Covid crisis? London falls behind in two-tier rental market

11 November 2020 | Investment

There’s a ‘firmly entrenched’ two-speed rental market across the UK, with London falling behind, according to Zoopla.

Its Rental Market Report has revealed a two-tier rental market with marked differences between rental prices in London and the rest of the UK.

Has the two-speed rental market become the norm?

Average rents in London are down by 5.2% this year, falling to levels last seen in 2014.

Zoopla says this fall in demand is due to changing work patterns and a lack of tourists, felt more acutely towards the centre of the capital. However, rents continue to rise in outer London boroughs such as Bexley (3.8%), Havering (3%) and Sutton (2%).

Apart from Edinburgh – which has witnessed a 1.6% decline with the shift from short-term to long-term lets – the wider rental market remains resilient, enjoying growth of 1.7%.

There is particularly strong growth in Bristol (3.1%), Glasgow (2.4%) and Cardiff (1.8%).

Some areas have dipped into negative territory, however, with Manchester and Birmingham seeing falls of 0.1% and 0.5% respectively. Coventry and Reading have seen larger declines of 2.5% and 1.8% as office workers continue to work from home.

What is causing the demand/supply gap?

The portal insists there are three key reasons for the demand-supply imbalance.

Firstly, there is the current squeeze on lending for potential first-time buyers, keeping them in the rental market for longer.

Secondly, the return of students to university despite the impact of Covid-19 will have boosted demand in the rental sector.

Thirdly, the lockdowns and other restrictions mean people are reassessing their lifestyle priorities, encouraging more moves. Zoopla’s top searches for rental properties include the terms gardens, parking, garages, balconies and pets.

Growth of ‘muted earnings’ begins to take effect

Average pay in the private sector fell in April and, with coronavirus causing uncertainty, this pressure on wages is unlikely to have let up over the summer.

While earnings growth is predicted to pick up in 2021, the existing pressure on wages could cause a gradual slowing in rental growth across the UK outside of London in the months to come.

Zoopla’s head of research Gráinne Gilmore says the split in the rental market has now ‘crystallised’. “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.”

This post has originally been featured in Property Investor Today.