Marcus Emadi | Director at Turning Point Capital
CONTENTS
Key Changes and Their Impact on Investors and Lenders
- Abolition of Fixed-Term Tenancies
The bill eliminates fixed-term tenancies, replacing them with open-ended periodic agreements. Tenants will be able to leave with just two months’ notice, while landlords must wait four months before seeking possession and provide their own two-month notice. For institutional landlords, this introduces several challenges:
- Higher operational costs: Potentially more frequent turnover, increasing costs related to void periods, re-letting, and maintenance. We estimate that operational expenses could rise by approximately £2,000 per unit annually.
- Valuation and investment risks: Uncertainty over tenancy duration, rental income streams, and higher void risks may lead to downward adjustments in property valuations.
- Financing constraints: Without a guaranteed lease duration, these assets may carry a significantly higher risk premium, prompting investors to demand greater returns. Lenders might also raise borrowing costs to account for the increased risk.
Despite these challenges, the income characteristics of open-ended tenancies enable a quick capture of market rent between tenancies. Furthermore, the structural undersupply and strong demand for high-quality, future-proof properties are expected to mitigate these risks.
- Abolition of ‘No-Fault’ Evictions & Changes to Possession Grounds
The removal of Section 21 “no-fault” evictions means landlords must now rely on expanded Section 8 grounds for regaining possession, such as for property sales or serious rent arrears. Landlords must provide four months’ notice and cannot invoke this right within the first year of tenancy for the former. Lenders exercising their power of sale face similar restrictions, which could affect lending decisions. For institutional investors managing large portfolios, these changes create new challenges:
- Asset management limitations: Investors lose the ability to proactively manage portfolios by reallocating assets or adapting rental strategies.
- Risk of rent arrears: Weakened possession rights may increase financial risks from non-paying tenants, further complicating underwriting processes for lenders.
- Rent Regulation
The bill restricts landlords from accepting bids above advertised rents and introduces stricter controls on rent increases, requiring landlords to give a two-month lead time. Tenants also gain the right to challenge rent hikes through tribunals. The implications this may have include:
- Conservative underwriting: Investors may need to adopt a more cautious approach when forecasting rental yields, which could influence asset valuations.
- Revenue growth potential: Rental growth projections should be adjusted to account for these new limitations, with a prudent approach to reversionary assumptions.
- Higher costs and administration: It is unclear at this stage who would be liable for any tribunal costs, but it is likely to fall back onto the landlord. Institutional landlords with large portfolios could find themselves facing high costs and administration to ensure compliance. Reputational risks may be higher as greater transparency means investors must uphold rigorous property management standards. Efficient data management and tenant dispute resolution processes will become critical components of portfolio management.
Impact on Housing Supply
Existing tax policies—such as higher stamp duty on buy-to-let purchases, the removal of mortgage interest tax relief, and stricter energy efficiency standards—have already prompted some private landlords to exit the market. The new regulations could accelerate this trend.
- Rightmove Data: 15% of homes listed for sale in 2024 were previously rental properties, up from 13% in 2023.
- Landlord Surveys: Nearly half of landlords surveyed by Goodlord and Vouch had already sold properties or planned to do so within the next year.
- English Household Survey 2024: 40% of landlords intend to downsize portfolios within two years.
We estimate a net loss of potentially 5% of the PRS market due to these combined pressures. With fewer PRS homes available, demand for BTR assets is likely to increase. One unintended consequence could be a shift toward short-term lettings, where landlords can achieve higher returns with fewer restrictions. Without proper regulation, this shift could drive up long-term rental prices and exacerbate affordability challenges.
Lessons from Other Markets
England is not the first country to introduce stronger tenant protections. Insights from other markets offer valuable lessons on potential unintended consequences.
- Scotland: Scotland introduced open-ended tenancies in 2017 and implemented rent caps in 2022. Instead of improving affordability, these measures led to a significant reduction in rental stock. The Scottish Landlord Association found that over 50% of landlords plan to exit the market within the next five years due to restrictive policies.
- Ireland: Ireland has also implemented extensive tenant protections, leading to an exodus of private landlords. The unintended consequence has been a surge in termination notices and a decline in high-quality rental housing.
Netherlands: Regulatory uncertainty in the Netherlands, especially concerning rent control measures, discouraged institutional investment and added to market volatility. The absence of a clear long-term policy framework amplified investor risk, resulting in decreased capital inflows and greater fluctuations in total returns, which only stabilised two years after its implementation.
Implications for the UK Market
Institutional investors prioritise risk-adjusted returns over absolute total returns. Their strategies focus on generating stable, predictable income streams by optimising rent levels to limit volatility and cyclical fluctuations. High occupancy is also key, helping to maximise net income while minimising the costs and risks of tenant turnover. The new regulatory landscape could make PRS investments less attractive, shifting capital toward other real estate sectors or international markets.
Notably, the government has chosen to exempt purpose-built student accommodation (PBSA) from the abolition of fixed-term tenancies, recognising the operational model of student housing. However, similar exemptions have not been granted to large-scale PRS schemes, despite their vital role in the rental market. Addressing this inconsistency may be crucial to maintaining institutional interest in the sector.
Navigating the Changing Landscape
The Renters’ Rights Bill represents a significant shift in the private rental sector, bringing both opportunities and risks. While it aims to strengthen tenant protections, it also creates new financial and operational challenges for landlords, investors, and lenders.
As regulatory changes reshape the market, institutional investors must adapt their strategies, ensuring their underwriting models reflect the new realities of rent regulation, void risks, and compliance costs. At the same time, policymakers should consider mechanisms to support rental supply, such as incentives for institutional investment or exemptions for large-scale PRS schemes.
Ultimately, the long-term success of the rental market will depend on balancing tenant protections with the need to maintain an attractive investment climate. Collaboration between industry stakeholders and regulators will be essential to ensuring a sustainable and well-functioning rental sector.
