The top areas for buy-to-let rental yields

It is a challenging time to be a buy-to-let landlord.

Many of the benefits of investing in property have been hit by slowing rental growth, tax relief restrictions and lower capital gains tax allowances, as well as increased regulations such as the Renters' Rights Bill.

This has led many landlords to consider exiting the sector.

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But while this may reduce supply, demand has also slowed as tenants have benefited from lower mortgage rates to get on the property ladder.

The days of double digit returns look likely to be over.

The latest Quarterly Rental Market Report from Zoopla for the end of 2024 showed the rate of rental growth in the UK is at its lowest level in over three years at 3.9%, down from 9.1% a year ago.

But data from property website Rightmove shows the number of rental enquiries are still double pre-pandemic, which could keep rents and growth high.

For those willing to deal with the increase in administration of being a landlord, there are still inflation-beating profits to be made.

The UK's buy-to-let hotspots

Demand remains high but tenants can only afford so much when it comes to rental increases.

Zoopla’s data suggests the impetus for rental inflation is generally being driven from markets with lower rental values.

In London, rents were between 3% and 6% higher as of the end of 2024 in lower-value areas.

For example, annual rental growth was 5.9% in Havering and 5.2% in Barking and Dagenham.

Outside of London, rents are rising fastest in Rochdale at 11.9% annually, according to Zoopla, followed by Blackburn, Birkenhead, Burnley and Newcastle.

Double digit growth is still possible in Belfast, which saw average rents rise 11.5%, according to Zoopla, while rental growth was at 8.7% in Newcastle and 6.5% in Liverpool.

Will rents rise or fall in 2025?

Rents aren’t expected to drop nationally as the imbalance between supply and demand continues.

While the number of homes available to rent finished the year 12% higher, Zoopla doesn’t expect any big increase in the number of homes for rent over 2025.

The number of homes for rent remains below pre-pandemic levels in all regions apart from the East Midlands.

Richard Donnell, executive director at Zoopla, said: “Private renters moving home have faced rents rising faster than earnings over the last three years.

“The number of rented homes hasn't grown since 2016 creating scarcity for renters at a time when demand has boomed on a strong labour market and the rising cost of home ownership. Rental growth has slowed but we expect an ongoing lack of rental supply to keep an upward pressure on rents.”

Rightmove is predicting that average newly advertised rents will rise by 3% outside of London, and 3% in London by the end of 2025.

Tim Bannister, Rightmove’s property expert, said: “There are two competing factors influencing rental price changes right now.

“The ongoing imbalance between supply and demand is putting upwards pressure on prices. On the other hand, rent rises outpacing wage growth over the past five years has stretched affordability to extreme levels, and is showing in the increasing number of price reductions.

"Whilst at a top-level, we’ve seen overall improvements in the balance between supply and demand, agents tell us they are still extremely busy and having to manage high volumes of tenant enquiries.

"We’re therefore likely to see a more normal figure of around 3% growth in newly advertised rents next year.”