Falling rents in London and the south east could hurt buy-to-let bonds, ratings agency Moody's has said.
Earlier this week it emerged rent increases for tenants across the UK have fallen to their lowest since 2013 as prices in London dropped for the ninth month in a row.
Average rents in London declined 4.7 per cent year-on-year while rents in the south east of England fell 2.16 per cent. Rents in all other regions increased year on year, according to data from Countrywide.
"If yields were to fall much below current mortgage rates, leveraged buy-to-let investors could face ongoing negative cash flow," Moody's said.
London and the south east account for a large portion of the UK's buy-to-let sector. According to Moody's data, 24 per cent of all UK buy-to-let loans are in London and 15 per cent are in the south east.
A sustained fall in rent yields could lead to increased arrears and defaults by underlying borrowers, Moody's said. House prices for buy-to-let properties are also at risk of dropping more than those for primary residences.
The problem is made worse by the reduction in buy-to-let mortgage interest rate deductibility on high taxpayers, which are being phased in over the next three years, and are already stretching buy-to-let investors' cash flow.
However, Moody's expects the buy-to-let mortgage sector's performance to remain stable, supported by low interest rates and a "benign" economic environment. It noted the sector is susceptible to a negative economic effect from Brexit.