Where are we now? Property development enters pastures new but old mantra prevails

Holsworthy Beacon

Feeling sheepish about your next property development project? Don’t blame you. It’s worth considering how we got to where we are. And where exactly are we anyway?

The avalanche of bad news for residential property started as a snowflake that innocently meandered down through the bright economic skies of 2014, with the Labour election manifesto Mansion Tax threat, and the Chancellor’s subsequent December 2014 Stamp Duty overhaul.

That flake soon gathered into a pretty hefty snowball with the addition of non-domicile taxation rule changes, a Tory outright election win (a trigger for the underestimated disaster-in-waiting Brexit vote), a 3% second-property SDLT surcharge impacting the investment and buy-to-let markets, the Brexit campaign itself and then the calamitous result with all the political fallout which resulted.

If there was an uneasy sense of the property market feeling overheated in early 2014, it has progressively cooled ever since.

Some might argue that this is a good thing, as the prospect of easier property prices means more access to those not on the housing ladder. While for some this may undoubtedly be true, there are significant negative outcomes: housebuilders and developers will build fewer, and smaller homes as the economics and risk profile of more and larger properties no longer add up. Even the cost of homeowner renovations is set to go through the roof with significant materials (think sanitary-ware, tiling, kitchen and bathroom appliances, designer furniture) being imported from overseas and sterling’s purchasing power having gone through the floor.

Vast swathes of dated housing stock risks sitting unrenovated as the numbers struggle to add up. RICS reported a shortfall of 1.8 million rental properties, and that 86% of rental investors have no intention of adding to their rental portfolios, severely reducing the number of rental properties available in the market; add to this the reduction in new-build supply coming on-stream and the outlook in the medium term isn’t so good.

All this is a pity for the investor/BTL buyer, as weaker property prices and more renters would mean a likely better yield to rental investors in an otherwise ultra-low yield universe right now. Without the prospect of capital gains underlying rental investments, property might deserve to take a back seat to equities and other asset classes for some years, from a purely ‘returns’ perspective.

Having said this, the property market is far from dead. Transactions may be low, but they are happening. Right now the market is one driven by necessity: the need to move, need to sell, need to buy. Without the investment and buy-to-let market, it’s a less dynamic, smaller, lower transaction market. But it’s there.

If you are looking for a property or site to develop, you would do well to focus on areas where that necessity-driven market is robust: attractive to upsizers and down-sizers in traditionally strong residential areas (good schools, attractive period housing stock, easily commutable etc). So for the time being at least, the old formula is best: location, location, location. This will be away from the new-builds and in Zone 2 and outwards London areas, and in the countryside near established, traditional, busy towns with good rail, road and air links as well as good schools.

As well as the old ‘location…’ mantra, remember ‘what goes around, comes around’: if you don’t buy in this weakened market, you can bet your bottom dollar when prices do take off again, it will be as unforeseen as when they fall.

There’s a vanishing chance the new Chancellor might do something about the taxes that got the market to this point, but don’t count on it. That chance is probably on a par with a snowball’s in the Sahara. Or Brexit ever being resolved.

Rock on down to Stowell and build a home worthy of the locale

stowell

Building plot in Stowell, Sherborne, Somerset. Guide price £300,000.

A 0.52 acre building plot for a new dwelling, and there’s additional land of 1.38 acres for sale for a guide of £45,000 within an easy annual commute of Glastonbury. Or if you’re more of a Thomas Hardy than Billy Bragg fan, then you’ll be pleased to know that this is Hardy country: Sherborne (‘Sherton Abbas’), Yeovil (‘Ivell’) and Cerne Abbas (‘Abbot’s Cernel’) feature amongst the towns in the area.

There’s recent outline planning consent, a train on the London-Waterloo/Exeter line nearby as well as good schools, five star hotel and great pubs. Not to mention the endless delightful villages of the area.

More details here.

Building plot with planning permission in gorgeous Goring on Thames

Goring on Thames

Building plot with planning, Goring-on-Thames. Guide £595,000.

If you’ve seen any of Roland Garros this year you should know that it’s as wet over there as  it is over here in any case, so take Brexit out of the equation by staying firmly at home and ignoring that Brit itch to buy property in France.

This is a chance to build a new 2,200 sq ft home in beautiful location in a former Oxfordshire Village of the Year. It’s walking distance to the train station, which gets you into Paddington in less than an hour. Planning permission is in place, so there’s a huge head-start on the bureaucracy of things, and you can get straight into the tendering process.

There may be reliefs available on VAT on construction costs for this project, and SDLT should be investigated closely to establish the rate this development property would attract.

More details and agent contacts here.

Will markets conjur another safe-haven safety net for the UK property market?

Flight

Blue skies or stormy weather ahead?

If the BBC hadn’t cocked up Top Gear, we could have used that as leverage to get anything we want from Europe: ‘Give us a gazillion more quid back, or we won’t let you watch Top Gear.‘ It would have worked. Think Germans and cars. But Top Gear isn’t what it used to be, and sadly neither is UK property.

The UK property market has long ceased to be about buying a place to live, in the same way that gold is not primarily purchased for the purpose of sculpting a new pair of earrings. As the UK residential property market is a de-facto investment asset class, it should behave like one. Unfortunately it may be starting to.

A variety of factors combined to ensure that the property market was sheltered from the full-on buffeting of the credit crunch cyclone in a way that other markets and asset classes weren’t (safe-haven buying, benign taxation, favourable currency exchange rates, light regulation etc) since 2008. The property market suffered a temporary blip but was quickly back on its feet. It was a huge let-off. Thank heavens for safe havens.

Every market exposed to fair risk suffers a point at which the strong money (wealthy unforced sellers or buyers) forces out the weak (forced sellers). There are, for sure, influences that market participants will claim aim to unfairly sway the direction of markets, but essentially when it comes to the forces behind the biggest markets, they are, like nature, too powerful to be tamed. Resistance is futile.

The risks to which the UK residential property market looks to be exposed right now are several-fold, and may combine to create an environment in which there are no mitigating influences to prevent a reduction in house prices:

The first item on the agenda is Brexit. A vote to leave the European Union will mean a cooling on foreign investment into UK residential property, and motivation for existing foreign property owners to cut and run as they see values fall, exacerbated by a drop in the value of sterling. If they can get out quick, they will likely still make gains but the combination of poor exchange rates and lack of buyers will mean they will chase the market down. As a result prime central London will be one catalyst for falling prices and over-supply (already in the pipeline with tens of thousands more luxury new-build London apartments being built and planned than demand requires).

Further to either outcome of Brexit is the political fall-out, the possibility of a General Election even, but in any case a likely leadership contest in a now split Conservative party. The effect of this will be that, if the Government were minded to look at easing SDLT rates, for example, in order to combat some of the impact of Brexit on the housing market, it will be unable to act. The Prime Minister will be a lame duck. The Chancellor will be preoccupied by a leadership race and will lose any respect he may have were he to tinker with the economy, under accusations of vested interest ahead of a leadership election, and by repealing tax legislation he himself instigated he would be admitting to past misjudgements.

The political background described above, as well as (if it is the case after June 23rd) Brexit, and numerous recent tax regulation changes and SDLT hikes could combine to remove the ‘safe-haven’ status of London property.

A threat which dwarfs the impact any foreign exodus could have on the market, is the potential for the international government bond market to turn. As a result of several central banks’ recent adoption of negative interest rate policy, banks have parked record volumes of cash in low-yielding gilts and treasuries. This has driven bond prices up, and yields down. When this inevitably reverses, the balance sheet losses the banks face will be unprecedented. Where will they turn to in order to recoup these losses? One target will be mortgage and other lending markets – think cars and student loans. The outcome will then be costlier lending. This will have a handbrake effect on an already fragile property market. People who dipped into their mortgage to get that status car will be squeezed, student loans will be unpaid. Debt will be deadly.

Having said all that, there are many other actors in play on the world stage right now. The potential of walls of money fleeing perilously high equity markets if they turn, indeed bond markets too, as well as political instability in Europe from the migrant crisis, a potentially war-mongering new US president, and a China (and even US) slowdown, all might provide for UK property looking like a relatively safe bet.

Taking the view that the UK property market might, as the least-worst investment class available, recover its safe-haven profile is probably counter-intuitive. But if this is case, then now is probably a good time to buy: there’s an opportunity to negotiate a decent in-price, a window to secure low finance rates which might soon be hiked, and if you’re not needing to sell on less than a three year horizon, shelter from the various storms looming out there with a roof over your head, where you can watch Top Gear reruns until everything gets better.

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Appealing Ealing: double-fronted statement of a house in prime W5

Marchwood crescent 2

Six bedroom detached house, Marchwood Crescent, Ealing, London W5. £2,650,000

The front garden to this property is 50 feet wide and 35 feet deep. I could fit my back garden into that about four times over. Storage for the table tennis table is not going to top the first-world problem list for whoever buys here. There should be a Crossrail extension covering the trip to the front door from the front gate.

Once you’ve made that journey, the house is as impressive in terms of proportions and potential, too. It’s a shame most contractors will charge for works on a per-square-foot/metre basis, as this house is 4,464 sq ft; so try to get fixed prices negotiated on the works, or at least volume discounts.

The rear garden’s a satisfying 157 feet of south facing football pitch proportions. There’s off-street parking and Ealing Broadway station is only half a mile away – just beyond the front gate.

Details and floorplan, plus pics here.

Marchwood crescent

SDLT hike hands property development on a plate to the amateurs?

Is the seemingly nominal 3% SDLT hike the straw that broke the camel’s back for residential property developers?

In November 2015’s Autumn Statement the Chancellor announced an additional 3% Stamp Duty Land Tax levy on second homes. The uproar as a result focused on the impact this would have on the buy-to-let sector, and the jury is still out on what, if any, impact may result. He also stated ‘It will be introduced from April next year and we’ll consult on the details so that corporate property development isn’t affected.’ But the last part of this statement hasn’t been honored, to date.

Agents have reported huge amounts of activity by buyers attempting to meet the April 2016 deadline for completion of purchases, depending on the profile of their transactions, but largely driven by investors or buy-to-let buyers.

What’s not really been picked up on in the media is that if you are a property developer, and buying a residential property in your own name, in a partnership, or in a limited company, for development and resale, then you will also be liable for the additional 3% levy (assuming it’s not your principal private residence you’re buying).

Residential property developers have been struggling for years to source projects for resale, because they have been competing with end-users (those buying a property to renovate for their own home) as end-users tend to have access lower mortgage rates, have underestimated the costs involved with the renovations, and have been ready to pay over the odds on the basis that any resale horizon would be much further away than for a developer.

Now end-users have been handed an additional 3% advantage.

Let’s say an unmodernised house is on the market in a desirable market, such as Wimbledon SW19 for £1,500,000. Somebody running the numbers on a development of £500,000 costs is going to have to pay £93,750 SDLT on the purchase; a developer will have to pay £138,750, being an additional £45,000. The professional developer will probably be running a budget of £550,000 on the basis of a 10% contingency, and will also likely have development finance running at 4% above the homeowner rate, of 60% of the purchase price and all the build costs, let’s say. The homeowner may consider they can do the work for £400,000* and not allow for a contingency, and have cheaper finance, and will possibly have to fund the works from cash. The developer also has to factor in a 20% return plus agency, legal and exit fees on resale.

This all adds up to a global difference in this example of more than £150,000, which the developer will calculate up front that he has to cover, and will have to make his purchase offer accordingly. So on the £1,500,000 property, if an end-user offers the asking price, the developer can only offer £1,350,000.

So the question now is: who’s going to renovate the properties?

Of course, George Osborne is a politician, and thus genetically programmed to tell the truth, honor promises and do what he said he will do. So that’s alright then.

*Bear in mind the end-user will still have to pay the £550,000 development costs (probably more as they won’t have access to the trade rates of a developer) but crucially will not be aware that this will be the case until after completion and receipt of the first tenders from contractors.

 

Bag a piece of happening Hammersmith before the April deadline

Hammersmith Grove

One bedroom garden flat, Hammersmith Grove, London W6. £650,000.

With the Chancellor hiking the taxation pressure on property as an investment or income-earner, there’s not much time to act. As a property at the very lower end of the west London pricing chart this is hard to beat: very central, well-located for transportation, locally Hammersmith’s King Street is due for an overhaul and Shepherd’s Bush to the is north already gentrifying at pace (not to mention the further extension of Westfield and BBC development), this is a happening spot.

This location can claim the Brackenbury Village tag, and Brook Green is just around the corner.

It’ll see you right as a rental property, and it would also suit as a reasonably straightforward teeth-cutter for the budding developer with some scope to get your hands dirty on some basic planning permission experience, as well as the development work.

More details and contact the local experts at Horton and Garton here.

By George, this Marylebone mansion flat is right up my street

George Street W1H

4 bedroom apartment, George Street, Marylebone, London W1H. £3,650,000.

Atop this grand mansion block you might have a pretty all-encompassing view, but you wouldn’t have spotted the recent changes to stamp duty (3% on BTL and second homes) on the horizon, nor those of last year which have proven particularly damaging for this price-bracket.

So what’s the angle? Well, as property developers you will be aware that, subject to meeting qualifying criteria, you should not be liable for the additional duty assuming you are developing for resale rather than investment/rental. The advantage in renovating a mansion flat versus a full-scale development involving extensions or a basement is that lenders should look favourably on this. Why? Because the construction risk is so much less, and in a sticky market which is the current state of Prime Central London, prompt financing plus a cosmetic refurbishment is probably a good thing.

Of course, the 3% isn’t a problem if you’re buying to live here, and in that case, lucky you – this apartment is bigger than many a London house!

More pic’s and agent contact details here.

 

Studiously NOT a Nine Elms buy to let development flat

Prince of Wales Drive

Studio flat, Prince of Wales Drive, London SW11. £550,000.

If you baulk at the idea of the shiny new cookie-cutter made-to-buy-to-let developments along the Nine Elms stretch of south of the river, take a look at the picture of this period mansion flat. Those windows, that floor – the epitome of shabby chic and you haven’t even started working on it yet.

It would make a great little pied-a-terre, it’s just across from Battersea Park (there’s a view, from the balcony) and just over the river from Chelsea, so you can eat out and party hard on the money you’ll be saving being just south of the river, and not splashing out on the Nine Elms uber-developments.

More details and agent contacts here.