Prime London lettings buck the trend as demand builds

The conflict in the Middle East is weighing on demand for residential real estate, with one notable exception: the prime central London lettings market.

The number of prospective tenants that registered in March was 16.6% higher than the same month in 2025, according to new Knight Frank figures. For properties valued at more than £1,000 per week, the increase was 16.9%.

There are a few things going on here. The surge in mortgage rates has led more potential buyers to rent until the outcome of the conflict becomes clearer, but there has also been a spike in demand among people looking to move temporarily to the UK from the Middle East. “They tend to be British, European or North American nationals with families who have moved to the Middle East recently, but who already have a network in London," says David Mumby, Knight Frank's head of prime central London lettings. 

It's still too early to tell whether activity in the lettings market will translate into more enduring demand in the sales market, where average values dipped 0.2% in March. That brings the annual decline to 4.7%. You can read more here. 

A swift impact

Rising mortgage rates have had a swift impact on the UK's mainstream sales market. The new buyer enquiries metric in a new RICS Residential Market Survey slipped to a net balance of -39% in March, down from -29% in February. That's the weakest reading since August 2023. Agreed sales fell to -34%, from -13% – again, the softest reading since the summer of 2023. Anything below zero indicates that more respondents reported a decline than an increase compared with the previous month. 

Near-term sales expectations fell to -33%, from -4%. The longer-term outlook is more positive, with responses pointing to a broadly flat trajectory for sales over the next twelve months. The outlook for prices is broadly similar – respondents are pessimistic over the short term, while the twelve-month metric remains in positive territory. House prices fell 0.5% in March, down from a 0.3% increase in February, Halifax reported on Wednesday. 

Conditions continue to tighten in the rental market. A new balance of +10% of respondents reported a pick-up in tenant demand during the month. New landlord instructions continue to run negative at -25%. A net balance of +29% expect rents to move higher in the near term, up from +20% the previous month. 

Build costs

Viability challenges in the residential development sector look set to worsen in the short term. Higher mortgage rates have hit affordability, and the prospect of a short-term spike in build costs will rise the longer the Strait of Hormuz remains closed. 

Nearly half of respondents to a new S&P Global UK Construction PMI reported an increase in their average cost burdens during March, while only 3% signalled a decline. Fuel surcharges and rising transport costs contributed to a surge in input cost inflation to its its highest level for more than three years. The month-on-month increase was the largest recorded in the firm's nearly three decades of data collection.

We'll know more about the likely duration of these distortions next week, following US talks with Iran in Pakistan beginning tomorrow. Oil has fallen alongside long-term government bond yields since the announcement of a two-week ceasefire, but both remain elevated relative to the beginning of the conflict. Normalisation is likely to take months, and some degree of scarring will persist. 

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