It’s Not Grim Up North

Data from peer-to-peer lender Kuflink shows that rental yields in the North of England and Scotland have been comfortably beating rental yields in London at 4.3% and 3.2% respectively. While this is, of course, interesting news for (potential) buy-to-let investors, it’s still useful market intelligence for those who prefer to avoid the politics of buy-to-let and invest in the property market through other channels, for example property development.

Takeaway point 1 – There’s a difference between price and value

London and the South East is an expensive place and hence landlords are likely to be able to charge higher rents than they would for equivalent properties in other parts of the country. The flip side of this, however, is that buying the rental property is likely to have cost them more than an equivalent property in another part of the country. There are still plenty of reasons why the Thames Valley area could be a good place to invest in property in some way, but it’s worth remembering that there is strong demand for property in other parts of the UK as well and hence opportunities for investors.

Takeaway point 2 – It’s always worth looking out for up-and-coming areas

According to Kuflink, Manchester and Salford provided rental yields of 6.7% and 6.6% respectively whereas Cambridge was a mere 2.7%. The data did not analyse why this was so, but one very feasible explanation is that Manchester and its neighbour Salford have both been in a process of regeneration over recent years, with the BBC making news itself by moving some of its production to Salford back in 2012. The availability of work attracts people to an area, particularly young adults, for whom renting is likely to be the most appropriate option, even if they have the funds to buy. The combination of relatively low house prices (compared to London) and increased demand for rental properties makes for good rental yield. It also offers good opportunities for other forms of property investment since many of the people who arrive as renters will ultimately settle down and buy property in the area. Cambridge, by contrast, is a mature market. As a University town, it has a pretty much guaranteed market for rental properties and as a research centre it also has a demand for property to buy, but there is nothing new about any of this and so the opportunity to invest at the start of an upward trend is really long gone. The North of England and Scotland have both been benefitting from improved infrastructure (particularly transport links and broadband internet) and as they are outside the “city” zone, they have less reason to be concerned about the prospect of some financial service roles being moved out of the UK due to Brexit.

Takeaway point 3 – Quality matters

The fact that in the UK there is always a strong demand for housing is hardly a secret and a quick scan of a newspaper website will probably reveal plenty of articles about landlords and home builders taking advantage of desperate renters or buyers. While there is certainly an element of truth in this, the simple fact is that the fundamentals of business also apply to the property market, even though it generally moves at a slower pace. Companies (or individuals) who supply shoddy goods and/or poor customer service may make a quick short-term profit, but over the long term they tend to get found out and weeded out. Because of this, anyone looking to make meaningful, long-term returns from property, whether that’s as a landlord or as an investor in property development, is well advised to be very selective about their purchases and only put money into high-quality builds.

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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 Build Concerns

Cowboy builders have long been fodder for the press (as well as various industry bodies and occasionally the police), but a quick look at press headlines about new build properties (and by extension, the companies which build them), could leave some home buyers with serious concerns about buying one.

What the headlines say

Some headlines point to developments which do have serious flaws in workmanship ranging from structural issues to problems with facilities such as heating or windows to more significant cosmetic flaws such as badly applied plaster. In many cases, however, the issues with new builds ultimately boil down to a mismatch between the buyer’s expectations and the reality of what they have been sold, which may have been brought about by some degree of misrepresentation. For example, a purchase contract may specify the exact dimensions of a room, but if the buyer takes a trip around a show home to help them to translate these figures into practical terms, the unwary may well find themselves caught out by the use of cut-down versions of standard household furniture, which gives the impression that the rooms are more spacious than the actually are. In fact space and the way it is used is a key issue with many new build homes.

The reality

The UK needs more new build homes. In addition to a growing population, existing low-grade housing needs to be removed and updated to meet modern requirements. This means that home builders know that there is generally an eager market waiting for any new development and, once that is sold, plenty more home buyers desperate for them to complete their next project. It’s therefore an unfortunate fact of life that some builders will look to maximise their profits by completing developments as quickly as possible and to the minimum acceptable standard. They may further resort to “tricks of the trade” to mislead buyers into thinking they are getting a higher-quality property than is actually the case.

Making a successful new build purchase

 

Understand the law

At present time, property is excluded from the Sale of Goods Act. Instead, there is an industry watchdog called the National House Building Council (NHBC). If the home owner identifies a defect within the first two years after purchase, the builder will be obliged to rectify it. After this period, structural issues will be covered for a further 8 years (making 10 years in total).

Check the credentials of your developer

In addition to speaking to the developers themselves, see what other people are saying about them. Go on to relevant internet forums and see where their name has come up in threads and what has been said about them. Be aware that even the best developers can trigger some complaints, but overall the comments should be far more positive than negative. Ask around the neighbourhood to see if you can find anyone who has already bought a property in the development which interests you. See what they have to say about their experience. If you can’t find anyone in person, try heading back online and seeing what you can learn there. Look up previous developments by that developer and either visit them in person or head back to the net to see what kind of reputation they have and how people feel about living in them now. Remember to be clear about the difference between issues which may have been caused by the developer (e.g. misrepresenting the amount of available space) and issues outside of their control (such as general changes in the local area). Check the developer’s promotional material against outside sources. For example, you could use a design tool such as SketchUp to see whether standard-size furniture will fit in a room in the same way as you saw in the show home. In other words, do thorough research on your developer before you commit to a purchase so that you can be confident that you are buying into the best that new build homes have to offer.

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5 Ways to Invest £50,000

It’s been a long time since savings offered any sort of meaningful return, which means that those who wish to grow their cash need to look at alternatives. With that in mind, here’s a look at where you could put a £50K investment.

The Stock Market

The stock market is a big place and the companies in it perform very differently, which is understandable given that the term “the stock market” includes everything from high-tech start ups to established blue-chip companies with little in the way of growth in their share prices but great dividends. This is why there is generally at least one stock-market investment to suit anyone of any age, appetite for risk or preference for capital growth versus income yield. The stock market can provide good returns, investors just have to place their money with care and accept the fact that both individual companies and the market in general can go down as well as up.

The Property Market

The property market has long been popular with investors seeking good returns on their money with minimal risk. There are some places where £50K could buy you a feasible buy-to-let property although you might need to budget a little extra on top for sales costs, e.g. surveys, but realistically in most parts of the country and for most properties, £50K is a deposit, albeit a very substantial one in some locations. On the other hand, buy to let has become something of a contentious topic over recent years and landlords have become an easy target for government revenue collecting, with changes to stamp duty and mortgage tax relief both benefiting the exchequer at the expense of landlords. Little wonder, then, that even though BTL remains popular, some investors are looking at alternative options.

For example that same £50K could be invested in a property development thereby benefiting from property without the hassle of managing tenants and properties within the law. Obviously this is an area in which we may seem to be biased but the ROI specks for itself and with a UK investment you can literally see your investment developing..

Invest in Companies Which Qualify for Business Property Relief

This is an option which may have particular appeal to older investors, since these investments are excluded from inheritance tax calculations after two years of ownership, whereas gifts need to be given at least 7 years prior to the individual’s death to qualify for full IHT exemption. In addition to this, the holder can continue to benefit from their interest in the company up to the point of their death, whereas they must give up any and all beneficial interest in any gift they give for it to be exempt from IHT. At the same time, however, it is usually best if the investment in question actually makes sense as an investment rather than simply, or even, primarily being a means to reduce IHT liability.

Given that companies which qualify for BPR are, by definition, small and are particularly likely to be family-run firms or start-ups, finding the right vehicle for your money can be complex. You also have to remember that as firms grow, they can stop qualifying for BPR although in this case, you may seal in a profit by selling your investment (or indeed choose to hold on to it anyway).

The State Pension Top Up Scheme

If you have already reached state pension age, you have until 5th April 2017 to make a lump-sum contribution to get as much state pension as you possibly can for the rest of your life. How much this will costs depends on various factors, particularly your age and the amount of extra pension you want to receive. The clock is now ticking on this one, so you’ll need to make a quick decision as to whether this option is for you.

As with all investments it’s best to seek financial advice and always bear in mind the caveat that investments can go down as well as up!

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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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What is Sustainable Housing?

Sustainability has become a huge topic over recent years and has started to impact many areas of our lives, from the food we eat to the transport we use and the homes in which we live. While the word “sustainability” may have passed into common usage, it’s worth taking a little time out to try to grasp what it means with regards to property in general and housing in particular. In general terms, the concept of sustainability refers to housing which is in harmony with its environment and ideally should have either zero environmental impact or, if at all possible, a beneficial environmental impact.

Sustainability starts with construction

One of the reasons why it’s important to replace existing “low grade” housing with a modern equivalent is that the concept of sustainability starts with the construction of the house. As time has gone by, not only have home builders gained a better idea of how to build in a sustainable manner, but they have also started to integrate more sustainable features into the fabric of the house, for example, in the UK’s climate, buildings which are created with insulating qualities are inherently more sustainable than those without.

Sustainability is closely linked to suitability for the local environment

While the basic concept of sustainability is universal and many of its general principles (such as minimising carbon emissions) also hold throughout the world, translating these principles into practice means taking into account the practical realities of any given local environment. For example, cities with high population densities, such as London and New York have been experimenting with enhancing sustainability through the use of higher-density housing, which is often closely linked with developments in technology. In simple terms, reducing the amount of housing space per head reduces the amount of materials and labour required to create it and therefore the environmental impact of its construction, plus it effectively makes for a more efficient use of resources. For example it takes the same amount of energy to heat an entire building regardless of whether it is used by 1 person, 10 people or 100 people. This approach has been yielding very positive results in the cities where it has been tried but is clearly useless in a rural environment, where dwellings can be literally miles apart from each other. In these cases, sustainability may relate more to making such dwellings “passive” in the sense that any resources they use either come from renewable sources (such as solar panels) or are replaced in some way, such as by planting trees for those cut down for wood.

Sustainable housing is dependent on sustainable infrastructure

Housing is, of course, a place for people to live and these days it’s also increasingly used as a place to work as well. Humans do not, however, spend all their lives in their homes. They need to go out to grow food or buy it, meet people, go to work, use services and do all kinds of other things. This means that developing sustainable housing needs the support of sustainable infrastructure. Again, what this means in practice depends on the local environment. In the city, where distances are relatively short, it may mean encouraging “zero-carbon” modes of transport such as cycling, by making them safe in every sense of the phrase and also providing effective public-transport for those for whom activities such as cycling are impractical (e.g. those with disabilities). In the countryside, however, the population spread can make it extremely challenging to develop a meaningful public transport network, so again sustainability returns to the concept of using renewable resources and/or replacing any resources used. In terms of transport this could mean making the switch to electric cars powered by solar energy as opposed to petrol ones.

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Property investment is not about getting rich quickly

Anyone who’s tuned into daytime TV or seen an advert before a YouTube video has probably seen a self-styled property guru offering to provide you with details of the secret but simple system which allowed them to accumulate vast wealth in a short time. Hopefully most people are intelligent enough to realise that property investment is anything but a get-rich-quick scheme. Here are three reasons why this is absolutely not the case.

1 – Successful property investing takes both strategy and the real market knowledge to implement it.

Investors need to have a clear strategy for building and maintaining their property portfolio. This may be to target a particular demographic (such as students or young professionals), a particular area (such as London and its surroundings) or a particular type of property (such as desirable new build). They then need to research they chosen approach to get the information they need to make it work in practice and they need to continue their research to ensure that they keep abreast with (if not ahead of) market trends and thereby keep their portfolio in good shape.

2 – Successful property investing takes motivation and organisation

Doing proper research takes time and it is not just a one-off activity. As the old joke goes, change is the only constant in the world and successful investors in any area need to make the time to keep on top of all new developments. This means that property investors need to be able to organise their schedule so that it includes time for this research and since there are only 24 hours in each day, this can mean either sacrificing or delegating other activities. This level of commitment takes both motivation and organisation.

3 – Successful property investing generally takes a support team

Successful property investors understand the importance of human relationships and of having a good support team. From initiating a purchase transaction with the seller, be it through an estate agent or directly with a property developer, to dealing with financing organisations and letting agencies (or tenants directly), to staying on top of legal requirements and managing the financial side of property investment, property investors understand the importance of getting support from the best people and of maintaining good relationships with them. There are two people in particular that most serious property investors will want to have on their team.

The first is a good lawyer. There can be a lot of legal requirements to be met when dealing with any form of property investment. Using a good lettings agency can mitigate many of these, but it can still be very much in a landlord’s best interests to have at least some level of familiarity with the relevant laws and a source of legal advice if needed. Good lawyers can also prove invaluable when it comes to understanding the key points of leases. While leases for new-build property are generally relatively straightforward, leases for existing property, particularly older property can be much more complicated and it is very much to the buyer’s benefit to resolve any issues prior to the exchange of contracts.

The second is a good accountant. Property investment and taxation go hand in hand. Good accountants will help with statutory compliance matters such as the preparation of rental accounts, the submission of personal tax returns and the provision of representation in the event that HMRC makes an investor the subject of an enquiry. They can also offer consultancy services, such as offering guidance as to when a corporate ownership structure might be more efficient than personal ownership and also what options might be available for reducing the cost of owning and/or selling property, such as making the best use of various forms of tax relief and where it is possible to off-set costs as tax deductions.

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Choosing The Right Way To Invest In Property

In very broad terms, there are basically three ways to invest in property in the UK. The best known is almost certainly buy to let, but there is also commercial property investment and investment in larger scale property development. While it’s certainly possible to invest across these markets, some investors prefer to specialise in one field. Each field has its own characteristics, so here is a brief rundown of the options.

Buy to Let

It’s easy to see why buy to let attracts investors. The UK is a small country with high population density and hence high demand for residential housing. In principle, a healthy rental market is a benefit to everyone, since it satisfies demand from people who need the flexibility which renting offers, particularly young adults, while providing an income to the landlords. In practice, frustration at the lack of affordable housing for those on lower incomes, particularly younger people, has seen BTL painted in a very negative light in certain sections of the media, which may make some investors uncomfortable. Others may simply look at the recent changes to mortgage tax relief and stamp duty and come to the conclusion that the figures no longer add up.

Commercial Property

Commercial property covers everything from small retail units for local businesses to major industrial complexes. Up to this point it has, generally speaking, kept a lower profile than its residential counterpart. The challenge for commercial landlords is to maximise income flow while minimising risk. Investing in properties intended for smaller companies makes it possible to spread risk, but smaller companies may lack the resources to succeed over the long term and if they do survive they may wish to move to larger premises. Investing in properties meant for larger companies can improve cash flow and reduce the impact of voids, but larger properties may be more challenging to fill if a tenant does leave. Additionally, commercial property investment is far from immune to taxation and regulation and some areas are particularly vulnerable to it. Investors looking at property for small businesses, for example, may find themselves in the same sort of situation as their buy-to-let counterparts and could find themselves being restricted as to what action they can take if tenants start to have issues with paying their rent.

Property Development

This is arguably the least contentious area of property investment, since it’s pretty much universally agreed that the UK does need to build more properties (both residential and commercial), if only to replace existing, poor-quality stock, which has ceased to be fit for purpose. While property shows may feature centuries-old properties which have been lovingly (and expensively) refurbished to make picture-perfect family homes, the reality is that these houses are exceptional and that the UK still has a substantial pool of ageing and/or low-grade properties, which are better suited to replacement than to refurbishment. Obviously the construction industry itself is covered by some degree of regulation, particularly relating to health and safety on site and the quality of the build itself, but in this context that could actually be seen as a positive since it means that the public in general and potential buyers in particular, can have confidence in the industry. This means that in terms of investing in property development, the question is purely one of investment return. The bad news is that there is no “one-size-fits-all” answer to this, each project has to be examined on its own terms and viewed in the light of the investor’s goals, their investment capital, their time frame and their perspective on risk and reward, but the rewards are certainly out there.

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