Knight Frank, in its April market reports released this morning, says that Landlords remained in the driving seat in the rental market across London and the Home Counties last month.

Low supply and high demand means that average rental values in prime central London increased by 3.5% in the first three months of the year. In prime outer London, there was a rise of 2.5%.

Annual growth has reached record levels due to how far rental values fell in the early months of last year as the market became flooded with short-let rental properties due to pandemic staycation rules.

Average rental values increased by 21% in prime outer London and by 26.3% in prime central London in the year to March. Rents are now 8.2% higher than they were before the pandemic in prime central London and 7.2% in prime outer London.

Knight Franks expects annual growth to return to single digits later this year due to the equally steep rise in rents that took place in the second half of last year.

“Demand is still outstripping supply,” said Gary Hall, head of lettings at Knight Frank.

“It’s good news for landlords as it means void periods are very short. For tenants, it is still a tough market and decisions need to be taken quickly. It has been this way for nine months and I can’t remember seeing these sorts of conditions for this length of time.”

Although supply is picking up, demand is growing more quickly.

The number of market valuation appraisals, a leading indicator of future supply, was 25% higher in the year to March than the previous 12 months. At the same time, the number of new applicants was 48% higher.

Despite the clear direction of travel over the last 12 months, there are early indications that more balanced market conditions are set to return.

“There is no real pattern yet but we have noticed stock levels start to pick up in pockets across London,” said Gary.

In the sales market Knight Frank says that prices continued their upwards trajectory in prime London markets in March as demand in the capital rebounded after the pandemic.

In prime central London, average prices grew by 2.1% in the year to March, which was the strongest annual rate of growth since May 2015.

In addition to the re-opening of the economy, relatively good value is driving demand in central London after six years of subdued activity.

Average prices in PCL are 16% lower than they were at the start of 2016. That compares to a 9% decline in prime outer London and a 13% increase in country markets.

Underlining the strength of demand, the number of new prospective buyers in PCL was 84% higher than the five-year average in the first quarter of this year. That compared to an increase of 71% across the whole of London and 42% in UK regional markets.

The key influence on the future performance of the market will be the return of international buyers. However, given the current extent of lockdowns in some parts of the world, the return is likely to be more gradual than transformational.

This suggests stronger price growth will only return next year when overseas demand starts to exert more of an impact.

The opposite is likely to be the case for prices in prime outer London, which we expect to peak this year.

Average prices increased by 4.4% in the year to March, which was also the strongest rate of growth since May 2015.

While prime outer areas of the capital continue to benefit from the so-called ‘race for space’, Knight Franks expects demand to soften as mortgage rates rise and the cost-of-living squeeze intensifies.

Rising supply will also increase downwards pressure on prices.