Rental growth has slowed and is now at its lowest level in 33 months, but there are still parts of the UK where landlords can make a decent profit on their buy-to-let portfolio.
The days of double-digit returns on real estate investments appear to be over, as the cost of living crisis has weakened renter demand and tax cuts have reduced the attractiveness of rental properties, causing many landlords to exit and thus an increase in supply.
This appears to be dampening rental growth as landlords try to fill their properties.
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The latest data from Zoopla shows that new-build rents rose 5.7% in the 12 months to June 2024, the lowest level in almost three years.
In the first half of 2024, rents rose by just 1.2 percent, according to the real estate website – another three-year low.
This equates to an average UK rent of £1,232 per month, an increase of £66 per month compared to the same period last year.
Why is rental growth slowing?
It was not foreseeable that double-digit rental growth would continue forever.
Real estate agency brand Savills warned last year that rental inflation would eventually reach a limit that tenants would no longer be able to pay because rents were capped in the face of further rent increases.
In addition, falling mortgage rates have made real estate purchases more affordable and many people are withdrawing from the rental industry.
Zoopla data shows that demand for rental properties has fallen by 39% over the past year.
It says a “small but not insignificant number of private landlords” are selling their rental properties in the face of a changing property investment environment and higher rental mortgage rates. This is having a negative impact on the overall number of properties available to rent.
The property website adds that while estate agents are listing 17% more homes for rent than a year ago, the average letting agent still has a third fewer homes for rent than the pre-pandemic average.
Where are the best rental returns?
According to Zoopla, rents in several major UK cities fell in the first half of 2024.
The biggest decline was in Nottingham, where rents fell by 0.6 percent annually, followed by a 0.4 percent decline in London and 0.2 percent declines in Brighton and Glasgow.
Of the 64 cities Zoopla tracks in its rental index, 75% saw slower rental growth.
However, rents in cheaper markets near major cities continue to rise at an above-average rate, so it may be worthwhile for landlords to look a little further afield.
The index shows that average rents in Rochdale rose 6.9% annually in the first half of 2024, followed by increases of 5% in Doncaster and Southend.
Sunderland and Telford recorded growth of 4.4% and 4.3% respectively.
Zoopla still expects an overall increase in rents this year, but only half the 8 percent rent inflation in 2023.
“Rents have risen so quickly that they have exceeded peak prices in some cities and we are seeing slight declines in rents in some cities as rents adjust to weaker demand and a slight increase in the supply of rental properties,” says Richard Donnell, managing director of Zoopla.
“In cheaper areas close to major cities, rents continue to rise faster as tenants seek better value for money.
“Rents are expected to be 3-4% higher in 2024. This is more than half of last year’s levels and below income growth, providing some relief for private renters in the UK.”
