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Category: August 2020

Fewer Property Sales and City Rental Prices Down

As predicted, house sales fell in July – in line with the end of the most generous government Stamp Duty Holiday offering. 

And the slump was pretty big. Only 82,110 properties swapped owners in July, compared to 213,370 the previous month. 

The figure, produced by HM Revenue and Customs this week, shows a dip of 62%. It was 1.8% higher than in July last year but then, at the time, buyers, sellers and estate agents were still struggling with the lockdown demands of the pandemic.

Property analysts are predicting a rise in sales again in September – just in time for the end of the government’s current Stamp Duty tax-free saving on the first £250,000 of a property in England and Northern Ireland. Albeit, this isn’t expected to be as large as the surge in July.

Stamp Duty holiday like ‘opening a window’

But the market is still expected to continue to tick over post-October and beyond in the absence of the Stamp Duty Holiday – thanks to the pandemic effect forcing many individuals to rethink their lifestyles. As Sarah Coles, property analysts at Hargreaves Lansdown, so succinctly put it:

 [The Stamp Duty Holiday] didn’t create demand from nowhere. There was already a crowd of people ready to buy because of changes in how we wanted to live, and pent-up demand from the closure of the market during the first lockdown. The tax break just opened a window … through which this crowd of people tried to squeeze.”

The London property rollercoaster

Meanwhile, a Zoople analysis showed that on 15 locations where demand for property was falling, 10 of these were in London. Looking at the period April 5 to July 25, it discovered that in the capital’s SW and E postcodes, demand fell by more than a quarter (26.5%) compared to the previous four months.

Demand for property in areas such as Shoreditch and the City is poor, with many people continuing to work from home for the foreseeable future.

In other areas of London there is problems with cladding – lenders aren’t willing to give mortgages unless buyers present an EWS1 external wall safety certificate.

But there is good news for luxury inner London homes in the likes of Mayfair and Knightsbridge, thanks to the return of international buyers looking for a second home in the capital. 

North East has biggest drop in demand

In Newcastle upon Tyne and Cleveland and Teesside, demand fell by 18.7% and 18.5% respectively. However, some locations in the North East enjoyed a 15% rise to June so figures were normalising. And, although demand in Darlington fell 27.1%, it was still historically high – 53% above the average in the same period in 2019.

Cities suffering slump in rental prices

When it comes to lettings, rental prices are rising fastest in the north east and south west. Both due to demand and supplies issues. Outside London, tenants are now paying 3% more for a rental, bringing the average cost to £780 per month. Zoopla’s Rental Market Report also shows it’s taking 16 days per property to rent out.

In the capital rents have fallen by 9.9% year-on-year, making it one of more affordable times to move there. In Leeds monthly rental prices have fallen by 0.7%. In Manchester they’re down 1.1% in Manchester, while landlords in Edinburgh are receiving 3.2% less than in 2019.

Prime Property Sales Double Year-on-Year

Sales of properties worth more than £500,000 are selling twice as well as they did last year.

Research by Frank Knight, based on property portal Rightmove’s figures showed sales of more expensive properties were twice the volume in July and August 2020 than for the same period in 2019. And they were particularly buoyant in the second week in August where they were 61% higher than in the previous year.

And more surprising still is the fact that none of these properties are eligible for Chancellor Rishi Sunak’s Stamp Duty holiday. Introduced last month and set to last until March 31 the rushed-through legislation means there is no Stamp Duty on property valued at up to £500m in England and Northern Ireland. A similar scheme applies in Scotland and Wales where there is no land tax on properties worth up to £250,000 – half the rate of England and Northern Ireland.

Sales volume increase biggest in £1m+ properties

Further research by the upmarket estate agency showed that sales of properties valued between £750,000 and £1m was 119% greater than the second week in August 2019. And, the number of Stamp Duty-qualifying properties which sold (ie up to £500,000) was 53% higher than the previous year

The big increase in sales of luxury properties comes at the same time as the UK government declared last week that the country was officially in recession. But analysts say the best-selling properties were those in the highest brackets of the market – a sector which wasn’t affected during the 2008 recession either.

August best month for property sales in a decade

Meanwhile, Frank Knight wasn’t the only company to declare a huge increase in property transactions compared to 2019. According to a Rightmove report, August 2020 was the best month for sales in more than a decade, with the total online value of those sales hitting more than £37 billion on their portal – an increase of 60% year-on-year. The number of properties coming to market was also far higher at 44% more than in 2019.

Rightmove’s figures continue to show the ‘city exodus’ is in full swing, with homeowners still intent on moving to smaller villages and the countryside in lieu of future coronavirus lockdowns. This resulted in 69% more London properties coming to market in July and August than in the same months in 2019.

Seaside properties faring well price-wise

Rightmove spokesman Miles Shipman also pointed out that properties in the commuter belt were no longer considered ‘premium’, thanks to more people planning on working from home in future. This is also evident in the rocketing prices of property in the seaside idylls of Devon and Cornwall.

House prices overall have risen

Figures from a survey by the Nationwide Building Society earlier this month show that house prices overall – regardless of geographical location or sector – were 1.7% higher in July this year than the previous one. This is despite a UK economic slump of 20.4 per cent during April, May and June.

Whether both the high number of sales and increased house prices continue for much longer remains to be seen – especially in light of the government’s furlough scheme ending in October.

Will England follow Scotland and extend Eviction Ban?

Will they – or won’t they? Thousands of landlords in England are waiting with bated breath to see if the government will indeed end the tenant eviction ban later this week on August 23.

The reason for the nervousness on behalf of buy to let landlords and other property owners is because the Scottish Government is voting this week on whether to extend the ban – to March 2020. The proposal is likely to go through.

Westminster has already done a U-turn on its exam results policy, following the Scottish decision to accept teacher’s results last week. Now those in the property market are wondering if they’ll go down the same road with the eviction ban.

Welsh Government to pay tenants’ rent

The Welsh Government has already extended the ban. But this is in a way that landlords won’t miss out on rent; the government will pay it on behalf of tenants who can’t afford it. The Scottish Government, however, haven’t come up with similar proposals, leaving landlords confused north of the border. Many are panicking that they will be forced to pay the rent on behalf of their tenants.

Homelessness charity Shelter claimed victory for the eviction ban extension in Scotland. Now Generation Rent are campaigning on behalf of English tenants.

London mayor Sadiq Khan has already asked the government to increase benefit levels to ensure these will cover rents. He also wants judges to have the power to ‘throw out’ eviction cases caused by Covid-19.

Around 180,000 Londoners in PRS in arrears

His remarks come on the back of research by YouGov which reckoned nearly 180,000 of London’s 2.2 million adults in private rented accommodation are behind with their rent. Another 374,000 worry it’ll happen to them soon too. Shelter say more than 170,000 people have already been threatened with eviction.

The National Residential Landlords Association are calling for a tenant loan scheme to help pay off rent arrears which have accumulated during the coronavirus.

Westminster making amendments for eviction cases

During the pandemic Housing Secretary Robert Jenrick promised to keep a roof over the head of tenants who couldn’t pay their rent due to coronavirus. The ban was originally for three months and then extended a further two months. Now the Westminster Government says it is amending court procedures to ensure ‘cases are dealt with fairly.’

Some of the measures include landlords having to tell the court how their tenants were affected financially by the coronavirus pandemic. If an eviction hearing doesn’t have this information then the judge can suspend proceedings.

At the same time, temporary court buildings (referred to as Nightingale Courts’) are being set up to deal with the current backlog of court cases to allow evictions and other cases to be dealt with in a reasonable time scale.

A spokesman for the Ministry of Housing, Communities and Local Government said: “The Government support package during the pandemic had helped prevent people getting into financial hardship or rent arrears.” 

There was no mention of whether this would be extended past Sunday.

Halifax record highest house price values on record

House prices last month were 3.8 per cent higher than the same time last year – despite the stagnation to the property market caused by coronavirus.

Halifax’s House Price Index recorded the value of the average home at £241,604. It was the highest price on record for the Index, which began life in January 1983.

Other figures show a total of 63,250 homes were purchased in June. That figure is 31.7 per cent higher than when lockdown was lifted in May. It is also 1.7 per cent higher than in June when the average house price was listed as £237,834.  

Property website Zoom recorded a loss of 124,000 house sales during lockdown. That’s equivalent to around £27bn.

Stamp Duty holiday buoying demand

Pent-up demand is responsible for both months’ high figures. However, it was the Stamp Duty Holiday that really pushed July’s sales. It came into force on July 8 and means thousands of pounds in savings for buyers of homes valued at up to £500,000 in England and Northern Ireland.

Buyers in both Scotland and Wales don’t pay any similar land and stamp duty tax up to £250,000. The scheme in all countries is due to end in March next year. So popular is the scheme that some in the property industry and urging the government to extend the barrier to property worth more than £500,000.

Halifax Managing Director Russell Galley also pointed to the ongoing lack of supply in housing as another contributing factor of higher property prices.

Property analysts say they are pleased to see the market recover after the slump. But they warn that the end of the furlough scheme in the Autumn could lead to a huge number of job losses and an economic crisis. This would, in turn, markedly affect the housing market.

Meanwhile current householders struggling to pay their mortgage will be entitled to continue to defer payments for up to six months from the end of October.

The eviction ban for tenants who can’t pay rent has already been extended and is due to end later this month on Aug 23.

Property markets continue through temporary Lockdowns

What happens to a local property market when a city, town or region is told to go into lockdown?

In Aberdeen this week First Minister, Nicola Sturgeon, re-introduced lockdown for a period of seven days. But viewings will already have been booked for that period and transactions taking place.

The Scottish Government hasn’t put a hold on the property market functioning, but it has insisted that estate agents and others in the industry follow ‘best practice’ in terms of coronavirus guidelines. England, Wales and North Ireland will follow similar procedures.

This means estate agencies don’t have to close the local branch and they can still go ahead with viewing (provided it is socially-distanced with only one person per household and that everyone attending wears a mask). They stress that in the first place though viewings should be via video or online. Physical viewings are only appropriate for buyers or tenants who seem very likely to purchase or rent.

Landlords to benefit from proposed leasehold reforms

Thousands of landlords could be set to benefit from the government’s plans to change leasehold regulations.

Boris Johnson and his cabinet are reviewing the recent Law Commission’s reports which recommend, amongst other issues, cutting the cost of buying back additional years on a lease. This is referred to as Leasehold enfranchisement.

It will affect landlords of apartments and some New Builds – which are more likely to be buy to lets. In fact, the government has calculated that there are currently around 4.7 million leasehold properties that will be affected.

The Law Commission – an independent body – looked at three main areas of the leasehold system in England and Wales. These were leasehold enfranchisement,right to manage and commonhold.

They want to stop the recent practice of developers selling on freeholds to property investment companies – rather than offering it to the leaseholder first. In many cases this has resulted in the freeholder charging the leaseholder extortionate service charges and land rents.

England and Wales using antiquated system

Other proposed reforms include abolishing the leasehold system completely. So antiquated is the system – it dates back to 1066 – that England and Wales are currently the only two countries in the western world who still operate leaseholds.

Landlords with buy to lets north of the border already have Outright Ownership of their property. Scotland abolished leaseholds in 2004 – a fact that makes changes to the other parts of the Union all the more likely.

Right to Manage to cut service charges

The Right to Manage issue, if it goes through, will mean that landlords can choose who they want to service their property. This is possible at the moment but leaseholders have to pay the freeholder’s legal costs in order to achieve this. In future, this wouldn’t be the case.

Commonhold may be compulsory

Under the Commonhold system apartment owners or house owners in a development can vote to manage their own block – despite not owning the freehold. All they would need to enact this is the go-ahead from half the owners. Other proposed changes include making all new apartments and housing complexes Commonhold in future.

Landlords to file quarterly in 2023

Landlords and other property investors will have to file tax returns under the Government’s new digital system in 2023.

The start date was announced recently and means that you’ll have to send quarterly updates of your accounts to HMRC and sign an annual ‘declaration.’ Sending reports can be as simple as pressing a button – but only if you already have a Making Tax Digital (MTD) account.

In order to sign up you will have to find software which is compatible with the government’s system. Right now, there are a number of software programmes which can do this and it’s likely that others are currently in development. If your property company is a partnership then you’ll have to find software that allows you to record the other individuals details too.

Exemptions ‘few and far between’

There are exemptions to the rules. If you earn less than £10,000, for instance, then you don’t have to open an MTB account. As far as landlords are concerned very few will quality, other than those who rent a room in their home and are eligible for a £7,500 exemption. You’ll also be exempt if you can’t get online due to your location, a disability or if your religion forbids you using a computer.

Penalties for non-compliance and late payment

Just like the old system there are deadlines and fines for late payment. Although – unlike the old system – late filing results in points which can be accumulated and then reset (like points on a driving licence). The first point is accrued after 15 days missed deadline. A penalty is issued after a certain amount of points have been reached.

Late payment penalties kick in after 15 days and double after 30 days. Interest is charged from the due date.  In the meantime, it’s believed the government will allow a year-long ‘grace’ period until users become familiar with the new system.

Those paying VAT at more than £87,000 pa are already using the system. Next year it will be the remaining VAT payers. The self-employed are being asked to file the same time as landlords and companies.

The government say they’re bringing in the new system to make errors in tax payment less likely. They have estimated the Exchequer lost around £8.5 billion for the tax year 2018 to 2019. It also means landlords, companies and the self-employed will have a better idea of how their business is going throughout the year – rather than waiting until they file annually.

Meet Ellie McKay

Ellie McKay is a property investor, developer, business woman and public speaker. She knows all about the pitfalls of property from personal experience, and it’s only through developing a strong […]

Private Finance

How do private lenders think?

Property is a great asset class. The problem is, it can be very capital intensive. Yes, you’ll borrow the vast majority of the capital you’ll need to finance the purchase (if done correctly), but what about the associated costs: cost of borrowing, legal fees, and more importantly, refurbishment costs?

On the forums and Facebook groups you’ll hear terms like “fixed return”, “investor funds”, or – my biggest pet peeve – “OPM (other people’s money)”.

If you’ve found an individual or company that is willing to lend you the capital to execute your project, well done. This is a feat in itself and should be commended. I’m going to assume you’ve found a private lender, or as you might call them, an “investor”. The problem with most property investors is that they think us private lenders offer money to anyone for any project on a “fixed return”, but it is seldom that simple – especially if you are new to the receipt of private finance.

Being a private lender myself, I’m hoping to help you understand how we think and behave.

Small businesses and property investors borrowed £113,498 from our company in 2019. We also invested £201,362 into joint ventures (JVs) in this same period. Now, I can’t speak for all private lenders, as we can differ quite a lot, but most of what I discuss will be typical across the board. I also have to stress that what I look for in a debt investment is very different to what I look for in an equity investment, so let’s just talk lending for now.

PEOPLE

First and foremost, do I like this person? If I don’t like them, I won’t lend to them, especially if they’re not credible. Do they have a business card? Does their website work? What previous projects have they managed? A common misconception here is that I will automatically lend if you have been on a training course for 2 days. Incorrect. We don’t just lend money “on a fixed return basis” because you understand what ‘ROI’ (return on investment) means… 

I think I speak for the majority of my colleagues when I say we look for credibility. Don’t get me wrong – I’m not saying you always need bags of experience for us to lend, but how much we are willing to lend (risk) will absolutely be influenced by your demonstrable experience. But it isn’t necessarily a barrier. I look for a critical thinker, someone who understands the project and, more importantly, who can deliver. Whilst I know some colleagues who are adamant on a credit check, I’m not.

PROFIT

Counter intuitively, I’m thinking about my borrower’s profit more than my own. Is there enough margin in their project? Can it sustain losses? To what extent can it be stress-tested? If you aren’t successful, then I won’t be. We don’t do heavy due diligence, but we will check the deal.

PERCENTAGES

This is where lenders differ enormously. In our business, we charge an interest rate of 12.5% per annum, payable monthly. One of my colleagues charges 8% per annum, payable quarterly, and I know another who charges 3% per annum, payable in full on redemption. How long the project will take is important, as this will determine how much I earn from your loan. How long is a piece of string? If you become very good at what you do, in some cases you can dictate to lenders what the rate and term will be, or cherry pick those who are prepared to lend at your desired rate.

PRESERVATION

Finally, we have to think about risk. Once that money leaves our account, we may never get it back. Managing risk is the biggest part of what lenders do. Depending on the amount we lend, I tend to get the following securities:

Fixed and floating charge over the company

This is the same as a mortgage charge on the limited company. If this company is an SPV (special purpose vehicle, due for wind up on completion) then a charge is crucial.

First/second charge on the property

If we are lending large sums of money, we will look to take a charge on the property itself. If the capital we deployed isn’t used to purchase the property, we will take a second charge.

Cross-collateralisation

If you don’t have equity in the project on which we can take a charge, we may ask if you have equity in another property that you can offer as security. 

Personal guarantee (PG)

Whilst I don’t typically look for PGs, some private lenders will. This means they can chase you personally in the event of default. 

Hopefully, this nutshell article has shed some light on how a private lender operates. Each case will be different. In terms of JVs, this is a completely different area. There is a huge set of FCA rules governing how you find and present yourself to private investors.

Working with private investors

So we’ve talked about private lenders. What about private investors? To many, this is the Holy Grail. By leveraging the resources of others, you can realise greater profits. There are some caveats, though.

JVs, or joint ventures, generally refer to businesses. However, you property investors kind of hijacked this term and applied it to property. I suppose it makes sense given that most JVs use SPVs (special purpose vehicles), which are sort of businesses! But let’s delve into the mechanics of a joint venture partnership, along with some of the ‘dos and don’ts’ that accompany it.

Much of what private investors look for is very similar to what private lenders look for but, in the case of investors, they will be much more stringent on their rules and generally go further than just doing some light due diligence. That’s because, as an investor (in equity, not debt), they become much less what we in the industry call ‘senior’ – they move to a more ‘junior’ capital position. This means that if the project fails, they will be the last people to get their money back, if they get anything back at all. 

Another important aspect of finding JV partners is a little-known directive called PS13/3. This is a set of regulations set out by the Financial Conduct Authority (FCA) that govern who, how and when you can ask people for investment capital. Fall foul of this and you’ll find yourself on the wrong side of them. Essentially, the FCA used to state that you may only advertise investment opportunities to “sophisticated investors” who can either prove that they earn at least £100,000 per year, or have net assets, excluding property and pensions, of more than £250,000.

However, these rules have been relaxed to help small businesses looking for investment. Investors can now ‘self-certify’ their status which moves the liability away from you, as long as the investors meet at least one of the criteria set out below:

  • They have made at least one investment in an unlisted security in the previous two years
  • They have been a member of a business angels network for at least six months
  • They have worked in a professional capacity in the provision of finance to SMEs in the last two years, or in the provision of private equity
  • They are, or have been within the last two years, a director of a company with a turnover of at least £1m.

This self-certification must be in writing. Once an investor has done this, the protections for them with regard to the promotion of securities by someone authorised under the Financial Services Act are removed. The relevant “risk warnings” must still be included in Promotions (your proposals).

So these guys that ask for investors on LinkedIn or Facebook have no control over the audience that sees their “Promotion” which means that the vast majority of people who read their post are non-sophisticated investors. This means that the person who posted is now in breach of Article 23 of the Promotion of Collective Investment Schemes Order, in Article 50 of the Financial Promotions Order. Unless you can guarantee your audience is made up of sophisticated investors, then you are going against the FCA’s rules.

WHAT WE LOOK FOR

Now we’ve covered the rules, what about the investor themselves? Well, as I previously mentioned, investors look for many of the same things that lenders do, except that they will go the extra mile.

Generally, investors will want to see experience. I know I do. Have you ever bought an investment property before? If so, what were the particulars of the project? How many of these projects have you carried out? And how many were successful? What can you demonstrate to me that will give me confidence that my money won’t just disappear into a black hole of inexperience? Do you have a project CV you can show me? If not, unless you can charm the proverbial pants off me, you’ll need to partner up with someone who has all this experience, or I won’t touch it with a bargepole, proverbial or otherwise. 

Investing is much more dangerous than lending, as it generally comes without many of the risk management provisions. Lenders get a fixed return, whereas the return for investors is linked to the profit (success) of a project and is therefore speculative. So in effect, unless we take equity for free and then loan the money to the business (utilising all the collateralisation tools) then we have pretty much no protection – we are relying entirely on your ability to make the project work. On the positive side, it does mean we can get involved and help steer the project, but in most cases investors are busy professionals that won’t want to do this, otherwise they would just do it themselves.

To conclude, my advice would be to put together a project CV showcasing everything you’ve done to date (include mistakes and failures). If you are new to property, partner up with someone that has experience and craft yourself a credible and professional team to impress your investor.

If you had £1,000,000 to invest, would you put it into an individual/a team who had completed and closed on 20 successful property deals, or someone who has never bought a property before..?

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