental market (excluding London) is resilient and has shown 1.7% annual growth in rents.

Average rents in London, however, have fallen by 5.2% over the last 12 months, reaching levels last seen in 2014.

Download the full report

What does the two-speed market mean?

Average UK rents outside London climbed by 0.7% in the three months to September, taking the annual growth rate to 1.7%. 

Our report reveals a positive picture across most cities. Belfast and Newcastle both recorded annual rental growth of 3.5%, followed by Bristol at 3.1%. Sheffield and Glasgow followed closely behind.

However, London sits at the other end of the spectrum, with rents falling by 3.2% over the last quarter to September. It’ll take the annual fall to 5.2% by the end of December.

This two-speed market is set to be entrenched during the second lockdown in England which started in early November and is due to lift on 2 December - although an extension hasn’t been ruled out. Scotland has a five-tier restriction system in place and Wales recently emerged from a two-week “firebreak” lockdown.

What is driving rental growth?

A mismatch between tenant demand and the number of rental homes on the market is underpinning rental growth. 

While renter appetite to move home has levelled off since early summer when the first lockdown ended, it’s still 20% higher than this time last year. 

Stricter lending as a result of the pandemic is forcing many aspiring first-time buyers to put their home-ownership plans on hold and remain in the rental market for longer, supporting overall demand.

With universities remaining open despite the impact of Covid-19, the annual influx of students to college in the autumn will also have boosted rental demand.

Against this backdrop, the number of homes available to rent has been constrained, with investment levels dropping since the 3% stamp duty surcharge was introduced in 2016 for those buying an additional home.

What’s the regional picture like?

The strongest rental growth is in the North East,where annual rental growth is up 3.2% in the year to September. 

In the North East, rental demand was 54% higher in the three months to September than the average in previous years, while supply is down 9% compared to the typical levels seen in the same three months over the past three years.

Rental growth is in positive territory in all other UK regions outside London, except Scotland and the West Midlands which have other factors affecting the dynamics of the market. 

In Edinburgh, a 1.6% annual fall in rents reflects muted tourism and the shift from short-lets to long-lets, while the Aberdeen market has been affected by the North Sea energy industry.

Manchester and Birmingham have just dipped into negative territory, at -0.1% and -0.5% respectively. There are larger annual rental declines in Coventry (down 2.5%) and Reading (down 1.8%) as some cities are hit by the impact of people working from home.

What about London?

The pandemic has had a major impact on London’s rental market, with rental falls reflecting changing work and commute patterns as well as muted tourism.

Like any housing market, London’s is very localised.

The move towards working from home has particularly hit central London, where rental properties normally used by workers for part of the week are coming back to the market. 

On top of this, restricted tourism during the summer and autumn has impacted the short-term rental market, with many landlords now offering long-term rentals instead.

However, rental demand is stronger in outer London boroughs where rentals tend to offer more space for the money and are more likely to come with gardens.

What impact has the first lockdown had?

The first lockdown led many renters, just like buyers, to reassess their home and lifestyle. As a result, rented houses are now being snapped up more quickly than flats in some areas. This suggests, perhaps unsurprisingly, additional space, often with a garden, is becoming more important to home-movers.

This trend is reflected in our data, which reveals that the most popular search terms are:

  • gardens

  • parking

  • garage

  • balcony

  • pets.

The timeline of renting a property has also shortened. The time it takes to rent a house and a flat in the UK, on average, is 16 days and 18 days respectively. This is down from 20 days last year for both types of property.

What’s the outlook for the months ahead?

The two-speed rental market in the UK is here to stay for the coming months, with restrictions set to exacerbate some of the trends that have emerged from previous lockdowns.

And moving into next year, the supply of rental homes in large cities could catch up with demand, limiting the scope for further rental growth.

However, earnings growth is expected to pick up again in 2021, which could pave the way for rents to increase, especially if office working becomes the norm again.

Gráinne Gilmore, head of research here at Zoopla, said: "The split in the rental market caused by Covid-19 has now crystallised and we are seeing the two-speed market firmly entrenched. 

"For most of the UK, the demand/supply gap is underpinning moderate levels of rental growth. We haven’t seen the exodus of students from cities and, as more people are staying in the rental market given the squeeze on mortgage lending, higher levels of demand will continue to underpin rents.

"At the same time, however, muted earnings growth will start to limit the headroom for rental growth in some markets.” 

"The search for additional space, both indoor and outdoor,  within the rental sector is also set to continue as the country goes through additional periods of lockdown."

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