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Commercial property investors warned of bombshell

The government must reform the British business rates system or risk “killing” a huge part of the UK commercial property market, according to a fund manager who runs over £2bn of commercial property assets.

Marcus Phayre-Mudge runs the £1.5bn TR Property investment trust for BMO, a trust which has 9 per cent of its capital deployed in physical buildings, none of which are in the UK.

The remainder of the capital is deployed in property shares, where the only UK exposure he has is to niche property businesses in areas such as student property and warehouses.

He said the dynamics driving property in the very centre of London have changed since the financial crisis, with banks now more reluctant to lend for large developments.

Mr Phayre-Mudge said bank loans have largely been replaced by capital from private equity and sovereign wealth funds, making prime London property less vulnerable to higher interest rates.

But he remains concerned about valuations, and what he said will be the significant impact of changes to business rates on commercial property.

He said: “The dynamics have changed since the financial crisis, with banks now much less likely to lend for large developments. This means UK commercial property is less sensitive to interest rates.”

The area of the market he believes will be “killed” by the changes to business rates is property let out to retailers.

He said the challenges faced by those companies from the rise of internet shopping has been made worse by the government’s changes to the business rates rules.

Business rates are levied based on the rateable value of a property. The rate varies depending on location in the country. A business with a property that is assessed as having a rateable value of above £51,000. If a property is given this value, then the rates bill faced by the business is £51,000 multiplied by 49.3p. For businesses with property at a rateable value of below £51,000 the value of the property is multiplied by 48p.

The government carried out an assessment of the value of properties in 2015, and decreased, or increased the rates owed accordingly.

The higher rates took effect from April 2017, two years after the valuations were made.

Mr Phayre-Mudge said online retailers such as Amazon have been advantaged by the change, as they require less real estate in cheaper out of town areas to do their business.

This means such companies have much lower costs than the bricks and mortar retailers who rent buildings from property companies.

It is the latter companies that are widely held in property funds bought by private investors and their advisers.

He said if the government do not act on the issue then vast amounts of retail property will lie empty, hurting the returns of property funds.

Robin Geffen, fund manager and chief executive at asset manager Neptune, said structural forces in addition to technological change means UK  commercial property is a poor investment.

Greater scrutiny of UK overseas territories that act as tax havens will also damage the returns available to investors in UK property, he said.

Mr Geffen added: “There is about £122bn of UK property assets owned by entities in these tax havens.

“That is a lot of money for one asset class, wherever that money has come from and whether it is hot money or not I think the greater level of scrutiny could lead to issues for that asset class.

“UK property has been a poor performer lately for other reasons, and I expect this is only the start of it. It is certainly not a risk I would want my 86-year-old mother exposed to.”

Mr Geffen added: “If you go to the top of a really tall building in London at night, look at all of the cranes. There is still a lot of building happening.

“But if you walk down somewhere like the Embankment in London at night, then look at all of the newly built flats, at how few of them have lights on.

“These companies can build the property at very low cost because interest rates are low, and then just hold them on their balance sheets, but they can’t do that forever.”

He said a contact of his who has been a professional investor in UK property for decades has the largest cash weighting he has ever had as a property investor, higher even than in previous financial crises.

Paul Stocks, financial services director at Dobson and Hodge in in Doncaster, said he has been much less keen to place client money in property funds since the global financial crisis.

A spokesman for HM Treasury said thousands of UK businesses don’t pay rates at all, and that the reforms they have implemented show they have listened to business.

Source: FT Adviser

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Landlords in remortgage surge

Intermediaries reported that 52% of buy-to-let mortgage cases in Q1 2018 were for landlords seeking to remortgage.

This was up sharply from 29% in Q1 2015 prior to the Summer Budget in the same year when wide-ranging tax changes were announced, including the gradual removal of tax relief on buy-to-let mortgage interest.

John Heron, managing director of mortgages at Paragon, said: “There’s a wide range of factors contributing to the surge in landlords remortgaging at the moment.

“These include the expiry of the initial term on mortgages taken out ahead of the stamp duty changes for second properties, the expectation of rate rises on the horizon and a desire to minimise interest costs in the face of new mortgage affordabilty rules.

“It will be interesting to see the extent to which mortgage applications for purchases and portfolio extensions increase once these factors have played out.”

Over the same time period, intermediaries said they have seen a drop in the proportion of mortgage applications from first-time landlords, down from 19% to 13% of the total.

They also reported a fall in landlords remortgaging to raise funds in order to extend their portfolios. Remortgaging for portfolio expansion has fallen from 39% to 22%.

Among those landlords looking to remortgage, the proportion seeking to secure a better interest rate reached the highest level ever in Q1 2018.

Compared with three years ago when equal numbers of landlords were remortgaging for a better rate and to raise capital, in Q1 2018 60% of landlords said securing a better interest rate was their primary objective.

This compares with just 30% of landlords who said raising capital was their top priority. As a result, the gap between landlords looking for a better rate and those raising capital is now at the widest seen since 2013.

Source: Mortgage Introducer

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UK expats buying buy-to-let property back home lose £40,000 on unnecessary costs

UK expats acquiring buy-to-let property back home are typically squandering £40,000 on unnecessary transaction costs, exchange and loan rates in the first five years.

Specialist loan packager, Thistle Finance, and global currency specialist, Mercury FX found specialist currency firms can typically save their clients up to 4% on transaction fees compared to the average high street bank.

For an expat transferring the equivalent of £500,000 of foreign currency into GBP to purchase a buy-to-let, that’s an immediate saving of around £20,000.

Mark Dyason, managing director, Thistle Finance, said: “Far too many UK expats purchasing buy-to-let property at home are being hoodwinked by the high street banks when getting their money back into the country.

“They’re then compounding their misery by failing to search for the best finance rates in what is an increasingly competitive market. It’s a painful and wholly avoidable double whammy.

“With more and more demand from expats for UK buy-to-let, particularly in Scotland due to the arrival of challenger lenders with significantly improved criteria and rates, it’s vital they do their homework before they transact. The result can be savings of tens of thousands of pounds.”

Far too many UK expats then squander additional funds by taking out specialist expat buy-to-let finance without shopping around.

On a £500,000 loan, the interest rate differential between the best and worst rates can conservatively amount to £4,000 annually — or £20,000 over a 5-year period.

With millions being squandered each year, Thistle Finance and Mercury FX have recently teamed up to deliver UK expats end-to-end savings when purchasing buy-to-let property at home while residing overseas.

Alastair Constance, founder, Mercury FX, added: “For UK expats, buy-to-let is the easiest way to hedge against rising house prices back home. You might be off the radar geographically but you’re on the UK property ladder, which can provide real peace of mind.

“What’s equally important is that you purchase buy-to-let property in the most cost-effective way possible. Right now, far too many expats are paying an unnecessary premium for the privilege, in terms of both the money transfer costs and the buy-to-let loan finance they secure.”

Source: Mortgage Introducer

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Sterling falls to lowest against dollar since November

The pound fell to a six-month low against a rallying dollar on Tuesday, while it held its own against a euro dragged down by concerns about a deepening political crisis in Italy.

Sterling has slumped against the dollar since mid-April as expectations of a Bank of England interest rate rise recede and the economy shows signs of prolonged weakness.

Renewed concerns about whether Britain can secure the Brexit deal it wants have also impacted the currency.

Against the dollar, the pound slid as much as 0.7 percent to $1.3205, its weakest since mid-November. The British currency, previously one of the best performers in 2018, is now down more than 2 percent versus the dollar so far this year.

 “We can ascribe a lot of it (pound weakness) to the U.S. dollar but I think sterling has been on the back foot independently,” said Jane Foley, an FX strategist at Rabobank, citing relatively downbeat UK retail sales and inflation data published last week.

Investors are only pricing in a one-in-three chance of the Bank of England raising borrowing costs in August, the next time it updates its economic forecasts.

 “There is nothing in there to restore confidence in the BoE’s ability to raise rates,” Foley said.

David Madden, an analyst at CMC Markets, said the pound remained “in its downward trend” and pointed to $1.32 as a key target.

Versus the euro, sterling has performed much better, and at GMT 1515 on Tuesday traded up 0.3 percent at 87.12 pence per euro.

Worries about divisions within the British government about whether it wants to remain in a customs union with the European Union after it leaves the EU in March 2019 have undermined sentiment towards the pound ahead of an EU summit in June.
However, the euro’s rapid descent – caused by investors buying into dollars and concerns about political uncertainty in Italy – have underpinned the pound and it remains up versus the single currency in 2018.

Source: UK Reuters

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Proposed changes to dividend tax could impact limited company buy-to-lets

Proposals from the Office for Tax Simplification (OTS) could increase the amount of dividend tax paid by landlords who operate their buy-to-let property businesses in limited companies, Andrew Turner, chief executive of Commercial Trust argued.

In recommendations that were published on May 25th, the OTS, an independent office of HM Treasury, which provides the government with advice on simplifying the tax system, has acknowledged that tax paid on dividend income is materially less than other sources of income.

Basic rate taxpayers pay 7.5% tax on dividend income they receive, which exceeds the current £2,000 allowance. Higher rate tax payers pay 32.5%, while additional rate taxpayers pay 38.1%.

However, the OTS describes tax calculations on dividends as “complex” and it proposed to tax dividends at the same rate as income.

Its report stated: “A more radical option would be to end the differential tax rates for dividend income. If all taxable income was taxed at the same rates, it would not matter how the personal allowance was used.

“Making this change would have the effect of increasing the amount of tax due from those who receive amounts of dividend income above the allowance. It would also impact on the taxation of profit extracted as a salary or as a dividend, from family owned companies.”

If the government was to make this change, landlords who are basic rate taxpayers would see the amount of dividend tax they pay on their limited company properties increase to 20%, a rise of 125%.

For higher rate taxpayers, the increase would be 7.5% and for those in the highest rate tax band there would be a 6.9% tax increase.

Source: Mortgage Introducer

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£14m housing boost for North Ayrshire Council

MORE than £14 million has been allocated to North Ayrshire Council to build new homes following a request from Kenneth Gibson MSP.

The Scottish Government awarded £14.165 million to the authority for Resource Planning Assumptions (RPA) after the Cunninghame North MSP submitted a question.

The money will fund a range of affordable housing options, including 158 new council houses this year. RPAs provide councils with the financial certainty they need to implement plans to meet their housing priorities.

Over the next three years, 701 new council houses will be completed in North Ayrshire. To help deliver this, the Scottish Government will allocate a further £15.003 million in 2019/20 and £16.007 million in 2020/21.

Since the Scottish Government’s Council House Build Programme began in April 2009, with the aim of incentivising local authorities to build new homes, 244 new council houses have already been built in North Ayrshire.

This follows investment of £16.025 million from the government, an average grant of £65,676 per house.

Kenneth Gibson MSP said: “Everyone deserves to live in a modern, safe, warm, comfortable and affordable home. That principal is central to the SNP Government’s drive to make this country fairer and more prosperous; creating and sustaining jobs here in North Ayrshire and throughout Scotland.

“Prior to the SNP coming to office, council housing had long been neglected. Between 2003 and 2007, the Labour/Lib Dem Coalition built only six council houses in Scotland. All in Shetland!

“By comparison, across Scotland, the SNP Government met its target of building 30,000 affordable homes by 2016 early, in October 2015.”

Source: Ardrossan Herald

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Right To Rent Scheme Issues Over 400 Fines

Over 400 fines have been issued to private buy to let property investors under the controversial Right to Rent scheme.

By the end of March, 405 financial penalties had been levied on landlords, amounting to the value of £265,000. This total marks all fine fines that have accumulated since the Right to Rent scheme was introduced across England two years ago.

The Right to Rent scheme requires that landlords must ensure that their tenants have the right to be in the country. They must do this by checking passports or identity cards. Failure to comply can lead to landlords being fined up to £3,000 per tenant. Those who knowingly let a rental property to someone in the country illegally can face criminal proceedings and a stay of up to five years in prison.

Although many fines have been issued under the scheme, an inspection report published in March found that there had been no prosecutions.

The scheme has been placed in the limelight once again as part of the newly framed ‘compliant environment,’ following the Windrush scandal, which saw people who have lived and worked in Britain for years wrongly challenged over their immigration status.

Following the scandal, the Home Office issued guidance to landlords to clarify that prospective tenants who have lived in the UK permanently since before 1973, and have not left the country for long periods in the last 30 years, have the right to rent property.

Analysis of official data on Right to Rent from the Press Association shows the number and total value of fines increased for five consecutive quarters. Numbers then fell from the middle of last year. 39 penalties with a total value of £23,500 were issued from January to March 2018.

The National Landlords Association (NLA) has called for Home Secretary Sajid Javid to review Right to Rent. Director of policy and practice at the NLA, Chris Norris, said that the latest figures ‘would seem to show that landlords are more aware of their responsibilities and are carrying out the required checks’.

However, he continued: ‘It is important to remember that landlords are neither immigration experts nor border agents. The Right to Rent scheme has placed an additional cost on an already pressurised sector, while the excessive checks and lack of monitoring may have had harmful consequences for would-be and vulnerable tenants.’

A Home Office spokeswoman said: ‘It’s right that we have a compliant environment to deter illegal immigration and protect public services and it is a policy that has been operated under successive governments. The Right to Rent checks were developed with the input of the Landlords Consultative Panel and there is online guidance as well as a helpline to ensure the scheme is fully understood.’

Source: Residential Landlord

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Property market swings back in favour of sellers as supply slides again

The property market may have swung back in favour of sellers during April, NAEA Propertymark claims.

The trade body’s latest Housing Report found demand from prospective buyers increased from 308 to 337 between March and April, while supply was down from 40 to 33 homes per branch over the same period.

This is a departure from March when the number of house-hunters on estate agents’ books fell from 309 to 308, while supply per branch hit a five-month high of 40.

The number of properties available per branch increased from 35 in February to 40 in March – the highest since October last year.

The number of sales to first-time buyers remained the same between March and April at eight per branch, while the percentage of sales to this cohort dipped to 24% from 25% at the same time last year.

Mark Hayward, chief executive of NAEA Propertymark, said: “Last month our findings indicated that we were entering what looked like a buyers’ market, but this month, the dial has swung back in the favour of sellers.

“With demand on the up, and the supply of available homes falling once again, buyers will find themselves facing stiff competition.

“This is particularly difficult for first-time buyers who traditionally have less bargaining power on price, so will struggle to enter bidding wars with second or third steppers.

“The Government is working to improve the house buying and selling process, which is music to our ears, but until more homes are built and supply catches up with demand, the process will remain difficult.”

Source: Property Industry Eye

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London home buyers receive more help from parents than in any other region

More buyers in London receive help from their parents to buy a home than in any other region, with residents of the capital also having the highest parental contributions – almost £31,000 per transaction on average.

Young people across the UK are set to increase their reliance on their parents to buy house, with the the “Bank of Mum and Dad” set to reach nearly £6bn this year, according to research released by Legal & General and the Centre for Economics and Business Research (Cebr).

The so-called Bank of Mum and Dad will be the equivalent of a £5.7bn mortgage lender in 2018, according to the research.

Family-supported lending remains a major force in the UK housing market, the firm said, with 27 per cent of buyers set to receive help from friends or family in 2018, up from 25 per cent in 2017.

This year, the Bank of Mum and Dad will help 316,600 relatives buy a home – up from 298,300 in 2017.

The value of Bank of Mum and Dad-supported property purchases in 2018 will rise to £81.7bn, according to the research, representing a five per cent increase since 2016.

However, parents are providing smaller sums, with the average contribution declining from £21,600 in 2017 to £18,000 in 2018.

Nigel Wilson, group chief executive at Legal & General, said: “The fact that in 2018, 1 in 4 housing transactions in the UK will be dependent on the Bank of Mum and Dad, while hard-pressed parents are finding it more difficult to provide the funds to help their family with deposits, will further exacerbate the UK’s housing crisis.

“We need more homes for the young, old and families alike.”

Under 35s are the most likely to receive parental assistance, with nearly 3 in 5 receiving money from family and friends to buy a property, according to the research.

By comparison, just eight per cent of over 55s receiving family assistance to buy a home. However, 20 per cent of homeowners aged between 45 and 55 are now relying on family help to buy a home.

“The volume of transactions depending on Bank of Mum and Dad funding keeps on growing, even as parents find it harder to provide as much money for the deposit,” said Wilson.

“Bank of Mum and Dad funding is a vital plank in the housing market, but this year the supply of funds is being squeezed.”

Source: City A.M.

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Pound drops to five-month low after UK GDP slumps

The pound eased in afternoon trading today, following a disappointing second estimate of first-quarter GDP growth from the Office for National Statistics (ONS).

Sterling was down 0.31 per cent to trade at $1.3339 against the dollar, its lowest level since mid-December last year.

Lukman Otunuga, Research Analyst at FXTM said:

“This has already been a terrible trading week for the pound, as cooling inflation figures dented expectations over the Bank of England raising UK interest rates in August.

“Matters worsened on Friday following reports that UK economic growth dropped to its lowest rate since 2012.”

Figures from the ONS showed that UK GDP grew just 0.1 per cent in the first three months of the year, a sharp drop from the 0.4 per cent growth seen in the final quarter of 2017.

ONS figures also showed that GDP per capita shrank by 0.1 per cent between the fourth quarter of 2017 and the first three months of this year.

The country’s economic growth was heavily weighed down by a 2.7 per cent drop in construction output and a 0.2 decrease in business investment.

Household spending grew by just 0.2 per cent, the lowest growth since 2015.

The ONS warned of a “pattern of slowing growth, in part reflecting a slowing in the growth of consumer-facing industries”.

​John Hawksworth, chief economist at PwC, said: “Overall, the figures confirm the view that UK growth was subdued in the first quarter, though we continue to believe that this overstates the underlying weakness of the economy, bearing in mind the strong jobs growth we’ve seen.”

The dollar was steady against a basket of major currencies this morning ahead of the upcoming speech from Federal Reserve chair Jerome Powell.

Source: City A.M.