Recession-proofing your property investment

Investment Jul 14, 2022

With each passing day new warnings emerge describing an ever bleaker economic outlook for the end of 2022 and 2023. With millions impacted by the cost-of-living crisis, central banks across the world are revising growth forecasts downwards and raising interest rates in an effort to bring prices under control. These shifts in monetary policy are driven by alarm at ongoing global supply chain issues, commodity price shocks caused by war in Ukraine, and higher than expected inflation that has broadened beyond food and energy prices.

With such grim economic indicators, and no obvious end in sight to the conflicts and crises destabilising the global economy, many policy makers now predict that there will be a major recession within the next 12 months.

For property investors, such dismal tidings land in stark contrast to the record returns currently being generated on the red hot residential lettings market. Rents in London are up 15% year-on-year, with the overwhelming imbalance between housing supply and demand driving strong price growth across the capital (and beyond).

However, as we saw during the pandemic, price growth can be rapidly reversed in a major downturn. Though residential property investments are more resilient in a recession than other asset classes (people are always going to need somewhere to live), if the economy does shrink then rental returns will take a significant hit.

There are several steps landlords can take now, while the market is strong, to recession-proof an asset before any slow down starts to bite. Learn more below.

How to make your property porfolio recession-proof

Build additional resilience into your investment asset with the following steps.

Race to let by mid-August

The current residential lettings market is very favourable to landlords. The annual peak season typically occurs in the summer months between July to September, easing off once the academic term starts and student renters have found their accommodation for the year.

In addition to the usual peak seasonal demand, rental stock is in very short supply due to the number of private landlords that have sold up and exited the market over the past few years (a process initiated by changes to landlord tax relief and accelerated by the Stamp Duty holiday introduced during the pandemic).

This means that now is the time to let your property if you want to secure the best rents. With a potential recession looming there’s every reason to expect significant downwards pressure on rental pricing, so act soon to ensure you maintain a strong ROI.

Secure rents for a long period of time

Once you have let your property at the peak of its potential value, the next step is to fix the monthly rent for a long period of time. The length of the fixed term should be a minimum of 12 months without a break clause to ensure that the property returns to the market in peak season if you aren’t able to renew. If possible, it’s worthwhile negotiating a fixed term of two or three years to provide additional security against an uncertain economic backdrop.

Be proactive and extend existing contracts ending in Q4 2022

It’s rarely a good idea to bring a rental property to market in the winter, but with many experts forecasting that the economy is at risk of falling into recession in Q4 landlords should take proactive steps now to protect returns.

If you have an existing tenancy that is due to expire towards the end of the year, reach out to your tenants now to offer a 6-month extension to the fixed term. You may need to be flexible with some of the terms of the lease to secure an extension, but it is worth it to avoid paying costly tenancy set up fees during a downturn and letting your property in unfavourable market conditions.

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