The market is already reacting from the Chancellor’s Autumn statement; applications for BTL properties in the vehicle of a LTD company have tripled from the same time last year.
Purchasing in the vehicle of a LTD company means you can offset the interest element of any borrowing as a legitimate expense. This is something which the government will be phasing out from 2017 to 2020 in doses.
The rate of stamp duty will increase to over 3% come April next year, this will lead to a spurt in property acquisitions between now and April. Given it can take about three months to complete a deal I would predict there will be a quick start from the traditional Christmas lull in the property market.
Acquisitions will be more likely to occur in the vehicle of a company in anticipation of the coming changes. The downside to this is currently the mortgage rates available for LTD companies are not as competitive in comparison to purchasing in individual names.
As time goes on mortgage lending for the LTD sector should increase both in the variety of products and more competitive rates given that the demand for this type of financing is looking to increase.
My prediction for the London market is there will be a spurt of activity up until April, and then a period of lull whilst the market absorbs the change and then it will carry on its rise, in a more dampened way. The top end is to be avoided at the moment. Already there are signs of a drop in the market for properties above £1.5m, which may sound a lot but in some boroughs of London it will only buy you a small Victorian house.
The doomsayers will say this will be the nail in the coffin, this will be the reason why the market will die, finally. Property is here to stay and will always serve as a great investment, its shape and nature will change according to the environment. You can be sure it will not disappear as an investment class, and it does not crash. There are 1.4m landlords in the UK, the market is worth £60bn and generates £5bn of rental income per month, 2/5 of this is from London; it is not likely to disappear.
Normally purchasing a company which owns a single property was only reserved for high value properties, this will slowly become common place. Purchasing a company means the incoming buyer will benefit in two ways, one is the saving on stamp duty which will only be 0.5% and the other is it will benefit from being insulated from the tax changes described above. When this becomes common place, and the government realises they are missing out on their share of the pie they will introduce a legalisation to outlaw this. Well, someone has to finance the wars, they aren’t cheap.
These two factors in combination should provide a catalyst for those who have been contemplating about investing in the London market to do so now. Or it can serve to paralyze, probably for most people, from doing anything.
I’m meeting an investor later today, he has been speculating about investing in Central London for many, many years. He calls me every so often to touch base, and see what’s going on in the market, and then takes the information and tends to do nothing. Meanwhile the property market has been going only one way, and that’s up.
He has in all fairness dabbled in some property in the outskirts of London, and outside.
His idea of an investment is to purchase something in cash and rent it out and earn about 5-10% per annum combined. A very ultra conservative approach.
I’m sure he does want to do something, he has the money to do so, but he is unable to take the decision to move forward with it. Hopefully the above will push him over the line to do so. If he delays the decision any longer he will be looking at a 3% uplift in transaction costs, which is no small amount when you consider the average property price in Westminster is £1m. Even on a property for £500k this equates to £15k, the price of a new car. From one point of view this can be a saving for a quick decision.
However there is an argument to suggest the property market will take a slight hit post April due to the uplift in stamp duty. Psychologically it will have a greater effect than the actual reality, meaning the uplift in stamp of only 3% will cause people to see this disproportionally, though it will be only 3% the effect may feel more like 10% in investors’ minds.
This will cause a lack of buyers, which means there will be deals to be had. There will still be sales due to the 3D’s: Death, Divorce and Distress.
This however remains to be seen, as every property is unique. One we were speculating over has just exchanged this morning. For the pounds per square foot it was cheap, in St Johns Wood, consisting of 878 sq. ft.; it exchanged for £790k which means just under £1000 per sq. ft. With a long lease and solid location the only issue was the building was a little quirky. It looked like a metal building, and the property itself was a long rectangle shape. Here the seller was desperate, there were two contracts out, he wanted a done deal as he was looking to purchase something else overseas. We were offered the contract directly for £725k.
It would have worked as a long term hold, we were exploring the possibility of adding many rooms to the property, and renting on a room by room basis to enhance the yield generated. But time and tide wait for no man.