UK tax changes may encourage investment funds to become residential landlords

Landlord Expert
By Landlord Expert April 26, 2011 13:10

A key move was made by Britain’s Chancellor of the Exchequer George Osborne last month when he announced plans to lower the stamp duty tax on for buyers of multiple residential properties by basing the rate on the average price of the properties rather than the total value of the purchase.

The government’s aim is to remove a barrier to large-scale investment, a Treasury spokesman said.

“That would add more fat to the bone and allow investors to take property off developers hands more easily and get the returns they require,” says Chris Lacey, director of residential development planning at CBRE.

Lacey is advising the UK’s biggest insurance group Aviva plc (previously called Norwich Union) on a £1 billion ($1.63 billion) fund focused on the private rental market.

Institutional investors own about 3.76 million apartments in the USA, according to CBRE, compared with virtually none in the £500 billion U.K. residential rental sector.

“The changes could make residential property in the U.K. an international asset class, as it is in northern Europe and the U.S.,” said Nick Jopling, property director at Grainger Plc (GRI), Britain’s largest publicly traded residential landlord.

The changes could also boost the UK house-building industry because institutional investors such as pension funds and insurers tend to prefer new properties, which can be purchased in blocks in a single location says Lacey. They also tend to be of higher quality and require less maintenance.

“We would expect the percentage that we sell to the investor market to increase,” Mark Clare, chief executive officer of homebuilder Barratt Developments Plc (BDEV), says. “Institutional investors would buy housing schemes and then rent them out on a professional basis.”

The sector may well prove a very attractive investment. The five-year average total return for residential property is about 6.8%, according to the London-based independent research company Investment Property Databank. That compares with a 1.8% return on commercial property.

UK stamp duty is based on the price paid for a home. The tax is zero for purchases of £125,000 and below, 1% from that level to £250,000 pounds, 3% from there to £500,000, 4% on up to £1 million pounds and 5% above that.

The government is expected to provide more details on the tax reduction “in the summer,” Lacey said. CBRE’s research suggests institutions have allocated about £7.5 billion for new U.K. residential development and property investments, including the private rental market, he said.

Approximately 73% of U.K. residential investors own fewer than 10 units, with the state accounting for most of the rest.

London will be the big winner if the changes go ahead says Mike Farley, chief executive officer of Persimmon plc, the U.K.’s third-biggest homebuilder by volume. “It’s a specialist inner-London market,” he argues. “If you’re trying to look at that across the country, the returns don’t work.”

The planned tax change is “an important step in leveling the playing field between investors and owner-occupiers and will remove a significant barrier to more widespread institutional and corporate investment in let properties,” said Roger Hepher, head of planning for Savills.

The demand is there. More people in the UK are choosing to rent a home rather than buy one, especially young professionals and people who prefer to be flexible in their living arrangements, according to Simon Rubinsohn, chief economist at the Royal Institute of Chartered Surveyors. The number of renters has grown by 500,000 since 2006 and now represents about 14% of all households.

 

Landlord Expert
By Landlord Expert April 26, 2011 13:10

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