Property Investment in 2025
The last half of 2024 taught us that further significant change is coming to the property investment arena and those who will be successful will be those who can best and most quickly adapt to the changes which are to affect our industry. What will property investment in 2025 mean for you?
We were well aware of impending changes as a result of new legislation but we must also factor evolving tenant demand and affordability issues into our business modelling. This will require a keen understanding of inflation and interest rates and the economic and political factors which could affect them.
In respect of regulatory changes we are expecting that the Renters Rights Bill to achieve Royal Assent by the end of the second quarter of this year. This will mean the abolition of Section 21 as well as the mandatory registration of landlords. It will also provide a much more challenging environment in respect of rent increases which will now be capable of being appealed to the First Tier Tribunal and that any increase will not be backdated. This will give tenants nothing to lose by appealing to the Tribunal and given the likely delays in that hearing system, may mean that rent increases are almost impossible to implement.
Consequently, most landlords I speak to are looking to initiate the marketing of their property at the maximum possible rental sum and to implement an enhanced tenant screening process. I would imagine this will include increased use of a tenancy Guarantor and perhaps an insurance backed rent guarantee policy. This is likely to be a necessary additional safeguard for the prudent investor given that removal of a non paying tenant will be difficult and with the likely burden on an already overwhelmed court system, potentially extremely lengthy. Within a couple of years we may see a much changed rental system as a result of the law changes with smaller landlords scaling back or leaving the sector altogether. Anecdotal evidence suggests this change may have already started following the introduction of Section 24 but my view is that this will accelerate. In the alternative, we may see an increase in smaller scale investors looking at commercial property given that it has thus far avoided some of the regulatory scrutiny which is to impact residential premises and that it still offers some favourable tax treatment where used in conjunction with a pension.
Affordability is likely to remain a key issue in 2025. Whilst those landlords leaving the market are reducing the supply of rented accommodation, the typical rise in rents which would be expected from such a supply shortage is likely to be tempered by affordability issues for tenants. Landlords, due to finance and compliance costs will typically be unable to change anything less than market rents, particularly those caught by the Section 24 regime wherein they cannot offset their borrowing costs as a business expense. The result will be that stubbornly high rents are likely to remain but that any further increases are likely to be somewhat muted if indeed capable of being enacted at all.
Central also to government policy is the continued drive to achieve net zero and Landlords are braced to be required to improve the energy efficiency of their buildings. For many, this is likely to lead to upfront initial costs although landlords could be rewarded for their compliance with lower borrowing costs and potentially a greater level of tenant demand. That said, there will be many properties where significant improvement in energy efficiency will not be possible without enormous initial cost at a sum which is disproportionate to the capital value of the asset in question. These properties will therefore likely be permanently removed from the rental market.
Personally I also think that there will be an increase in the number of smaller portfolio landlords who will consider using a professional managing agent. The altering tenant rights, requirements for membership to an ombudsman scheme and compulsory landlord registration will be an administrative burden too heavy for many to bear. Given the increased regulatory burdens, this would be a perfect time for the Government to implement the formal regulation of Property Agents, something which has been mooted for some time but never quite implemented despite its initial reference in Section 22 of the Estate Agents Act all the way back in 1979
In summation I think 2025 will be characterised by regulatory reform, economic pressure and shifting tenant expectations. The anticipated Renters Rights Bill coupled with economic pressures as a result of muted growth will set the stage for the success of those landlords who prioritise tenant security, affordability, sustainability and transparency.
I wish you well with your property investing in 2025.
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