VAT
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How bridging loans can solve commercial property VAT problems

Buyers set to seal a deal on the purchase of a commercial property have been told they needn’t panic when it comes to securing the short-term funding required to settle the VAT.

Laurence Rutter, who is the CEO of principal lender VATBRIDGE, says help is at hand for borrowers who face a headache as they try to secure a loan for what they might consider “a potentially unfundable problem”.

The VAT in question arises when an opted-in commercial property is sold. VAT is charged on the sale of the property and at completion the buyer is liable to pay VAT on the purchase price. This leaves many borrowers having trouble in securing the short-term funding required to settle the VAT. Every commercial property buyer must plan for a 45- to 120-day delay between payment and recovery of the VAT.

Yet Rutter explains that paying VAT on commercial property need not be a burden. He says: “If you are financing your purchase with debt, it is worth bearing in mind that most commercial mortgage lenders adopt a maximum loan-to-value criteria of 70 per cent-80 per cent leaving the VAT as a potentially unfundable problem.

“More than a year ago, we designed the VATBRIDGE product to provide the solution; short-term secured loans that recognise the inherent security of the VAT recovery from HMRC, rather than being limited by the available equity in the property being acquired.

“A VATBRIDGE loan advanced the VAT less interest and charges. For some this was enough, but we soon realised there were many borrowers that needed more help, a loan that advanced the full amount of the VAT due.”

In response the business developed VATBRIDGE+, a top-up loan used in conjunction with a VATBRIDGE loan to ensure the borrower receives the full amount of VAT due. However, as this loan is not repaid by the VAT recovery, it is only available to borrowers where it can be seen that there is a viable repayment plan that coincides with the recovery of the VAT.

The development has led to huge interest from potential clients, says Rutter, adding: “By the end of the summer, with VATBRIDGE and VATBRIDGE+ products and processes in place, our focus shifted to promoting the business to a wider audience.

“We have seen a significant increase in the number of enquiries and with it the development of an interesting new trend – the borrower with the funds available to pay the VAT but choosing a VATBRIDGE loan.”

Another aspect of the approach is for the business to talk to borrowers to understand their reasons for choosing to borrow, and these fall into various categories, says Rutter.

He adds: “One is to maintain a war chest. Developers with an eye on their next project have cited the need to maintain free cash to take advantage of opportunities arising in the short-term. We lent £120,000 to an expanding developer on the south coast. With cash in the bank, they didn’t need to borrow but were planning to buy another property at auction before the VAT would be recovered and didn’t want to tie up the funds.

“Another is that borrowing is cheaper than the cost of exiting investments. Borrowers with significant invested assets have cited high costs of exiting investments as the reason for taking a loan.

“We previously offered a £2.2million loan to an experienced property developer, where the total cost of the loan was less than 4.5 per cent — they accepted as the cost was lower than they would have faced in liquidating other investments to pay the VAT.”

Also, says Rutter, developers look to increase returns by reducing their dependency on profit share partners. He continued: “Developers are recognising a short term VATBRIDGE loan can be cheaper than taking short term funds from a profit share partner.

“We previously lent £800,000 to an experienced developer, who approached us very close to completion of their latest purchase. The developer had arranged to source the funds for VAT from their profit share partner at a cost of an additional four per cent of the development profits – the loan was less than a quarter of this figure.”

Source: Bridging Directory

house prices
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Don’t panic! Stagnant house prices are great news for us all

Last month, annual house price growth in the UK fell to the lowest rate seen since mid-2013. According to Nationwide, house prices in August were up just 2% compared to the same time last year. That’s compared to year-on-year growth of 3.2% seen in January.

What’s responsible for the shift?

First and foremost, it’s the great buy-to-let sell-off.

Why house prices are roughly flat

There are masses of different house price indices in the UK, reflecting the national obsession with property values.

But they all point to roughly the same thing happening: house prices nationwide are rising roughly in line with inflation, which means they are flat in “real” terms.

This average covers the fact that house prices in London are falling a bit, they’re flat in the southeast, and they’re gently rising in other parts of the UK.

In other words, prices are falling in the places where houses are most expensive, and they’re rising slowly in areas where they are at less unreasonable levels. That makes sense.

What’s driving this change and will it continue?

We’ve discussed this several times here before but it’s worth keeping an eye on. Firstly, because residential property is a critical yet oft-neglected component of the economy and the financial system. Secondly, because we want to see if our thesis is panning out as expected.

The first factor behind the gentle cool down in the property market is that residential property has been made far less attractive as an investment. There’s an extra layer of stamp duty for second homes. The tax treatment of buy-to-let landlords is becoming steadily less favourable and that will only continue over the coming couple of years. And foreign investors now have more hurdles to leap over.

So that has knocked a big chunk of demand out of the market. Capital Economics points out that, according to the latest available data, the stock of privately rented homes fell by 46,000 in the year to March 2017, and that the rate of growth slid sharply in the previous year.

According to the research group, this drop appears to have continued and perhaps even increased in scale, judging by changes in the number and value of buy-to-let loans outstanding.

“And given the further reduction in mortgage interest tax relief that is on the way, stagnant house prices and rising interest rates, there are few reasons to think that sell-off will soon abate”, notes property economist Hansen Lu.

This was always the point of the changes to the tax treatment of landlords, made when George Osborne was chancellor: to replace the would-be buy-to-let landlord with the would-be first-time buyer.

The Tories (certainly since Margaret Thatcher) always wanted Britain to be a property-owning democracy. This – plus the much less sensible Help-to-Buy scheme – was their “nudge” scheme to get that ideal back on track.

The second factor, of course, is that interest rates are rising and houses are already very expensive. If house prices are already as high as they can go, and the cost and availability of credit to buy a house is stable or rising, then prices can only remain the same or fall, barring a massive increase in wages.

This is very good news – let’s hope it continues

Just to be very clear – this is all good news. As we’ve said many times before now, this is what a healthy housing market correction would look like.

You want house prices to fall in real terms (ie, after inflation – specifically, in this case, wage inflation). A drop in real terms makes houses more affordable and would go a long way to addressing the anger that a lot of younger people feel about being shut out of the market.

At the same time, a fall in real terms doesn’t panic people in the way that a fall in nominal terms does. Most people (perhaps excluding Londoners) are mentally equipped to cope with the idea that their house is still worth roughly what they paid for it, even if they bought it a decade or more ago.

But they struggle a lot more with the idea that their primary asset has lost value. That’s bad for confidence. And given sufficiently big falls, it’s bad for banks’ balance sheets too.

So here’s what we’re crossing our fingers for: at the margins, the housing market balance of power continues to shift towards first-time buyers from buy-to-let landlords. The fact that mortgages simply can’t get any cheaper keeps house prices frozen or gently falling. Those things seem likely.

The missing component for now is wage inflation. Pay (including bonuses) rose at an annual rate of 2.4% in the second quarter of the year. So while that’s just about keeping up with house price growth, it’s hardly shooting the lights out.

Source: Money Week

properties brought to market
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More properties brought to market while selling prices stay strong in east central Scotland

This month has seen another increase in the number of properties brought to market in east central Scotland compared to last year, ESPC reports.

In August 2018, there was a five per cent increase annually, while in ESPC’s July and June House Price reports, this figure was 3.4 per cent and 3.2 per cent respectively.

Average selling prices rose by 3.4 per cent to £248,092 across east central Scotland, compared to the same period last year. The average selling price in Edinburgh rose by 4.5 per cent to £268,151. Within the capital, two-bedroom flats in Leith, the Shore and Granton saw the biggest increase in average selling prices, rising by 18.5 per cent to £202,173. Two-bedroom flats in Newington, Grange and Blackford also saw an increase of 18.1 per cent, rising to £306,566.

Properties in West Lothian also saw a significant increase in average selling prices, rising by 19.3 per cent to £233,325. This is less pronounced than the increase last month, when average selling prices in this area increased by 34.5 per cent compared to the same period last year. The average selling price was driven up due to a greater proportion of higher value homes sold recently.

The median time to sell across east central Scotland was one day slower than last year, with half of all properties going under offer within 18 days. In Edinburgh, the median time to sell was 16 days, which is one day slower than last year.

The number of properties sold in east central Scotland between June and August 2018 decreased by 5.7 per cent annually. This is due to fewer properties being brought to market in previous months and is not indicative of falling buyer demand.

Claire Flynn, PR and content executive at ESPC, said: “A further increase in the number of properties coming to market in east central Scotland is encouraging. This trend is positive news for buyers, as a shortage of properties has been limiting the local property market in recent years.

“Furthermore, average selling prices are still increasing steadily in comparison to last year, and we are continuing to see very short selling times across Edinburgh, the Lothians and Fife. Reports of house price drops and falling buyer demand in the wider UK market indicate that east central Scotland continues to buck UK housing market trends.”

Reflecting on Nationwide’s most recent House Price Index which reported price drops in the UK property market, Jenna Spence, operations director at Neilsons Solicitors and Estate Agents, said: “There is no such thing as the ‘UK property market’ – the UK is a patchwork of local markets each with its own dynamics and, unfortunately, much of the press commentary on the housing market focuses on what is happening in London and the south east of England.

“What matters most is what is happening in your local area if you are considering selling. In Edinburgh, sales prices have increased by 4.5 per cent on average due to huge buyer demand.

“We are definitely not seeing falling buyer demand by any means. It is very much the opposite in Edinburgh and the surrounding areas as evidenced by the speed at which properties are selling and the record selling prices achieved in many cases, if properties are accurately priced, professionally marketed and well-presented for the sale. Closing dates have become the norm in most cases and supply is simply not keeping up with buyer demand.”

Source: Scottish Legal

new-build
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UK construction activity slows in August, price pressures ease

British construction activity slowed in August after reaching a two-year high the month before, as builders worked their way through projects delayed by bad weather earlier in the year, industry data showed on Tuesday.

Financial data company IHS Markit said its monthly purchasing managers’ index for the construction industry dropped to a three-month low of 52.9 last month from July’s 55.8, below all forecasts in a Reuters poll of economists.

“The construction sector slipped back into a slower growth phase in August, with this summer’s catch-up effect starting to unwind after projects were delayed by adverse weather at the start of 2018,” survey author Tim Moore said.

The slide follows the weakest manufacturing PMI in more than two years on Monday, but analysts will not have a broad picture of the economy until figures for the much larger services sector are released on Wednesday.

Data released overnight showed robust consumer spending growth, driven by spending at pubs and restaurants, though some high-street shops suffered from hot weather and a long-term challenge from online retailers.

Overall, Britain’s economy has slowed in the two years since June 2016’s Brexit vote, and the Bank of England raised interest rates last month for only the second time in more than a decade on concern about longer-term inflation pressures.

The PMI survey showed widespread capacity shortages remain, and suppliers were taking the longest to deliver building materials since March 2015. Shorter-run inflation pressures eased, though, with input prices rising at the slowest rate in more than two years.

Source: Investing

housing
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Brexit and the housing market

On 23 June 2016, the UK went to the polls to determine whether the country should remain a member of the European Union (EU). After months of fierce political debate leading up to the vote, the public ultimately decided in favour of leaving the EU. The implications of this decision were felt almost immediately, with the then Prime Minister David Cameron tendering his resignation and the pound plummeting in value.

Some economic commentators feared the Brexit decision had ushered in a new era of stagnant market growth, with investors less likely to consider investment into the UK. In the ensuring months, however, the positive performance of the UK economy demonstrated that people had not been deterred from pursuing real estate investment opportunities. A survey of investors commissioned by Market Financial Solutions (MFS) at the beginning of the year found that 77% do not think Brexit is likely to affect their long-term investment strategies.

Of all the asset classes on offer in the UK, residential and commercial real estate have remained popular for those seeking an investment that can deliver stable returns. The MFS report found that 63% regard property as a safe and secure asset, with 18% of investors considering to invest in one or more properties over the next 12 months.

With Brexit scheduled to formally commence on 29 March 2019, businesses, investors and consumers have been given little detail on how the withdrawal process will be managed. For property investors, homeowners and prospective house buyers, an awareness of the current market trends is vital. Such awareness ensures UK society is ideally placed to take advantage of the property opportunities during the Brexit transition period.

House prices rise steadily
Since 2000, UK house prices have been steadily rising as a result of sustained market demand for property. Over the two years since the EU referendum, house prices across the UK have grown on average by 7.3%.

The rate of house price growth may have slowed down in London, but there are two primary reasons why this should not be cause for concern. Firstly, the average price of a London home sits at £476,752. To put this into perspective, the UK’s average house is currently worth £228,384. Secondly, the city’s allure as a cosmopolitan city continues to attract investment from domestic and foreign investors. Foreign direct investment from Asian countries have proven to be particularly popular. For example, South Korean investment into the UK property market totalled £1.1 billion in the first half of 2018, with £1 billion of this used to facilitate real estate transactions in the capital.

Outside of London, the UK’s regional cities have become investment hotspots for property investors. The performance of Manchester and Edinburgh’s housing market has been nothing short of impressive, with each experiencing respective house price growth of 7% and 7.1%. The reasons for this range from affordability to the new-build development projects and reflect the positive outlook construction companies and prospective homebuyers hold towards the future growth prospects of the UK’s regional cities.

Housing policy
Historically, attempts to resolve the housing crisis have been undermined by a lack of policy cohesion. For example, since 2000, there have been 18 different housing ministers. This makes the ability to deliver long-term policy particularly difficult. Part of the government’s efforts to resolve the housing crisis stem from promoting new-build developments.

However, the overall effectiveness of the government’s approach to encouraging housing construction has been questioned – a survey earlier in the year revealed that only 12% of surveyors think the government can reach its target of 300,000 new homes a year.

Based on the resilient performance of the property market over the past few months, Brexit certainty has not deterred prospective homebuyers from seeking real estate investment. This makes it extremely important for the government to ensure that the current imbalance between housing supply and demand is addressed in the lead-up, duration and follow-through of the UK’s transition outside of the EU.

Alternative finance
The global financial crisis was a defining moment for the UK’s financial sector. The imposition of strict lending measures imposed by banks made it difficult for investors and businesses to acquire the credit they needed to pursue new investment opportunities.

In response, alternative finance instruments such as bridging rose in popularity, offering access to fast, flexible and tailored loan solutions. Since September 2011, annual bridging loan completions have jumped from £474 million to an impressive £4 billion at the beginning of the year.

With 29 March 2019 set as the Brexit date, there is the risk of traditional lenders introducing strict lending rules similar to what was seen a decade ago. This time, alternative finance instruments will be at the ready to meet market demand for fast capital.

While it is difficult to pinpoint exactly how Brexit will affect the property market, the trends that have transpired following the EU referendum suggest that property will remain a popular investment. House prices are rising, and with demand outweighing supply, there is an added onus on the government to ensure people can move up the property ladder. The uncertainty surrounding Brexit could also lead to tighter credit controls, however, the rise of alternative finance means that investors are well-placed to access capital.

Source: Mortgage Finance Gazette

pound
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Weak pound, higher commodity stocks boost FTSE

The UK’s top share index rose on Monday, starting September on a stronger note as a weaker pound and a bounce across commodity stocks helped British equities outperform continental peers.

The blue chip FTSE 100 .FTSE index was up 1 percent at 7,504.60 points at its close, while mid caps .FTMC were flat in percentage terms.

A rise in oil stocks contributed more than 21 points to the FTSE 100, the biggest sectoral boost to the index.

Shares in Royal Dutch Shell (RDSa.L) and BP (BP.L) were up 1.9 percent and 1.2 percent respectively as the price of oil rose, supported by concerns that falling Iranian output will tighten markets once U.S. sanctions hit in November. [O/R]

UK mining stocks also rose, with Glencore (GLEN.L), BHP Billiton (BLT.L) and Anglo American (AAL.L) up as much as 1.9 percent. [MET/L]

Other major stock markets across Europe were subdued on Monday, however, as investors fretted about an escalation in the trade war between the United States and China, which had also weighed on Asian markets overnight.

“Investors still have mixed outlooks regarding the global trade situation as well as the turmoil in emerging markets caused by the recent Turkish Lira crisis,” Pierre Veyret, technical analyst at ActivTrades, said.

“This means fewer traders are going long on stocks right now.”

A weaker pound was another factor keeping the FTSE in positive territory. A fresh round of Brexit-related headlines dented demand for the currency, as critics at home and abroad ramped up their opposition to Prime Minister Theresa May’s plans for leaving the European Union.

A depressed pound lifted the FTSE 100’s big, dollar-earning constituents on the day.

However, worries over Brexit kept investors cautious on UK equities.

“The UK is a defensive, high-dividend yielding market which might have a problem if bond yields move sustainably higher, and if global equities advance, as we expect,” equity strategists at J.P. Morgan said in a note. They are underweight UK equities.

“We look for a stronger GBP, which will weigh on the performance of FTSE 100.”

Veterinary firm Dechra Pharmaceuticals (DPH.L) was the biggest faller among mid cap stocks, its shares tumbling more than 21 percent. This was their biggest one-day loss since January, 2003.

Dechra Pharma dropped after it said it would implement a plan to navigate a hard Brexit, adding that the measure may result in 2 million pounds ($2.6 million) of additional expense.

Analysts at Investec said that while Dechra’s preliminary results were ahead of their expectations, they were introducing some caution into their forecasts to reflect the potential impact of accounting standard changes, sanctions on Iran and a hard Brexit.

Source: UK Reuters

prospective tenants
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Prospective Tenants Reach Record Numbers

The number of new prospective tenants has reached its highest level seen in 2018 so far.

ARLA Propertymark’s July Private Rental Sector report has found that the number of new prospective tenants registered per letting agent rose from 71 in June to 79 per cent in July. This is the highest level seen in 2018 so far.

This figure has not been so high since September 2017. During this month there were also 79 per branch.

The report also found that year on year, demand is up 13 per cent. There were just 70 prospective tenants registered per letting agent in July 2017.

A decline in rental property supply was also noted in July, falling from 191 in June to just 184 in July. Year on year, this figure has fallen four per cent from 192 in July 2017.

The report also focused on rent increases. Many landlords have been forced to offset costs from growing regulation onto tenants. In June, the number of tenants who saw their rent increase grew to 35 per cent. However, this declined slightly n July to 31 per cent. Year on year, this figure has not seen much fluctuation, remaining at 31 per cent in July 2017 as well.

ARLA Propertymark Chief Executive, David Cox, said: ‘Buy to let investors are being pushed out of the market by increasing costs and continued regulatory change, and new landlords are being deterred from entering. Last month, an average of four landlords took their properties off the market per branch, up from three this time last year – and as supply falls, competition among tenants increases, which pushes up rent costs.’

He continued: ‘Almost a third saw their rents rise last month, and although this figure was down from June, it’s still far too high. To put tenants back in the driving seat, we need more homes available to rent, and the only way this will be achieved is if the Government makes the market more attractive for buy to let investors.’

Source: Residential Landlord

industrial
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Office and industrial property build strong returns in ‘attractive’ Scotland

Returns in Scottish commercial property dipped in the ­second quarter, with the exception of growth in the office and industrial ­sectors, according to the latest research from CBRE.

In Q2 total returns hit 2.4 per cent for the offices sector and 2.3 per cent for the industrial sector, both “significant improvements” compared with Q1, said the property adviser’s quarterly Scotland Property report. Scottish commercial ­property achieved an overall return of 1.4 per cent, a slight decline from 1.7 per cent in the first quarter of the year.

The weakest performing sector was retail with a 0.3 per cent return, which CBRE described as “reflecting the turbulence this sector has experienced so far this year”. Retail was the only sector in Scotland to see capital ­values fall, down 1.1 per cent ­during the quarter, as a number of major high street retailers have embarked on store ­closure programmes or sought company voluntary arrangements.

On an annual basis, the Scottish all-property total return remained virtually unchanged at 7.1 per cent over the 12 months to the end of June. Total returns in Scotland are now close to matching the returns being achieved across the UK as a whole, with the exception of the industrial sector, which is fuelled by the strong market in London and the south-east of England.

Steven Newlands, an executive director in CBRE’s investment team, said: “It is encouraging to see Scotland being considered as an attractive investment location again after the threat of another independence referendum has diminished. “This is evidenced by Scottish property returns now being very close to those achieved across the UK as a whole, with office sector returns actually ahead of the UK for the first time in eight years.

“Industrial property hasn’t followed the same pattern as the rest of the UK. “However, the gap is narrowing and we predict that Scotland will eventually catch up on the “last mile delivery” trend being seen in London and the South East given industrial property here offers very good value for money.”

Overall, there has been some £1.25 billion of property spending across Scotland during the first half of the year, a rise of 43 per cent compared to the first half of 2017, with more than £500 million of this invested in the office sector. LCN Capital Partners’ purchase of the Aker campus at Aberdeen International Business Park for £112.5m was the largest office deal.

Source: Scotsman

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Councils may push for reform to empty property relief after policy

Since 2008, when empty property relief was first introduced, the use of short-term lease arrangements as a form of business rates mitigation has become commonplace. This typically involves tenants taking short-term leases on properties, often on very favourable terms, allowing the landlord or property agent to reduce their business rates liability by taking advantage of empty property relief when the lessee leaves. This can significantly reduce the landlord’s business rates liability across a property portfolio.

Of course, local authorities do not like this practice and seek out every opportunity to challenge these short-term occupations. Often, this involves pushing for evidence that the property is genuinely occupied and that there is a commercial benefit to the occupation. For example, the tenant could be running a business from the premises to make a profit.

In Principled Offsite Logistics vs Trafford Borough Council, the local authority argued that, by using the premises to simply store goods short term, the tenant was not getting any commercial benefit from its occupation and therefore it could not be regarded as a rateable occupation. The council argued therefore that the landlord should not be able to claim empty property relief when they leave.

The tenant openly described the arrangement as a rates mitigation scheme and explained that in exchange for storing goods, it was paying the landlord a peppercorn rent and also receiving a percentage of their savings when leveraging empty property relief. Trafford Borough Council had obtained magistrates’ court summonses seeking rates liability orders against Principled. However, Principled Offsite Logistics decided to challenge the council’s approach and it requested a judicial review.

The review has now concluded that, in the eyes of the law, rateable occupation does not have to be for commercial benefit as long as there is some benefit to the tenant. This outcome means the common objections raised by many local authorities against this type of rates mitigation scheme can be defeated and schemes can continue unheeded. This result will be welcome news for businesses, commercial landlords, property agents and corporate occupiers alike.

Yet the situation could change in the future. Local authorities have been up in arms for some time about what they consider a loophole in the law. The outcome of this case could encourage them to push for changes to legislation. Landlords and corporate occupiers need to be prepared for this.

Source: Property Week

government
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Haart Says Government Must Increase Buy To Let Support

The government needs to increase the support it extends to buy to let investors, according to Haart estate agents.

The government needs to begin supporting investors or it will see significant numbers of landlords exiting the buy to let market says Haart. This will lead to a sharp decline in rental property listings.

The call for further support comes amidst the government consultation for longer tenancies. Without greater incentives for buy to let landlords, many will not be prepared to offer longer tenancies. They will then leave the market. This will contribute towards the already-exiting supply and demand imbalance in the private rental sector that is beginning to push rental prices higher, adding more pressure on tenants.

Prospects for the sector without further incentives are looking worrying. The latest data from UK Finance found that gross mortgage lending rose by 7.6 per cent to £24.6 billion in July 2018 year on year. This was ahead of this month’s base rate rise.

However, activity in the buy to let sector did not grow. This is likely due to increasingly punitive tax measures levied by the government, such as reducing mortgage interest relief to the basic rate of income tax and adding a 3 per cent stamp duty surcharge to the purchase of additional homes.

12 per cent fewer landlords are purchasing properties in comparison to the same time last year.

CEO of Haart estate agents, Paul Smith, commented: ‘Mortgage lending jumped a huge 8 per cent on the year in July as existing homeowners sought to seal themselves into a lower rate ahead of the Bank of England’s interest rate hike. The buy to let sector is a fundamental part of the UK property market, and with fewer landlords, we are seeing rents rise. The government must stop penalising those who are willing to invest in the rental market and stop its needless crackdown on the sector.’

Source: Residential Landlord