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RESIDENTIAL RESEARCH - YEAR END 2025
LETTINGS MARKET
HIGHER TAXES FOR LANDLORDS
Rents in our markets rose by around 2% over the course of 2025, a pace we consider to be both moderate and sustainable. The average tenancy stay in 2025 was 26 months up from 18 months in 2024 indicating a stable market.
It is a long way from the heady growth recorded in the post[1]covid years but the severe imbalance caused by the flight from, and return to, London has broadly been resolved. These rates of growth are in line with the expectations of institutional investors (such as pension funds and insurance companies) from residential rental income – what is generally referred to as ‘long-term patient capital’.
In a return to the long-term pattern, the growth occurred in the first half of the year leading up to the summer peak, and rents remained stable in the latter months. Unfortunately, this does not reflect a return to a settled and balanced market because there are two significant changes bearing on future rental growth. The first of these is the increase in landlords deciding to sell their investment properties and the second is the Renters’ Rights Act, which passed into law in November and will come into effect from May 2026. Like so much of the policy designed to protect tenants, there are provisions in this Act that will have unintended consequences and lead to higher rents.
Sales of rental investments has put pressure on supply as renters compete for a smaller stock of properties to let. That inevitably puts upward pressure on rents this year - but the real elephant in the room is the Renters’ Rights Act.
The Act includes a ban on accepting bids over the asking rent which will encourage landlords to raise the initial asking rent simply to leave enough headroom to settle on the correct market rent. It also includes a requirement to issue a S13 notice to trigger a rent rise on an existing tenancy - which can only happen once a year and bestows on the tenant, the right to challenge the rent increase at the ‘First Tier Tribunal’. This new process will prompt landlords to increase rents as standard to avoid missing the window. To put that in context, more than half of landlords did not actually request any rent increase in the past year – before the Act came into force.
It is vital for landlords to prepare for the incoming regulation and to be aware of the timelines for its implementation.
We do expect some larger portfolio landlords to scour the market for opportunistic purchases but not our traditional investors who held one or two properties. The Budget dealt yet another blow to the investor market, by imposing an additional 2% tax on the income earned from rent at the investor’s marginal rate of tax. In reality, the additional tax will not make a material difference to yields. It will be levied on the net income after costs. Also, it will not come into effect until April 2027.
While the average rental growth has been 2% in our markets, East London has seen steeper increases of around 5% on 1, 2 and 3 bed properties while the rents on larger properties in Midtown did not change at all over the year. This narrowed the gap between City, Midtown and East London but still the weekly rent for a one bed apartment in Midtown is 50% higher than for a two bed in East London. Similarly, the rent on a two-bed apartment in the City would be more than enough for a 3 bed in East London. It is this relative pricing that probably accounts for the slower pace of growth in the more central markets as renters trade off centrality for floorspace.
Seeing the rents expressed as £ per sq ft makes the differential very clear. In East London, a 3 bed apartment attracts a rent of £25 per sq ft compared to a one bed in Midtown at £66 per sq ft. These metrics are familiar to renters in much of continental Europe but have not been widely used in the UK where ‘number of bedrooms’ has been the more usual space comparator. London has ‘space standards’ for new build homes that set minimum size requirements and thus a one bed apartment is likely to be 500 sq ft or more in London, whereas in Paris (for instance) that might be considered spacious.
It is 25 years since the start of the new millennium, a fitting point at which to look back at long term rental growth. The average rental growth for a 1 bed apartment is 2.75% per annum – very much in line with the growth recorded this year. For a two bed it was marginally higher at an average of 3% per annum over the 25-year period.
Of course, these averages disguise volatility from year to year. Over that time there have been three periods where rents have fallen by more than 10%. These were: post dot-com bubble in 2001-2003; post Global Financial Crisis in 2008 – 2009 and during covid in 2020. The steepest fall was in 2020. Each was followed by a period of significant growth in: 2006/7; in 2010/11 and, as the city recovered from the impact of covid, in 2021/2. Growth exceeded 10% in these years and reached close to or above 20% in 2006 and again in 2022.
Housing economists normally expect rents to grow in line with wage inflation in the long term but to respond to local or temporary conditions in the short term. Events like the dot-com bubble and Global Financial crisis were particularly significant for London because of its clusters of financial and tech sector employment.
The gross initial yield on a one bed apartment in our markets has topped 7% for the first time since we began collecting data. With capital values dropping and rents rising, yields have been steadily increasing for a decade. At 7.15%, even taking account of service charges, the returns start to look interesting when compared with bank rates. In 2015, the gross initial yield on that same apartment would have been 3.9%. Stamp duty is to blame for denting the appeal of investing in these markets.
annum, the property would earn £57,200 in the first two years and would have incurred transaction costs of £40,000 (or £50,000) in stamp duty plus service charges. Add to that, the legal and agent fees, void periods and any repairs and maintenance, and the proposition loses its shine.
A surcharge of 3 percentage points on top of the normal Stamp Duty rates was introduced for extra properties in 2016, then increased to 5 percentage points in October 2024. More than £5.4 billion was raised from the Stamp Duty surcharge imposed on those buying a property that isn’t their main home in the 2024-25 tax year, up £870 million or 19 per cent on the year before for the Treasury.
The other cloud over the rental market in our areas has been cast by the international visa changes implemented in January 2024. Since then, most international students have been prevented from bringing dependents with them during their study time in the UK. The impact has been to reduce demand for rental homes from overseas students in central London over the summer months. It is not yet clear how the Renters’ Rights Act will affect the seasonality of rental demand but it could impact on the traditional summer peak and spread demand more evenly through the year.
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