As is customary for this Chancellor of the Exchange, his latest budget contained plenty of surprises for property buyers. George Osborne’s latest bombshell, in November’s Autumn Statement, is a planned 3 percentage point hike in stamp duty charged on buy-to-lets and second homes. The move, predictably, drew howls of outrage from landlords’ associations, and will certainly have major ramifications for London property. But we believe it will help to cool a potentially over-heating part of the market, and Osborne’s extension of the Help-to-Buy scheme will make London property affordable for a wider range of buyers. In the immediate aftermath of the Chancellor’s speech to the House of Commons, lawyers and accountants are digesting the implications of Osborne’s stamp duty increase. Indeed, the government is consulting on the details of the new rates, which will be introduced from April 2016.
But at Black Brick we think a number of results are likely:
– A flurry of activity over the next four months, as buyers scramble to find, exchange and complete on properties that will be subject to the additional stamp duty. We have already taken calls from clients looking to accelerate their plans.
– A shift in demand, rather than a reduction. For buy-to-let investors (as opposed to second home buyers), the additional stamp duty charge will be much more keenly felt on more expensive properties (see table 1). At the same time, there remains considerable demand for buy-to-let investments. So we think demand will rise for cheaper – sub-£1 million – properties, and fall for those above that mark.
– More tempering of buyers’ expectations. The move will add momentum to falling prices in parts of the market, which we believe will unlock deals. Vendors should become more realistic about asking prices, helping to bring buyers back to the market. Buy-to-let investors will certainly expect to be able to negotiate the additional 3% out of asking prices.
– A move from residential to commercial property investment. We think this government’s approach to property taxation will see investors shift their focus from the over-taxed residential sector towards commercial property. We note that stamp duty on commercial real estate remains untouched at just 4% on property above £500,000. We are already seeing enquiry in this direction and Black Brick plans to add commercial property capability to our client offering, augmenting our recently launched development and hotel arm.
– Interest in new investment vehicles. The stamp duty surcharge will not be applied to companies or funds making “significant” investment in residential property (although these will be subject to corporation tax and tax on dividends). This will increase the appeal of these structures to institutional investors, and Black Brick will explore the potential of setting up our own such fund next year, as a tax-efficient investment vehicle for our clients.
In addition, there are a number of question marks about the stamp duty hike. First, whether it applies to purchases that have been agreed, but which will not complete before next April – such as off-plan purchases. Our lawyers say that precedent from earlier stamp duty reforms suggest this is unlikely, but a definitive answer must await the conclusion of the government consultation.
Second, how – if at all – the increase will be applied to overseas buyers. In his Autumn Statement speech, Osborne explicitly mentioned purchases to let by non-residents. If the rise is applied on a blanket basis to overseas buyers, we would expect to see substantial falls at the high end of the prime market.
Third, it is an open question how the second home qualification will be implemented. Given the difficulty in enforcing such a provision, we suspect that this element may disappear following consultation.
Some landlords’ associations warn that the increase in stamp duty may not have the effect that Osborne intends – namely to encourage home ownership. Many developers rely on forward-selling off-plan to finance developments. If this stamp duty increase, in addition to other tax changes affecting buy-to-let investors, discourages such forward sales, then developments may simply not get built. In addition, rents may well rise, as landlords pass on the additional costs they face acquiring and financing properties.
However, the Chancellor should be given credit for attempting to address problems in London’s property market, in particular, which is seeing whole swathes of the population priced out of the capital. To the extent that the stamp duty reforms reduce speculative investment, they are to be welcomed – indeed, the Bank of England has been warning of the risks of a property bubble inflated by buy-to-let investors for some time.
Longer-term, a property market supported from the bottom by demand from young people living and working in the capital is important to the city’s fabric, and to the health of the whole property market. We would, however, hope for a period of stability in terms of how London’s property market is taxed, after a series of rapid changes over the last 18 months or so.
One thing is clear: these moves underscore the importance of taking professional advice on property purchases, especially in the buy-to-let space. Buyers and advisors will be digesting these changes for some time to come. At the very least, buyers should expect to negotiate hard to ensure than any tax impacts are addressed in the price paid for a property.
Table 1 illustrates how the new stamp duty rates are likely to look for buy to let investors and second home buyers from April 2016 onwards although final details of exactly how this new regime will apply are awaited. It appears that the first £40,000 of the purchase price may be taxed at 0% which would have the effect of reducing each figure quoted below in the ‘Stamp Duty April 2016’ column by £1,200 but exactly how this may be applied is not yet clear:
Osborne’s stamp duty raid will have sent property analysts back to their spreadsheets to calculate the likely effect on property prices – but not before some of the leading property companies published their forecasts for 2016 and beyond.
Table 2 summarises those predictions available for Prime Central London and the wider UK residential market. Most anticipate solid medium-term growth – but only after sluggish performance in the next couple of years.
Savills is the most pessimistic of our forecasters, noting that, “although there are early indicators that sentiment is beginning to pick up across all the prime regions, there remains a lack of urgency among buyers”. It blames London’s lacklustre market for affecting prime residential property more widely, arguing that it “currently looks fully valued and fully taxed”. Medium term, “in London, the fundamentals of wealth generation support medium-term price growth,” it says.
Jones Lang LaSalle, meanwhile, warns of “additional uncertainty” with the “spectre of additional taxation or other intervention a possibility” in 2016, and worries over the EU referendum meaning that market stability is unlikely before 2018.
Strutt & Parker, the most bullish of the forecasters, notes that statistics for the Prime Central London market “hide an increasingly polarised market”, with growth at the bottom end and stagnation at the top. While it echoes other agents by noting the effects of stamp duty reforms and the “accumulation of recent tax revisions aimed at high net worth property owners”, it adds that “sellers placing properties on the market that are sensibly priced and good quality will continue to do well”.
Despite the latest curveball from the Chancellor, we anticipate another busy year in 2016, particularly in the run up to April, although the cumulative effect of various tax changes are likely to make different areas popular with our clients. Two themes will, we believe, drive activity in 2016:
The stamp duty ripple effect: As we have discussed, changes to stamp duty have made £2 million-plus homes much less attractive than cheaper properties. We are seeing buyers deterred by high prices and taxes in central London looking to hitherto overlooked parts of the capital. Tooting and Streatham in South London, for example, boast large volumes of substantial Victorian properties that offer attractive family homes for a fraction of the cost of central London postcodes, as well as good transport links into town. Because of our relatively low search minimum of £500,000, these are areas that we already cover for clients.
Croydon, meanwhile, is also attracting growing interest. It has benefitted from significant regeneration investment in recent years, and is becoming a technology hub, while a Westfield shopping mall is due to open in 2017. It is also only 20 minutes from Victoria and London Bridge.
In more prime areas, according to latest research from Knight Frank, Knightsbridge is leading the way in terms of price drops compared with the other prime residential boroughs. The area is now showing negative price growth (a drop of 4.5% in the 12 months to Oct 2015). One of the most desirable residential areas of the capital, you won’t find a huge amount for lower budgets, but with values falling, 2016 may be the year to snap up a bargain in the area.
London emigres look east: The arrival of children often sends London-dwellers further afield in the search for larger properties and more open space. In the past, with the locus of the city to the west, these London emigres often looked to Oxfordshire or the Cotswolds.
However, with the emergence of east London – Shoreditch, Islington and even Docklands – as prime residential areas, we expect to see the next generation of ex-Londoners to consider locales that are, relatively speaking, on their doorsteps. We believe east Kent is likely to prove popular, especially when you consider the price differential between it and towns in Surrey, for example. Consider our recent acquisition for a client near Hadlow.
So far this year, Black Brick has advised on over 33 transactions spread right the way across London, from Shoreditch and the City Fringe in the East, to Shepherds Bush in the West, Hampstead and St Johns Wood in the North down to Battersea in the South. We have battled hard for our clients, saving on average an impressive 5% discount from the asking price of properties.
For this edition of the newsletter, we’d like to highlight three of our standout acquisitions this year.
Top 3 Acquisitions of 2015:
The Factory, N1 Our client was a high profile figure in the music industry, looking for specialist advice and confidentiality. They were looking for a flat with privacy and security, as well as open-plan spaces and a ‘wow’ factor. The initial search area was across the whole of north and east London but, after educating our client about the merits of certain areas, settled on Shoreditch, where we found a suitably funky warehouse conversion. We were able to negotiate £200,000 off the £1.65 million asking price, and we also secured a private parking place as part of the deal.
Television Centre, W12 We have closed not one but six transactions for clients in this off-plan development this year. The off-plan/new build market is a minefield for most buyers and investors, given the range of options across London, and the need for in-depth market knowledge about how they are likely to perform when completed. We like this development for a number of reasons – its transport links, proximity to the Westfield shopping centre, investment going in from Imperial College, opening of a new Soho house hotel and private members club and the fact the BBC will continue to be on site, all make it compelling. It is also relatively low density. Furthermore, we achieved an attractive rate, at circa £1,000 per square foot, which we feel is good value for a development of this quality and in this location. We also leveraged our contacts to get our clients in early, securing the best units before the development’s UK launch.
Culford Gardens, SW3 The challenge, here, was finding a dog-friendly apartment for two returning British ex-pats. They were also looking for plenty of natural light and a location close to the shops, cafes and restaurants of Chelsea’s Kings Road. The property identified, however – a south-facing top-floor three-bedroom flat in Culford Gardens – was highly sought after, given its location and the quality of the £3.2 million property. However, our relationship with the agent secured us a two-week window of exclusivity. That allowed us to complete negotiations and exchange contracts, preventing the sale going to a competitive auction.
Bolton Gardens, South Kensington SW5 While we primarily act for buyers, our team can also assist in selling properties. Our Canadian client approached us having had his property tenanted and managed by us for a number of years, he decided he wanted to sell and release some equity in order to buy a larger home outside of London. As the property had been a rental investment, our advice was to embark on a focused refurbishment program, which we managed for our client, to ensure that the apartment would attain its full value when brought to the market. Our client was delighted when the property achieved £75,000 above the guide price of £2 million given by the selling agents who appraised it prior to sale. The sale shows the difference we were able to make with our understanding of the market, our knowledge of which estate agents to work with, and the correct attention to properly “dressing” a property.
Finally, we would like to thank all our clients and introducers for their custom and support in 2015, and we wish you all a merry Christmas and a happy and prosperous new year. We look forward to working with you all in 2016.