Trend: 2015 Budget Impact on Buy to Let


2016 Budget changes to the mortgage interest tax shield. What are the strategic considerations and moves you can make?


  • Like many other buy to let strategic operators, we were all left in awe by the sudden surprise of the buy to let mortgage interest rate relief change as part of a seemingly left wing 2016 budget delivered by the incumbent Conservative party. Mortgage interest rate relief is now only taxable at the basic rate of 20% as opposed to 45%.
  • Mortgage interest rate relief supposedly costs the government £6.3Bn a year, thus driving the proposed policy. Did the Conservatives impose this new policy to placate an overwhelming number who wished to blame their lack of success in the property market on the so-called greedy BTL property landlords? Maybe, and maybe it works well as a less punitive budget impact response to harsher policies being advocated by the Labour party and the Greens wishing for longer tenancies, limited rental hikes and the full removal of interest rate relief.
  • BTL landlords may very well argue that the entire strategy is like a business and debt interest costs should benefit from a tax shield. However, we need to be practical in a dynamic market such as property in which legislation with regards to planning, lease contracts and tax changes are frequent.
  • The proposed change will be staggered however, over a 4 year period commencing from April 2017. But how exactly does this work? We have analysed the proposed change here to see the potential effect that have left many pondering a mix of new ways around this strange new policy.

Worked example:

Budget Impact : Mortgage interest relief changes


 

The potential budget impact on the market…

  • A flood of properties coming on to the market for sale? Some have suggested this, which may be favourable for first time buyers in terms of increasing housing stock available for residential purchases and in a current environment of high property prices versus average incomes. Whether the increase in property stock results in a lowering of house prices is debatable but it may very well serve to be a depressing factor in any strong house price inflation that may otherwise occur.
  • Landlords retaliate with a hike in rents? Some have said that BTL landlords will simply seek to compensate for net cash flow losses due to the increased tax contributions by increasing headline rents for tenants. Will this method actually work? We believe that the property market is suitably fragmented to avoid the majority of landlords colluding to raise prices. Basing decisions on this potential move by landlords is not believed to be wise. We would propose in not being reactive collectively but look to be proactive individually.

The strategic moves BTL landlords are contemplating…

  • The correct tax efficient number of BTL properties held as an individual: One way to be proactive is analysing the correct amount of cash flow and buying the correct number of buy to lets that fits the basic rate of income, thus being tax efficient. This assumes that your primary career if you are a full time property investor. The income generated will hopefully face the same amount of income and tax that is faced under the current system. If you have another career, then it may make sense to look at other methods to be tax efficient, such as buying properties via a company vehicle.
  • Switching properties into a company: This proposed move may be beneficial for many who seek passive rental income and enjoy a hold strategy. The cost of transferring existing property into a company may be punitive and prohibit such a move (with capital gains, stamp duty etc). Therefore, it may be more worthwhile for many BTL portfolio landlords to sell existing portfolios and start over via a new property holding company. Please note that commercial mortgages are required for companies and these have typically been more expensive than personal mortgages. It is asserted that the mortgage market will enjoy an influx of new BTL commercial mortgages due to an expected increase in BTL landlords seeking to acquire via company vehicles. (Click here for a useful link to commercial mortgages)
  • Incorporate more development opportunities: Another way to tackle the proposed tax changes is to look again at development opportunities as opposed to the simple passive income BTL strategy. The positive cash flows would be less consistent as a result but could be lucrative if performed in the correct manner. Please be aware of property flipping being recognized as trading, thus if you are a higher rate tax payer you could end up paying 40% on the profit rather than the typical 28% capital gains tax rate (or 18% if you are a basic rate tax payer). Thus, you may end up having to look at doing so via a company in any case.

 

London Property Analyst is not a qualified tax advisor and the above does not purport to be and should not be relied upon as tax advice.

Trend: London growth spots


London growth spots: strong potential investment areas for smart investing.


  • In this article, London Property Analyst has illustrated the strongest potential growth areas that are presented going forward in the highly competitive capital city.
  • The current environment is summarised by 1) an impending general election looming (casting temporary uncertainty over the housing market with threats of mansion taxes and other budget property inflationary legislation), 2) persistent cheap credit conditions (with cheap mortgages available for BTL and first time buyers, despite MMR imposed regulations), 3) ‘good deflation’ (given recent zero trending inflation recorded and according to consumer surveys set to drive bigger purchases going forward with greater individual perceived purchasing power).
  • Given the above, it is imperative for property investors to smartly allocate scarce financial resources and efficiently capitalise upon available leverage in acquiring residential assets that will both preserve capital and generate alpha returns going forward.

  • The map below identifies strong investment areas broken down into two categories. Red spots indicate current strong London growth spots in which property price growth is expected to continue in the short run. Blue spots indicate strong growth spots in the medium term.
  • Key infrastructure projects, both recent developments and ongoing large London capital expenditures, are driving area prospects and form a key part of London Property Analyst’s proprietary housing model price forecasts. We account for Crossrail (Central stations as well as NE, SE and W branches), the London Overground (‘ginger line’), as well as other key area-specific regeneration/development aspects around London in addition to the intrinsic value shift towards relatively poorer Eastern and Southern regions versus more mature Northern and Western siblings.
London growth spots
London growth spots

 

London Property Analyst provides Expert Consulting Services

Contact manager@londonpropertyanalyst.co.uk to see how LPA’s bespoke property consulting services can help you achieve successful acquisitions in the highly competitive and lucrative London property market


Trend: Zero inflation – impact on property?


Zero inflation and future ‘good’ deflation expected to promote stronger property prices but the general election adds aura of uncertainty…


Zero inflation reported 

  • zero inflation
    UK split of YoY CPI Inflation over 2000-15

    ONS reported that UK CPI inflation fell 0.3% YoY in January to zero in February, which is a record YoY low since 1989 marked the inception of CPI recorded data. Inflation for food, alcohol, energy and tobacco was -3.9% (vs -3.5% in January).

  • Core inflation (i.e. CPI ex food, drink, energy and tobacco) declined to 1.2% YoY vs 1.4% YoY in January  – not a record low.
    • Core inflation matches the average for 2000-07, a period in which CPI inflation averaged 1.6% YoY. It is within core items that things get interesting, with services inflation remaining relatively low (at 2.4% YoY in Feb in line with Jan) but consumer goods prices slipping into deflation (we note not as severe as in 2000-07).
    • It is expected that the lower oil price environment endured over recent months will feed through in household energy price cuts as well, with YoY rates turning negative in coming months. (Note: CPI inflation ex tax changes are already slightly negative at -0.1% YoY).

Going forward, ‘good deflation’ or ‘bad deflation’?

  • There is a split in views between the two concepts:
    • Good deflation i.e. a boost to real incomes that will subsequently result in greater confidence and spending, which will lift prices going forward reversing any deflationary spiral.
    • Bad deflation i.e. a precursor to renewed weakness in demand. Consumers will delay purchases with the expectation that prices will continue to fall resulting in lower spending and further compounding deflationary pressures.

Click here for a recent article going into more detail on the two types of deflation.

Which deflation is it and how does it impact London property and the UK real estate market overall?

  • It is too soon to tell but we anticipate good deflation so far. The decline in prices is expected to drive confidence and purchases. In the recent February consumer confidence survey, it showed that the share of people who believe it is a good time to make major purchases now rose in February to the highest level since 2007, and the figure for expectations of major purchases in the coming 12 months next year rose to the highest since 2003.
  • Larger real incomes will help the demand side in the London property market (which is facing issues with current price levels largely reported to be out of reach for the majority of locals who are left unable to clamber onto the property ladder). Structural supply side issues in the London market will largely not be impacted from zero deflation. Greater money in consumer pockets, recent consumer sentiment studies and the availability of cheap credit (see here for record low mortgage rates) is expected to drive property price increases. A short period of temporary deflation could certainly aid to boost the property market.
  • In addition, there seems to be some general uncertainty with regards to the looming general election with the overall view that the incumbent conservatives retaining power will help drive prices while a Labour victory will serve to temporarily depress property prices.
  • The impact on the property market is uncertain, however we have briefly outlined a few possible scenarios. Should the Conservatives stay in power, we expect property prices to rise going forward removing any uncertainty and also aided by a period of short term ‘good’ deflation.  However, if Labour wins, we anticipate a short period of relatively more depressed property prices. Under the latter scenario opportunities still remain for savvy investors, particularly for those who are cash rich and seeking to either 1) snap up strong cash flow yielding buy to let purchases (the rental market has boomed so far this year and presents a good investment opportunity going forward given the general trade-off between sales and lettings, or 2) acquire development projects with the aim of executing a rental strategy before selling when the market picks up momentum. Note, consumers generally prefer to buy property as the market is rising and this will happen again despite the 1Q lull. Opportunities will become clearer in the coming months, either for your existing portfolio or for new acquisitions.

 

London Property Analyst provides Expert Consulting Services

Contact manager@londonpropertyanalyst.co.uk to see how LPA’s bespoke property consulting services can help you achieve successful acquisitions in the highly competitive and lucrative London property market