Zoopla: UK rental growth hits three-year low - where can landlords still secure decent buy-to-let returns?

Rental growth has slowed to its lowest level for 33 months but there are still parts of the UK where landlords can make a decent profit from their buy-to-let portfolio.

The days of double-digit returns from property investing appear to be over as the cost-of-living crisis has weakened tenant demand and tax clampdowns have reduced the attractiveness of buy-to-let, leading many landlords to exit and pushing up supply.

This appears to be dragging rental growth lower as landlords seek to fill their properties.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The latest data from Zoopla shows rents for new lets have risen by 5.7% over the 12 months to June 2024, the lowest level for almost three years.

Rents have risen by just 1.2% over the first half of 2024, the property website says – another three-year low.

This puts the average UK rent at £1,232 per month, or an increase of £66 per month compared with this time last year.

Why is rental growth slowing?

Double-digit rental growth was never going to last forever.

Estate agency brand Savills warned last year that rental inflation will eventually reach an affordability limit as there is only so much renters can pay amid other bill hikes.

Additionally, falling mortgage rates have made it cheaper to buy a property, taking people out of the rental sector.

Zoopla’s data shows that demand for rental homes has fallen by 39% over the past year.

It says a “small but not insignificant number of private landlords” are selling their rented homes in the face of a changing property investing environment and higher buy-to-let mortgage rates. This is acting as a drag on the total number of properties available to rent. 

The property website adds that while estate agents have 17% more homes listed for rent than a year ago, the average letting agent still has a third fewer compared with the pre-pandemic average.

Where are the best rental returns?

Rents have fallen across several major UK cities over the first half of 2024, Zoopla says.

The largest fall has been in Nottingham where rents are down 0.6% annually, followed by a 0.4% drop in London and 0.2% declines in Brighton and Glasgow.

Of the 64 cities that Zoopla tracks in its rental index, 75% have registered lower rental growth.

But rents continue to rise at an above-average rate in more affordable markets close to large cities, so it may be worth landlords looking a bit further afield.

The index shows that average rents rose by 6.9% annually in Rochdale during the first half of 2024, followed by rises of 5% in both Doncaster and Southend.

Sunderland and Telford registered growth of 4.4% and 4.3% respectively.

Zoopla still expects rents to rise overall this year but at half the rate of the 8% rent inflation over 2023.

“Rents have risen so fast they have over-shot in some cities and we are seeing modest falls in rents in some cities as rents adjust to weaker demand and modest increases in the availability of homes for rent,” says Richard Donnell, executive director at Zoopla.

“Rents continue to rise more quickly in more affordable areas adjacent to large cities as renters seek better value for money.

“Rents are on track to be 3-4% higher over 2024 which is more than half the level recorded last year and below earnings growth providing some modest relief for the UK’s private renters.”