This will also filter out into the wider commuter zone, though demand from the financial and business services sector is forecast to remain relatively subdued, according to a new report from real estate firm Savills.
The firm is forecasting rental growth of 17% over the course of the next five years unless a mansion tax is introduced and levied on the owners of homes worth £2 million or more. The Labour party has said that if it wins the general election in May it will introduce such a tax.
On the supply side, a more muted sales market in the run up to the election could result in more would-be sellers bringing stock to the rental market, according to Lucian Cook, director of residential research at Savills.
‘In the short term this is likely to continue to suppress rental growth. In addition, in certain locations on the fringes of prime London, where high levels of new build stock have been bought by overseas investors, we expect rents to come under pressure over a longer period,’ he said.
‘Beyond London we expect the preference for prime family housing in key commuter towns to continue, with existing demand supplemented by that from those relocating to these areas and temporarily renting before buying,’ Cook explained.
‘On the supply side, we believe a stronger sales market is also likely to reduce the impact of the accidental landlord over the medium term, causing a reduction in available rental stock at the top end of the market and supporting rental growth,’ he added.
He also pointed out that the reform of the stamp duty system in December may impact on future investor behaviour. ‘Stamp duty costs will be lower for all acquisitions below £937,500. However, across Kensington and Chelsea the average stamp duty bill is expected to rise by over £40,000. This may drive investor demand to higher yielding, lower value parts of the market that equally are less likely to be affected by the continued political rhetoric around a mansion tax,’ said Cook.
‘The Autumn Statement also contained provisions to increase the levy on those long term UK residents who wish to retain their non-dom status. Though many will be home owners, this may impact on the budget of long-term renters,’ he explained.
‘A similar differential in rental performance was seen in the prime regional market. Smaller properties servicing core market demand have generally performed the most strongly, with one and two bedroom units delivering annual price growth ?of 4.3%, bringing total growth over the three years to 11.7%,’ he added.
‘By contrast, there has been a much thinner market for large properties at the top end, which continue to be price sensitive. Rental value for properties with six or more bedrooms rose by just 1.1% over the course of 2014, with the growth over three years around half the level seen for the smallest properties,’ he continued.
The analysis also says that prime regional lettings markets performance has continued to be location specific with the town markets of Guildford, Harpenden, Tunbridge Wells and Winchester delivering the highest levels of annual growth.
There continues to be strong demand for good quality four bedroom accommodation in town or city locations with access to good schools. Such property showed rental growth of 4.6% over the year. There is a much smaller pool of demand for similar sized properties in village or rural locations, which showed rental growth of just 1.2% last year.
‘This means prime four bedroom rental properties in town locations currently carry a 10% premium above equivalent stock in a village or rural location, despite the latter being on average 19% larger,’ said Cook.
