'15% Stamp Duty Land Tax rate likely to threaten development'
Published by Max Salsbury for 24dash.com in Housing and also in Development, Finance
Law firm BLP has released a report into the barriers to residential housing development. The report concludes that the new Stamp Duty Land Tax (SDLT) rate of 15% is likely to threaten the development of new residential accommodation and so has the potential to harm normal tenants as well as targeting the super-wealthy.
Here Andrew Yates, commercial real estate partner with BLP, explains the report's findings:
A chronic shortage of affordable housing combined with investor appetite for alternatives to commercial real estate investment is driving fresh interest in UK residential development investment, which government can support with targeted tax and other policy reforms.
A cross-industry report examining the obstacles and solutions to greater investment in residential development in the UK by international law firm Berwin Leighton Paisner (BLP) discovered genuine interest in the sector.
However, the report, entitled ‘Bringing home residential investment’, demonstrates that investors will remain cautious about committing funds into projects until they have:
• More evidence that the right returns can be generated on investment
• Greater confidence in the willingness and ability of registered providers to develop and manage private rented properties
• Clearer support from government to drive investment.
This caution has meant that foreign institutional investors, often with experience of the rented sector in their own markets, are getting in first.
The BLP report is based on interviews with senior representatives from registered providers, banks, property developers, investment firms and policy organisations.
There is unprecedented demand for high quality, stable rented accommodation. This message was reinforced by our contributors who all perceived a sector teetering on the brink of being the next big destination for real estate investment. We saw, in particular, an emerging opportunity for large registered providers to work with investors to provide private rented housing.
Recent announcements that some UK institutions are planning substantial investment in affordable housing and the private rented sector prove this opportunity exists.
However, this is tempered by reluctance among some UK institutions to be the first to invest. The Government’s Autumn Statement will provide an ideal opportunity to develop this interest and encourage greater take up of residential initiatives.
The report argues that, in order to make residential a comparable asset class to commercial real estate, its tax treatment must be rationalised in order to create a level playing field. In particular:
• Genuine property rental businesses should be excluded from the new 15% SDLT rate and from the impact of the new annual charge and CGT rules
• VAT leakage of up to 8% on repairs and refurbishment costs and capital expenditure should be addressed
• Unlisted REITs should be permitted and investor concerns that their ability to make periodic sales of residential assets out of a REIT could be unduly restricted should be addressed
Further recommendations include ways to encourage local authorities to release public sector land for private rented sector schemes and to help them develop their understanding of new investment models.
To address investors’ lack of experience in residential, the government should invest in private rental schemes to prove their commercial viability and grow institutional confidence in the potential returns available. This is an area where we expect further Government-led announcements shortly through the Homes and Communities Agency.
Individuals are finding it harder than ever to buy a home. At the same time, registered providers are expected to reduce housing waiting lists in a new world where capital grant, and cheap long term bank debt, can no longer be relied upon.
The Government is right in the middle of this and has a window of opportunity to use the forthcoming Autumn Statement to build on its current initiatives with targeted tax reforms. These will encourage more pilot schemes and ensure that the opportunity to kick start the private rented sector is not delayed any further.
Alex Jeffrey, CEO of M&G Investment’s real estate fund management business, PruPim, said: “The shortage of good quality, private rented housing in the UK is clear, with demand only set to increase as home ownership remains out of reach for many.
“Long term investors such as pension funds and insurance companies can play a significant part in meeting this demand. In doing so they can gain access to an asset class providing a stable income which responds to real earnings growth, has strong diversification benefits for multi-asset portfolios and has typically outperformed commercial property in the long term.
“If the government wants to see an increase in institutional investment then some changes to public policy may be required. Ensuring a viable, stable regulatory and tax regime to give investors the confidence to support the sector for the long term is vital in the success of this asset class."
Ralph Luck, Property Director at the Olympic Delivery Authority responsible for selling the Olympic Village – which was delivered by a British developer with the backing of an international investor following a lack of UK institutional interest - has called for the industry as a whole to take an open-minded view about new models for residential development: “The real estate sector must respond decisively and collectively to the failure of residential supply to match the growing demand for property.
“Developers must begin to look at ways of demonstrating the income credentials of new residential assets by enabling people to occupy the homes they build on various tenures and not just looking to build and sell. Likewise, investing institutions in the UK should look to successful real estate investment models abroad to further their confidence in the prospects of the sector. When this happens, residential real estate will truly have reached its tipping point."