It has taken three months for buy-to-let investors to digest the complicated implications of the Budget bombshell dropped by George Osborne in the summer.
The government’s tax changes for landlords will significantly eat into profits and, in some cases, could wipe them out.
The announcement of radical curbs to the tax relief received on mortgage interest are causing dismay and sparking real concern that the changes will wreak havoc on many investors’ business models.
For some highly geared owners, especially high-end investors who have been absorbing the stamp duty hike to 12% on residential property sales of over £1.5m, it is, as one market analyst told me, “a silent nerve gas”.
As the saying goes: “out of crisis comes opportunity”, so while this may be bad news for some highly geared and newer property investors, it will provide opportunities for others who are cash-rich coming to residential auctions.
It is quite a balancing act for residential property investors: mitigating between harnessing price increases (currently predicted to average 6% next year) and looking to jump the wave as the withdrawal of mortgage interest relief reaches 100% over three years from 2017.
In recent weeks I have spoken to four residential investors with between six and 15 properties in their portfolios in locations including central and Greater London, the Home Counties and Wales, all of whom are gauging the right time to sell and how to hold on to as much stock as possible.
One said: “It will have a real impact on my current business plans and my future projections for retirement and instead of growing my portfolio, I will now be rationalising it. I see no alternative but having to sell a number of the properties in order to pay off the mortgages on others.”
Savills has worked out the impact on personal landlords. It found that a £200,000 property purchase in 2020 with an average mortgage rate of 5.2% and a deposit of 30%, earning a gross yield of 6%, could potentially suffer a cash loss after tax. In addition, there could be another hefty slice of profit being cut by the end of the generous “wear and tear” allowance, which currently allows investors to take 10% off their rental income before calculating their tax bill.
So it is hardly surprising that residential sales momentum has slowed significantly in the private treaty sector, where transactions have slumped by 25%, according to some prime-end estate agents.
Turnover at residential auctions, where smaller numbers of single lots priced at £1m-plus traverse through the room and an average property costs just under £300,000, has been sheltered from the worst of the effects so far.
One factor distinguishing private treaty from auction is that many buyers at auction are cash-rich and therefore less dependent on fluctuations in swap rates.
In October, Savills residential auctions sold a retail investment in Covent Garden , WC2, for £6.2m (a yield of 1.98%), while Allsop Residential sold a property in Mary-lebone, W1, for £5.9m and a flat in South Kensington, SW7, for £3.3m. This clearly demonstrates that at the top end of the market, buyers have fully factored in the new stamp duty thresholds and are not adversely affected by bidding in the auction room.
Between both of these residential auctioneers, October sales realised £125.7m from the sale of 325 lots.
Allsop’s commercial sale on 20 October sold four lots for more than £1m and two for more than £2m. A parade of four shops and nine flats in Wood Green, N22, sold on the day for £2.5m (a yield of 5.8%). The next sale on 8 December has 20 properties with a guide of more than £1m.
On 22 October, Acuitus sold 20 lots under the hammer with a price tag of more than £1m. Of these, a freehold shopping centre rather curiously appeared for the second time in a year. The George shopping centre in Grantham, Lincolnshire, first sold in Acuitus’ May auction for £2.7m (a yield of 12.9%) and then it was offered again in October, when it sold for £1.9m (a yield of 17.6%). Both times it was guided at just under £1.3m. The next sale on 10 December has 12 lots with a guide price of more than £1m.
From the evidence of the main commercial and residential auctions, demand is as strong as ever for UK real estate, especially with such volatility in the stock market and the uncertainty presenting itself overseas.
John Townsend is a consultant and head of auction services at Harold Benjamin
