January 2016

Investors are likely to go large to swerve stamp duty rise

As the property market continues to digest the implications of last November’s surprise increase in stamp duty on buy-to-let investments, we are seeing early signs that some investors are considering making larger investments in response to the tax change. The government’s consultation document, published on 28 December, has confirmed a number of exemptions for the additional 3 percentage point stamp duty charge on buy-to-let investments, which will be introduced from April. This would take stamp duty to 13% for properties worth between £250,000 and £1.5 million, and 15% for those worth more.  It states that the new higher rate will not apply to non-residential property purchases, which instead pay a maximum stamp duty of 4%.

These transactions include those where six or more residential properties are bought in one transaction, and mixed-use properties, which contain both residential and non-residential elements. Furthermore, where six or more residential properties are bought in a single or linked transaction, the buyer will still be able to apply multiple dwellings relief, effectively negating the stamp duty rise.

The consultation document states: “The government is considering an exemption from the higher rates for those making significant investments in residential property, given the role of this investment in supporting the government’s housing agenda.”

“We stand by the predictions we made in December: we are seeing a flurry of activity, as potential buy-to-let and second home investors rush to complete on purchases ahead of April, and increased interest in sub-£1 million properties, where the impact of the rise is lower than on more expensive real estate,” says Black Brick Managing Partner Camilla Dell.

“But we believe that these planned exemptions will encourage those with upwards of £2 million to invest to consider buying multiple residential or mixed-use properties,” she adds. Such purchases can be significantly more complex than individual acquisitions, although we bring substantial experience of such deals, such as arranging the purchase of eight flats in Westbourne Gardens, or that of a five-storey mixed-use building in Ossington St, W2.

“Given the continuing upward pressure on rents, especially in London, we think there’s a strong case for investing in rental properties in the capital,” adds Black Brick Partner Caspar Harvard-Walls. “These multi-property investments are likely to be much more attractive after April’s tax rise.”

Distressed sales to provide opportunities?

Regardless of any dampening of demand from smaller-scale buy-to-let investors, there will always be demand for prime London property, given perennially limited supply. This year could, we believe, generate opportunities for such buyers to snap up relative bargains through distressed sales – especially those driven by currency weakness. For example, we are currently acting for a Middle Eastern investment client buying an unfinished apartment in Battersea Power Station from a Malaysian seller. We specifically targeted this development because of the near 25% fall in the value of the ringgit against the pound in the last 12 months, and the preponderance of Malaysian off-plan buyers in the development.

Conversely, the current strength of sterling may encourage some overseas owners to sell UK property to crystallise exchange-rate driven gains. For example, a Russian buyer who bought a UK property in 2012 could more than double their money in exchange rate terms alone, by selling and converting sterling back to roubles.

Such opportunities are likely to be sporadic – continuing low interest rates in the UK will, we believe, mitigate against any wider sell-off, despite London’s prime market being fully priced. And buyers will need to be extremely mindful of the higher acquisition costs that have been introduced by successive changes to the UK tax regime. Now, more than ever, it is vital to seek the best advice on a property purchase, and ensure that your advisers can negotiate hard to ensure that as many of these costs as possible are borne by the seller.

…While the outlook for the stock market looks grim

For stock market investors, January has got off to a pretty gloomy start. And, what’s worse, the first week of trading is often an indicator of how the market is going to perform over the year. According to analysts at RBC Capital Markets, the performance of the Dow Jones Industrial Average in the first week of January has predicted the market’s annual direction 67% of the time in the last 15 years. The first day is even more reliable, with a 73% correct record. The Dow closed down 1.6% on Monday 4^th, and ended the week more than 6% lower than it started.  Of course, it’s a bit early to write 2016 off, but with a lot of dark clouds on the investment horizon, we believe that investors with cash may be inclined to look towards bricks and mortar rather than risk taking a bath in the equity markets. Certainly, there’s the possibility that London property may move sideways or dip slightly in 2016, but we – and most analysts – are confident that the market will deliver strong medium- to long-term performance.

Checking into hotel and development investments

As we noted in last month’s newsletter, the commercial property sector in the UK is now enjoying significantly more favourable tax treatment than its residential equivalent. We expect this to encourage something of a migration of investors from the residential to the commercial sector, a move that we are anticipating with the launch of two new services. Our Hotel Acquisition service offers our clients with a way into what is historically something of a closed market, where many transactions take place without ever reaching the open market. Hotel investment can provide predictable yields, in the range of 2-3%/year for boutique hotels in prime postcodes, rising to 3-5% for secondary prime addresses.

For those looking for higher returns, there remains a consistent pipeline of serviced apartments and student housing nationwide, enjoying yields of 6-10% but without the potential capital growth of Prime Central London assets.

Later this year, again as flagged in last month’s email, we plan to launch a dedicated commercial property investment service.

Meanwhile, we are seeing growing interest in a service we have been offering for some time, for investors seeking property development opportunities, whether on consented land, unconsented sites, or for change-of-use commercial property investments.

High demand and limited supply in Prime Central London has reduced the number of profitable opportunities and, as a result, return expectations have moderated somewhat. Primary charge holders, developers and immediate funders can expect returns of 10-15% per annum, while mezzanine financiers and joint-venture funders can expect higher returns of 20-25%, commensurate with the higher risk they take on.

The scarcity of development projects has led people towards using buying agents as well as teaming up with big name, established developers. Those seeking higher returns are also looking beyond the M25, and speculating on the next potential growth pockets with commuting times to the capital below 1.5 hours.  Returns of 20% or more can be achieved here, but there is an element of risk for larger multi-unit schemes in terms of certainty of sale of all the units.

Given the continuing gap between supply of property in the UK and demand – across the entire market – we expect the environment for property development to improve in the years to come. And we quote the words of support from the Government in its stamp duty consultation, where it notes that the changes should not “discourage … significant investments in residential property”.

Acquisition of the month- Onslow Gardens, SW7

In today’s market, the ability to move quickly can reap dividends. Black Brick was able to secure a massive £545,000 discount on a £3.795 million property in South Kensington by closing the deal in a short timeframe. Our client was a CEO relocating from Hong Kong to London, who had never lived in the city before, and who understandably had little time to devote to the search. We handpicked a small number of properties for evening and weekend viewings, and he settled on this stunning two-bed, first-floor apartment on one of South Kensington’s best streets, Onslow Gardens. The vendor accepted a below-asking price offer – and one that, at £2,249/square foot, was also substantially below the £3,085-3,480/sq foot at which the last three first floor flats on the street sold. The condition was that the deal needed to close in just three weeks. By managing the legal process, surveys and mortgage, we were able to exchange before Christmas.

Black Brick on the road

Managing Partner Camilla Dell will be visiting Dubai from January 25^th to January 28^th, Geneva on the 9^th and 10^th February and Jersey and Guernsey from 2^nd – 4^th March. She would be delighted to meet property investors and intermediaries interested in UK real estate. Please email camilla.dell@black-brick.co.uk to arrange an appointment.