Super-prime property agent Trevor Kearney went house-hunting in London recently with an Australian family who had more than £20,000 a month to spend on rent in the English capital.

High life: Glenfield Property Management manages the penthouse at Chelsea Creek Tower, west London

“We were viewing houses in the morning and talking about potentially second-viewing them that afternoon or the next morning, and by that point they had already gone,” he says. “If it’s quality and worth what you’re asking, it’s going quickly and it’s going at a premium.”

Kearney is founder of The Private Office: Real Estate, which helps people buy, sell, rent, let and manage luxury homes in the UK and overseas. He says the rental side of the prime residential market is overheating as demand rises in the face of a subdued sales market, while the supply of properties shrinks due to government policy. “You can rent a £5m house for four years for the cost of stamp duty,” Kearney points out by way of illustration.

The simple logic is unarguable: a non-resident of the UK buying a second home here would pay more than £860,000 in stamp duty on a £5m purchase price, equivalent to almost £18,000 a month over four years.

“In a market that is static at best, you might as well rent rather than buy,” Kearney says. “Renting gives you flexibility and freedom and you don’t have to maintain the place yourself.”

So, wealthy individuals, particularly from overseas, are increasingly looking to become tenants when they move to this country. And, Kearney says, there is renewed interest in living in the UK as global tensions rise.

You can rent a £5m house for four years for the cost of stamp duty
Trevor Kearney, The Private Office

At the same time, the supply of rental properties is shrinking. “Landlords are leaving the market because of the Renters’ Rights Act [RRA], taxation and the view our government has in relation to wealth creation,” Kearney says. “It’s becoming harder and harder to be a landlord, especially in the super-prime space. Ultra-high-net-worth individuals are taxed at a phenomenal rate.”

He cites Finance Act Section 24 changes introduced in 2017 and fully implemented from 2020, which reduced the tax relief available to many landlords for their mortgage interest. When dealing with high property values and interest rates, this can potentially lead to negative cashflows.

Meanwhile, last year’s RRA limits rent increases to once a year and allows challenges to rises that place a property above the market level, as well as restricting evictions. While some super-prime arrangements may be less affected by these law changes, especially as lets above £100,000 a year are outside the scope of the legislation, Kearney points out that many landlords have a range of interests.

“They generally will own more than one property and the impact of reforms across their portfolio makes them think ‘I’m out – this doesn’t work for me’,” he says.

Pushing prices up

With supply and demand moving in opposite directions, prices are only going one way, according to Kearney. The Australian family he was working with had to almost double their budget “effectively to get the house we would have got last year”.

Yasmin Ulhaq, founder of Glenfield Property Management, has seen the same underlying trends. “There’s definitely been stronger demand and a constrained supply of prime rental property,” she agrees.

However, Ulhaq feels that prices in many areas are starting to plateau as the wider economic and housing climate takes its toll. “The picture is quite nuanced in the sense that new rental listings are coming in across London that are below the longer-term averages,” she says.

“People are being price-sensitive. It is down to affordability, stock levels and demand. And it’s area-specific. East London is in really high demand; Knightsbridge is popular, but doesn’t have the vibe of five years ago. We’ve just [let] a five-bed penthouse in Westminster at £35,000 a month. We marketed it for a day, but I think possibly a year ago we could have got slightly higher rent.”

People are renting for a year because they want to try different areas
Yasmin Ulhaq, Glenfield

Ulhaq says that although landlords are being driven away by legislation such as the RRA, they are often finding that the sales market is not what they would wish for either.

“They’ve put it on the market, they’ve not got the result they’ve anticipated and as a result they’re staying in the private rental sector longer,” she explains.

Tenants are also choosing to move more frequently, according to Ulhaq. “People are renting for a year, two years, because they want to try different areas in London,” she says. “We had a family who tried Chelsea. They didn’t like it and they moved to Notting Hill.”

She adds that tenants have high expectations. “People are looking for houses in pristine condition,” she says. “They are looking for how efficiently it’s operating; they want a turnkey apartment, fully furnished.”

Ulhaq deals with a number of foreign nationals looking to move to London and be near specific schools or universities.

“I expect the market to remain active but increasingly selective,” she adds. “Rental values are going to continue growing in certain pockets and boroughs of London. If more owners decide to postpone sales, which is common right now, and bring the properties into the rental market, volumes will rise.”

Rents are also being pushed up by a trend to upgrade properties to attain the golden ticket of £100,000-a-year rent and escape the clutches of the RRA, Ulhaq says.

Everyone’s pricing just that little bit higher to test the market
Amelia Greene, Savills

Research from Savills shows prime residential rents grew across the UK in the second quarter of this year, with the traditional heartland seeing the weakest rises. Values were up 0.4% from the prior three months in central London, 1.2% in the rest of the capital and 1.3% in the rest of the UK.

Amelia Greene, head of lettings at Savills, says this surprising geographical trend is driven by both supply- and demand-side factors. “In central locations, you’ve got more stock, more build-to-rent properties available at the high end, which offers real lifestyle living,” she explains.

“A lot of our applicant demand has moved out of London because it’s cheaper and more people now have hybrid working, so maybe they’ll commute that bit longer for three days a week.”

Added pressures

However, Greene adds that with interest rate hikes for those coming off long, fixed-term mortgages, ever-rising upkeep and servicing costs and restrictions in the RRA, these small gains in income are often not enough to keep landlords in the sector.

This is putting further pressure on rents, exacerbated by the new ban on bidding wars that push prices above the initial asking point. “Everyone’s pricing just that little bit higher to test the market,” Greene says. “You can come down, but you can’t go up.”

She thinks rents will continue to rise. Savills predicts growth of between 6% and 13% over the next five years.

“Tenant demand will still be there – a lot of people still can’t get on the buying ladder and London is globally respected as a business hub, so people will come for that,” she says. “There will always be a rental market; the concern is whether the stock will be there to service it.”

Greene hopes returns will be driven up by scarcity to a point where it becomes attractive for landlords to return. “We surveyed our clients in November last year and the world was a pretty gloomy place,” she says. “We knew the legislation was coming and most of them were saying they were probably going to divest in six months’ or a year’s time.

“We’re hoping we will be able to go to our client base in six months and say it’s business as usual; it’s a change in the law, but if you keep relationships and you’re compliant, being a landlord is still a good thing.”

She expects a major switch in ownership from accidental landlords, who are letting an urban home they moved out of during the pandemic, to more corporate investors.

“Institutions will definitely see an opportunity to make hay with what’s available,” Greene says. “They’ll be buying up developer stock that hasn’t sold, of which there’s a lot, and it’ll be cheaper and easier for them to be compliant and operate within the confines of the new legislation in an organised way.

“The demand will still be there, so I think for them it will be a no-brainer.”