4 Things About Interest Rates

Although it may not seem like it at first, interest rates really are interesting. High rates are great news for savers but bad news for borrowers and vice versa. Regardless of whether you’re a saver or a borrower, it’s important to understand 4 key points about interest rates.

For savers interest rates are in a race against inflation

Life is often a balancing act between conflicting goals and possibilities. In financial terms, this generally boils down to risk versus reward and/or cost versus benefit. Higher-risk investments can offer the possibility of great returns but, pretty much by definition, there is also the possibility of losing your initial investment. Cash savings can be viewed as safe in the sense that there is a relatively low risk of the saver losing their deposit, but if inflation (the cost of living) outpaces interest rates (the return on investment), savers can find their nest egg losing its value in real terms. This can be particularly challenging for older people on fixed incomes (pensioners) who do not necessarily have the long-term investment horizon of the younger generation but who do have a need for a reliable source of income to maintain themselves.

The interest rates available to consumers may be completely different to central-bank rates

About once a month, the press reports on the activities of the Monetary Policy Committee of the Bank of England, which sets the Bank of England’s interest rates. These are the rates charged (or paid) to banks which borrow from or deposit with the Bank of England. These rates may then feed through into consumer products such as savings accounts, mortgages and credit cards, some of which track this base rate. Some products, however, are fixed-rate and hence are unaffected any changes to the interest rates set by the Bank of England for the life of the fixed-rate deal. The key point to understand is that the interest rates offered to consumers are influenced by a number of factors as well as the base rate. Some of these are generic, such as what the banks think of the economy in general. Some, however, are specific to each individual, such as their credit history. Then, of course, there is the simple fact that banks need to pay their own bills and make a profit for their shareholders.

How do interest rates affect the market?

It’s usually considered that rising interest rates are bad news for stock markets. Reduced spending on goods as businesses and consumers borrow can cause stocks to drop. This is only a part of it though as different types of investments see rate rises differently. For instance gold may appears less shiny when interest rates are high as it doesn’t pay interest and can be less attractive to store.

The impact on property investment is found when combined with mortgages and higher interest rates. Mortgages become more expensive making buy to let less profitable. Savvy developers however will watch the economy and know when to hold back on new build. This can then increase a demand for property in that area meaning that the returns in development can still be high.

As with all investments, there is no hard and fast rule and you can lose as well as win.

Interest can be simple or compound

With simple interest, the interest payments are calculated purely on the basis of the initial sum deposited or lent. So, for example, if you deposit £100 then the interest you receive will always be based on that initial £100. With compound interest, however, interest is calculated on a rolling basis. Hence for example, if, after the first year you had received a total of £10 in interest payments, your next year’s interest payment would be calculated on the whole £110 rather than just the £100 you initially deposited. This is great news for savers but, of course, terrible news for borrowers and is part of the reason why those who take out high-interest credit can wind up paying more in interest than they borrowed to begin with.

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Landlords Vs Limited Companies

Napoleon is said to have described the English as a nation of shopkeepers. If he were around today, he might describe it as a nation of small-scale landlords. In the near future, however, people might refer to the UK as a nation of corporate landlords as changes to the financial and legal landscape impact both the cost-effectiveness of being a private landlord and the level of personal risk involved.

Investment is about numbers

You buy a home to live in, but you buy an investment property to make you an income. In the most basic of terms, you work out the gross income you can generate from your property, you estimate your expenses, and you decide if the difference between these two figures leaves you with enough profit to be worth the effort involved. If circumstances change, you do your sums again and decide whether or not your investment is still worthwhile. Recent, well-publicised, changes to the tax system have the potential to be seriously detrimental to the net income generated by investment properties held by private landlords, i.e. landlords letting out property outside the framework of a limited company. The announcement of these changes led to a slew of articles both online and in mainstream publications, discussing the possible use of the so-called “landlord loophole”, i.e. the possibility of converting a property portfolio from a private holding to an asset belonging to a limited company. While this might be a good idea in theory, in reality, setting up a limited company can be an expensive and complex undertaking, so much so that small-scale landlords may find it more appropriate simply to sell up and find another investment vehicle.

Risk is also a factor

All landlords have to deal with three main forms of risk:

  • the risk of property being damaged
  • the risk of being sued for compensation for negligence
  • the risk of letting a property to a tenant without the “right to rent”

Even though the risks may be the same, how they affect landlords can be very different. While dealing with a damaged property may be the most obvious risk of being a landlord, it’s arguably the one which should cause the least degree of concern since it can usually be mitigated through a combination of tenant selection, deposits and insurance. The risk of being sued for compensation for negligence may be much smaller and again there are steps landlords can take to mitigate it (the obvious example of this being to take good care of their property), but in a world of “no win no fee” lawyers and adverts making people aware of the possibility of them claiming compensation for an accident which wasn’t their fault, the reality is that even the best landlords can find themselves on the receiving end of a claim from a tenant who has nothing to lose. If a private landlord is found negligent, they are personally liable for the damages, whereas a limited companies can only be sued to the extent of their assets. Likewise, while the “right to rent” scheme applies equally to both private and corporate landlords, the former may find it much harder to navigate the complexities of the scheme in a non-discriminatory manner.

The end for private landlords?

While it’s still relatively early days and the attraction of owning property in the UK should never be underestimated, it is fair to say that the government’s actions have the potential to push private landlords out of the market. Smaller private landlords may well just liquidate their portfolio and move on, while larger ones may become limited companies. What’s more, the government has committed to abolishing letting agent fees for tenants, which presumably means that letting agents will charge landlords instead. While, in theory, this should be a situation which is six to one and half a dozen of the other, private landlords who are already seeing their returns dwindle and their risks increase (due to the right to rent scheme) may decide that enough is enough.

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Will The General Election Bring Joy To Buy To Let?

From a political perspective, UK-based buy-to-let landlords have had little celebrate over recent times. New affordability criteria for (re)mortgaging, the controversial “right-to-rent” scheme, and the tax “triple whammy” have hardly left buy-to-let-investors in the UK filled with good cheer. Nevertheless, the buy-to-let market continues to hold strong, there’s a very simple reason for this. In the UK there is a chronic shortage of housing in general, coupled with a significant percentage of people for whom renting is clearly the best choice for their life stage. The fact that international investors are making the most of the weak pound to buy up UK-based assets is merely a reflection of this, rather than a key driving force for behind the strength of the market. Now we have a forthcoming General Election, could this provide a welcome boost to buy to let? Answering this question requires looking at three others.

What is the impact of having an election?

Elections, fundamentally, are a choice between the status quo (the current government or their direct successors) and change and any time there is the potential for change there is an element of uncertainty. This means that the period just before an election can, in many ways, be the equivalent of a person holding their breath while they wait to see what is going to happen, hopefully followed by a sigh of relief. It’s also worth noting that even when an election result is as widely expected, it can take a little while for people to absorb the fact and decide what, if anything, they need or want to do about it. In the short term, that may mean that the buy-to-let market is “on hold” in many respects, until everyone concerned has a clearer idea where they stand.

Who will win the election?

People may feel cynical about opinion polls these days, but it’s a hard fact that Theresa May had to ask parliament’s permission to call an election about three years earlier than scheduled and therefore it’s a reasonable assumption that she thinks she can win it, or, perhaps it would be better to say, she thinks her opponents can’t. For their part, her opponents, theoretically, have a lot to gain, in that they have at least some sort of chance of taking power, and very little to lose in that the election will only extend the Conservatives’ mandated by another two years, assuming they win. A quick scan of newspaper headlines reveals that this seems to be a widespread assumption even former Labour leader Tony Blair saying that he expected Theresa May to win it.

What is the Conservatives’ attitude to buy-to-let?

If we assume that the Conservatives win the election, then it also seems reasonable to assume that, at least in the beginning, they will carry on along much the same path as they have been on so far. This includes a promise to “fix the broken housing market”. That’s a pretty broad statement, but the last couple of budgets give an indication of what the Conservatives currently see as their preferred approach. There has been money to build more new homes and higher taxation on buy to let. At current time, the government is also discussing a ban on letting agents’ fees to tenants. In short, the government seems to be trying to make it more of a buyers’/renters’ market. The problem is that the main reason housing in the UK has long been a sellers’/landlords’ market is because of the lack of supply and this is highly unlikely to change overnight or even in the next five years. What may well disappear are “amateur” landlords, possibly to be replaced by “buy-to-let” housing funds, which would allow people to invest in the buy-to-let market without actually becoming direct landlords. This would allow for a consolidation and, indeed, professionalisation of the market and perhaps create a more effective industry force to allow landlords to get their point of view across to decision makers. So, in short, although the election may cause some short-term pain in the buy-to-let market, it has the potential to bring a lot of longer-term benefits.

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Why Brexit Might Not Be That Bad

It’s official (almost), the wheels have been set in motion to trigger Article 50 and start the process of taking the UK out of the EU. Understandably, there has been a great deal of media coverage about what this will all mean and while, on the one hand, the future is anybody’s guess, on the other, when trying to determine what will happen, it’s often helpful to look at the fundamentals.

Fundamental 1 – London is a property market apart

London is home to the city, which has been quite open about its concerns regarding leaving the EU. Other European cities have also been quite open about their desire to lure businesses away from their London bases. There are, however, a number of reason to refrain from panicking about a property crash in London, for example:

1 – While it would probably be painful for the city to lose access to the European market, it has global reach so it is highly doubtful that the blow would be terminal.

2 – Even though London and the city are often spoken of as though they were one and the same, in actual fact there is far more to London than the city. The creative industries are one obvious example of this, as is the fact that many digital technology and other “disruptive” companies, have chosen to make London their base. These cover a broad scale from industry giants such as Apple, to niche start-ups. In principle, these companies could be lured away by other cities with equivalent infrastructure and continued access to the single market, however in practice there are a number of reasons why they should stay put.

3 – The UK has a very flexible labour market including a thriving freelance economy, which is great news for companies who need to get work completed but want to avoid the commitment of taking on employees (at least until they have a clearer idea of where they stand). It also tends to be at least relatively accommodating of disruptive business models. Paris, by contrast, has been locked in a battle with tech giant Amazon, which is unlikely to have passed unnoticed by any technology companies who may have been approached about moving there.

Fundamental 2 – The UK is an attractive export market for other countries

While some pundits have speculated that certain EU members may be prepared to sacrifice their own export potential in order to make an example of the UK and deter other countries from leaving the bloc, it’s a wide open question as to whether this would be a feasible ploy in real-world conditions. In simple terms, such an approach carries the risk of causing job losses and this may go down badly with the (voting) public. Even if such a scenario did occur, it is highly likely that other countries would look to fill the gap, which would create reciprocal export opportunities for the UK. This is important for the post-Brexit outlook of regional economies which are based on agriculture and/or manufacturing.

Fundamental 3 – Long-term value will always attract investors

While the weakening of the pound makes it more expensive to import raw materials, it also means that anything priced in sterling becomes more affordable in real terms to international buyers. This includes finished goods (for export), shares in UK-based companies and, of course, property. The fall in the value of sterling could, therefore, help to provide a short-term boost to the UK economy during and after the Brexit process. Over the long term, it is a reasonable expectation that as the UK economy stabilises, the value of sterling will rise again until it is, eventually, back to its pre-Brexit levels.

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How Will Stamp Duty Affect Buy To Let?

April 2016 saw the introduction of a 3% stamp duty levy charged on purchases where the purchaser already owned a property. There were a few exceptions to this and certain circumstances in which the levy could be refunded (e.g. if people were moving from one property to another and only had two properties temporarily). Buy-to-let landlords, however, essentially pay 3% more for a property than a first-time buyer would.

The Theory

Home buyers and buy-to-let landlords are in direct competition for properties. Competition increases prices and higher-priced houses require larger mortgages and hence higher incomes and bigger deposits. If higher house prices mean that people are unable to afford to buy, then these people are, effectively, forced to rent and as renters they have to pay their landlord while saving for a deposit. This puts them at a disadvantage in the property market. The 3% surcharge is, therefore, intended to level the playing field.

The Reality

Given that the 3% surcharge was introduced just a few months before the Brexit vote, with all the turbulence that has caused, it is difficult to impossible to determine what specific impact the surcharge has had by itself. What is, however, possible, is to look at recent history and see what indicators it may give for the future. Home ownership has long been a central plank of government strategy (at least since the days of Margaret Thatcher). Over recent years, various governments have introduced a range of schemes to make it easier for first-time buyers to get on the housing ladder. These have included: shared ownership, equity loan, mortgage guarantee and the help-to-buy ISA. For want of a better term, these schemes can be seen as carrots to help home buyers. The government’s new stamp duty surcharge, therefore, can be seen as a stick with which to beat BTL landlords. The fact that the government is now using sticks as well as carrots raises the question of what other action might be taken to make life more difficult for BTL investors if the current measures fail to have the desired effect.

Moving Forward

The BTL market, for the moment, still seems very much alive and well and there has already been extensive discussion about the action(s) landlords could take to minimise (or eliminate) the effect of these charges. Suggestions have varied from passing the costs on to tenants to moving properties into a limited company, whereupon different tax rules apply. The challenge facing BTL investors is that if they find themselves locked into a battle with government policy any move they make, even if it is legal at the time, can be rendered ineffective at a later point through a change in the law or the tax system. On the one hand, there are many reasons why the BTL market could and should offer attractive returns in a country like the UK, on the other hand some investors may be feeling uncomfortable about the prospect of being in the government spotlight and may be looking for alternative ways to profit from the UK’s thriving property market.

Is property development the new BTL?

One point on which there is broad consensus is that building new homes is crucial to the UK’s future, partly because the population is increasing and partly because existing, lower-grade housing stock needs to be replaced. Because of this, high-quality property development is actively encouraged, for example, the 2016 autumn statement included a specific commitment to building new homes. Hence investors who want to enjoy the returns from property without the risk (and effort) involved in buy-to-let, might find investing in property development is the perfect solution.

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New Home Manifesto – What Does It Mean?

Annual budgets serve many purposes, one of which being to show that governments are making good on election (or other commitments). Affordable housing (or the lack thereof) has long been a political hot potato in the UK and therefore it was only to be expected that the government would take some form of action to address this in the budget.

The promises in brief

There were two key points which directly relate to housing throughout the UK. The first was the promise of a £2.5bn housing infrastructure fund, which should lead to the building of 100,000 new homes in areas of high demand. The second was the promise of £1.4bn which was specifically for the provision of 40,000 affordable homes. With regards to this second point, it’s worth noting that this pledge actually goes even further than simply providing the funds. The government has relaxed the rules around bidding for the funds, meaning that companies have more options open to them than previously. In addition to this, there was a £3.15bn funding pot provided to London for the provision of affordable homes.

The budget also contained a number of promises relating to infrastructure, which could feasibly have an impact on the property market, for example increasing transport options may make it viable for people to travel to work from places they would otherwise have been forced to overlook and similarly rolling out superfast broadband may increase the options for home/remote working, which again could have a knock-on effect on the property market.

A stick for buy-to-let, a carrot for new homes

In 2015 the government delivered two sucker punches to BTL landlords. It made changes to stamp duty so that those owning more than one property paid an increased fee and it reduced the amount of mortgage tax relief which landlords could claim. The 2016 statement left BTL landlords alone, although plans were announced to clamp down on fees charged to tenants by letting agencies, but contained the announcement that the government would be supporting house building in general and the provision of affordable homes in particular.

However with new taxes and stricter lending controls coming into force in a few months the buy to let market is not looking as promising as it once did.

The outlook for 2017 and beyond

At the moment it’s rather hard to say what effect all these changes will have in practice. First of all, the autumn statement was only a few months ago and happened right before the Christmas period which has its own set of rules (some economic sectors being frantically busy, while other go into seasonal limbo). Secondly some of the changes are yet to be enacted and in some cases, it’s unclear at what point they will be implemented. For example Philip Hammond’s promise to put the brakes on agency fees is to be implemented “as soon as possible”. Thirdly, and possibly most importantly, there is very little clarity on how these pledges are going to be implemented in practice. For example, the government has relaxed rules around bidding for funds to develop affordable housing so that, in principle, bidders could develop homes for affordable rent instead of having to offer some sort of ownership option, be it shared ownership or rent to buy. These new rules, however, have yet to be tested. In other words, at this point it’s entirely unknown whether or not bidders will consider it worth their while developing property intended purely for rent or whether their applications will be accepted if they do. It’s also unclear where the priority will be in the “high demand areas”. London would be an obvious example of a place where housing is desperately needed, but it has already been designated its own pot of affordable housing funds. Presumably the answer to these questions will be revealed in time, but the government acknowledging the importance of home building in the UK is, at least, a positive sign.

https://www.theguardian.com/housing-network/2016/nov/23/autumn-statement-2016-social-housing
http://www.homesandproperty.co.uk/property-news/autumn-statement-2016-five-ways-it-will-affect-the-property-market-a106501.html
http://www.bbc.co.uk/news/uk-politics-38075649

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Rice’s Hill, East Grinstead update – March 16

The Bastien Jack team are pleased to confirm planning permission has been granted for a new development of twelve new One and Two bedroom apartments in East Grinstead, the site will also incorporate two penthouses. We have appointed a design team who are developing conception/planning drawings  to construction drawings.

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The site has already had Soil Investigation tests and a Topographical Survey to assist with the foundation design and all results so far have been positive.

We are developing the internal specification but will base on our current well received spec used in Phoenix House Phase 1 and Phase 2.

Joseph Gilbert, our newly appointed Project Manager will take the lead on this site as well as Saxley Court.

There is keen interest in the properties, please give our Lincoln office a call if you want to reserve off plan.

Kind regards

Rick

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Saxley Court, Horley update – March 16

Bastien Jack are pleased to announce and welcome Joseph Gilbert as Project Manager, he will drive the Saxley Court project forward as one construction phase with Bastien Jack Limited leading as Main Contractor.

Due diligence of sub contractors aligned to the project continued during March.  We take great care to ensure the correct contractors are appointed who have a reliable track record, where we can be confident of the quality of work and the programme can be delivered as scheduled.

Please review the proposed development:

Saxley Court walkthrough video

We are still on track to deliver the project by September 17.

Warm regards

Rick.

 

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Saxley Court, Horley update – February 16

The team are now pleased to confirm we have the necessary Party Wall Licences and Access agreements to allow us to demolish part of the existing structure and commence the development at Saxley Court. We have also secured sales for 31 apartments and the legal exchanges will be sealed over the next couple of weeks.

It has been necessary to have lead in period for this project. In the past Bastien Jack developments have been smaller and work has started on site as soon we have legally completed. Saxley Court is a lot larger and more complex meaning we couldn’t have started this site as soon as we purchased it. We have tenants in five existing and trading retail units which we need to accommodate throughout the project.

The design also fills the whole site, therefore building up the to the curtilage requires license awards form our neighbours both freehold and leasehold before we can begin. After we bought the site last year, we embarked on the process of obtaining the necessary licenses/agreements. Unfortunately, there is no time limit for a neighbour to agree or disagree to the licenses, it’s down to the appointed surveyors to carefully negotiate and agree consideration payments. It is therefore difficult to account for a timeframe and include this into a lead in programme. For simple non contentious requests it takes three months to agree an award from the point of issuing the request, however Saxley Court was not a straightforward application.

As well as the Party Wall Awards, the project was further complicated by initial requests to develop in two phases. This created more planning considerations and practical methodology to ensure the build was achievable. We are now able to consider the conversion of the existing building and new build section in one phase, which will assist us in practical construction and successfully accommodate the existing retail units.

Bastien Jack has the experience to alter its entity, we have split up the development into separate Sub Contractor packages where Bastien Jack takes the role of Main Contractor and we’ll drive the project with a full time Site Manager and site staff, overseen and supported by our Project Manager. Firm labour and material prices for the defined sub-contractor works are being gained, we’ll award accordingly and commence on site with the knowledge the project will deliver all the objectives previously communicated.

With the benefit of this knowledge, we projected to commence on site in January 2016, we will now look to commence as soon as Sub Contractors have been appointed and conclude by September 2017.

Regards

Rick.

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