2025 Predictions for Residential Property Investment
Andy Jones, Group Director of Corporate & BTR at Leaders Romans Group (LRG), thinks that 2025 is set to be a good year for residential property investment.
Government support for increased professionalism in the rental sector
Fortunately for property investment, the government’s political ambition – and self-imposed, non-negotiable target – of delivering 1.5 homes this Parliament, requires that investment in residential property is encouraged.
Fiscal changes
With residential property investment key to the government achieving its ambitions, the ‘painful’ October Budget inflicted less pain on the sector than was feared. Most importantly, residential property rates of Capital Gains Tax remain unchanged.
Of greater concern was the immediate 2% increase (from 3% to 5%) in Stamp Duty on the purchase of a second home which will add a further £10,000 in Stamp Duty costs to the purchase of a £500,000 home, or £400,000 to a £20m portfolio purchase. Another concern was Bank of England’s warning that, as a result of the Budget, inflation will creep higher and interest rates will take longer to fall. That said, it remains the Bank’s intention that interest rates will continue to fall during 2025.
While we expect a Spring Statement in March, further fiscal changes are unlikely until the next Budget, in October 2025.
Central bank lending rates
An immediate concern following the Budget was that UK plc has made itself less unattractive to Europe based on central bank lending rates and taxes. Without corporate and institutional investment from elsewhere in the world, the government may fail to achieve the housing targets – one of its main political aims.
Concern about borrowing was compounded by the Bank of England’s announcement, while reducing interest rates to 4.75% in November, that a further, pre-Christmas interest rate fall (previously expected to take place on 19 December) is now unlikely.
Emerging legislation
The Renters’ Rights Bill will have a significant impact on the private rented sector (PRS) – ending Section 21 ‘no fault’ evictions; replacing fixed-term tenancies with periodic tenancies; limiting rent increases; banning of ‘rental bidding’; allowing tenants to request permission to keep pets; ending of discrimination against tenants who receive benefits or who have children; introducing a new ombudsman; creating of PRS database; introducing a decent homes standard and applying of Awaab’s Law to the PRS.
Its impact on properties under corporate ownership, and specifically Build to Rent (BTR), will be less extreme however, as many of these practices already exist in the sector.
Supply and demand
As we approach 2025, the lettings industry is entering a phase marked by stabilisation and opportunity. Rental inflation has slowed to an average of 3-4% for new lets, reflecting the effects of affordability constraints and renters’ budgets are beginning to limit how much rents can rise. Despite this moderation, high demand persists, especially in regions with limited rental stock, providing considerable opportunity for investment.
Supply remains constrained, with data showing that around 12% of current property sales are from landlord disposals: again, an opportunity for corporate landlords who are less impacted by regulatory changes – such as the emerging requirements concerning tenancy agreements and energy efficiency.
Incentives needed
To meet the government’s ambitious housing targets, further change is necessary.
For example, the Spring Statement must provide incentives across the property market in relation to new Net Zero targets. Similarly the Chancellor will need to review Stamp Duty for target groups such as downsizers and first time buyers, and consider re-introducing additional financial incentives for first time buyers.
Currently many new build schemes are stalled because of viability. While changes to planning policy are set to open up the opportunity for more development – public and private, for sale and for rent, brownfield and greenfield – getting these homes built will require the government to be flexible in the planning gain requirements which can now include 50% affordable housing, 10% biodiversity net gain and substantial Section 106 commitments, alongside increased material and labour costs.
We had hoped to see a reversal of the abolition of Multiple Dwellings Relief (MDR) – this must be a future priority. Currently the abolition of MDR is estimated to have cost the UK 25,000 homes – almost 7% of the government’s 370,000 housing target – while also costing 60,000 jobs. Were the decision to abolish MDR reversed, the BTR sector would have the means of delivering much needed additional units across a variety of tenures, including much-needed later living accommodation.
Looking ahead
While the Budget was mixed news for professional property investors, a long-term reduction in interest rates would go some way to balance the detrimental effect, making debt cheaper and more accessible, allowing landlords to expand their portfolios, and lenders will show more forbearance towards those at risk of defaulting on their loans.
Against the backdrop of the Renters’ Rights Bill and greater regulation for the PRS, the BTR sector is emerging as a key solution to the PRS’s supply-and-demand crisis.
Already, institutional investment in BTR developments has skyrocketed, with the British Property Federation reporting a 23% growth in completed BTR units over the past year alone. The sector now boasts over 120,000 completed homes, with a pipeline exceeding 273,700. Initially concentrated in London, BTR developments are expanding regionally, reflecting a growing appetite for professionally managed rental housing nationwide. Regional growth in BTR units (31%) has outpaced London (13%), demonstrating the sector’s broader appeal.
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