Prime rents are now 1.9% higher year-on-year in Prime Central London (PCL) and 2.9% higher in outer London, according to Savills. 

PCL outperformed over the latest quarter, recording its strongest rental growth in two years and signalling a return to momentum following a more subdued period.

Against this backdrop, the Renters Rights Act (RRA) remains the biggest concern for landlords, with almost half of Savills’ agents identifying it as a key issue. 

Increased taxation on property investment income ranked second, followed by higher mortgage costs.

But its impact has varied across markets, says Savills. 

Rental growth has been strongest among properties with annual rents below the £100,000 threshold defined by the RRA, where landlords are most exposed to regulatory change. Here a reduction in available stock has intensified competition among tenants.

“There are signs that landlord caution is continuing to constrain rental supply, particularly in the lower rental value bands where pressure is most acute,” comments Jessica Tomlinson, research analyst at the agency.

“That, in turn, is helping to support rental growth, although affordability constraints continue to limit the pace of increases.

“It remains too early to judge the full legacy of the Renters’ Rights Act. For now, we know that it has made some landlords more cautious, and some have reassessed their options. The future direction of prime rents will depend on how many decide to leave the sector or, instead, take advantage of current buying opportunities.”

Across prime central London as a whole, yields are now at their strongest level since 2009.

Across prime regional markets, growth slowed to 0.3% on the quarter, although remains 1.5% higher on the year, according to the agency.

On the year, rents have risen most strongly across London’s outer commuter belt, where they are now 33% higher than in Q1 2020. While on a quarterly basis, regional cities including Birmingham, Edinburgh and Manchester were the strongest performers, driven by smaller properties, where demand remains most resilient.

“Rental growth remains in positive territory this quarter though the pace of growth remains well below the levels seen during the post-pandemic surge,” says Tomlinson.

“Affordability constraints are increasingly acting as a ceiling on rental growth, with many tenants reaching the limits of what is realistic and sustainable within household budgets. As a result, landlords are becoming more pragmatic on pricing, recognising that securing a suitable tenant is often preferable to facing a costly void period.

“At the same time, legislative changes have reduced the flexibility available to landlords. But with short-term letting becoming a less viable alternative for many, and yields strengthening, there is a growing incentive to remain in the rental market rather than wait for more favourable sales conditions. 

“This should help support supply and create opportunities for well-positioned landlords as the market adjusts to the evolving regulatory landscape.”