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Young Index: Q1 2008
Darling's Budget Holds Few Surprises
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Darling's Budget Holds Few Surprises
Paula Hawkins

Alistair Darling has had an inauspicious start to his period in office as Chancellor of the Exchequer. His handling of the Northern Rock crisis, as well as hastily drafted reforms of the capital gains tax (CGT) and residence and domicile regimes announced in the Pre-Budget Report, have been widely criticised. His first Budget, delivered on March 12, was therefore a critical moment for the new Chancellor.

He is unfortunate to have been appointed to the post at a time at which the UK economy is slowing. Figures from the Office of National Statistics show that although GDP grew by 0.6 per cent in the fourth quarter of last year and by 2.9 per cent year-on-year, both the quarterly and the year-on-year figures are weakening: quarterly growth in the second quarter of 2007 was 0.8 per cent, while annual growth was 3.3 per cent.

At present, inflation is 2.2 per cent, only marginally above the 2 per cent target, but Mervyn King, the governor of the Bank of England, expects the inflation picture to deteriorate over the coming months. In his latest inflation report, delivered in mid-February, King said that “the near-term outlook is one of inflation rising sharply alongside a marked slowing in growth”. Inflationary pressure comes largely from rising road fuel prices, with average petrol prices rising 1.3 pence in January to 103.9 pence. This compares with a fall of 0.8 pence in January of 2007.

There is some good news for the Chancellor: January tax receipts were £60.6 billion, well above Government spending, which left net borrowing in surplus to the tune of £14.1 billion. While January is always a good month for the Exchequer, because of the payment of self-assessment tax returns, this year’s surplus was significantly higher than the £9 billion forecast by City economists.

While the unexpected surplus was one piece of good news in an otherwise torrid initial period in office for Mr Darling, given the combination of an economic slowdown and business input costs rising at their fastest rate for more than a quarter of a century, the Chancellor cannot count on a similar bounty going forward. Moreover, despite January’s stronger figures, the overall picture of public finances remains relatively weak: the cumulative total of borrowing for the current tax year is around £4.6 billion higher than in the 2006/07 tax year, while public spending is 6 per cent higher than in the previous fiscal year.

The figures will no doubt look even worse once the Northern Rock liabilities have been factored into the equation. Nationalising the bank is expected to add around £100 billion to the country’s public sector debt, sending net debt as a proportion of income to 44 per cent, well over the Government’s target of 40 per cent.

Many accountants argue that Mr Darling now faces a mammoth task if he is to raise sufficient revenue without further compromising economic growth . “Few Chancellors have inherited a worse combination of economic outlook and fiscal position,” says Patrick King, tax principal at MacIntyre Hudson, the firm of accountants. “Experience suggests tax revenues will fall off rapidly in any downturn, forcing tax increases just when the Chancellor would want to avoid them.”

Some accountants predicted that the most likely way that Mr Darling would seek to raise taxes was through ‘stealth’ measures such as an increase in National Insurance Contributions (NICs). MacIntyre Hudson put the likelihood of an increase in NICs for high earners at 2:1. The rationale for raising NICss at this level is strong: since it affects higher earners it will not hit core Labour voters, nor is it inflationary in the way in which a VAT or stamp duty increase would be. But on this occasion, a rise did not transpire.

An increase in VAT was also mooted as a possibility. “Such a move would definitely help to plug the budget deficit at little or no extra cost to the Treasury,” said John Voyez, VAT director at Smith & Williamson. “The standard level of VAT has not changed since April 1991, and is now below the standard rate in most other EU member states.” However, a politically sensitive and inflationary-rise in VAT was not on Darling’s agenda.

With the price of oil hovering around $100 a barrel and energy companies reporting record profits, a windfall tax on the oil and gas industry was also a possibility. However, energy companies have been lobbying hard against such a move, arguing that it would undermine investment in projects designed to combat climate change. No such windfall tax has been announced.

As widely predicted, green taxes and initiatives featured heavily. The chancellor has announced a levy on plastic bags which will come into affect by 2009. However, few new initiatives have been unveiled and the government continues to consult on items such as fazing out traditional light bulbs and has even committed to providing 31 million low energy bulbs to priority groups. Vehicle excise duty will be stepped to penalise the most polluting drivers with the greenest being exempt from the charge.

Zero carbon homes will be exempt from stamp duty while all non-domestic buildings will be required to be zero carbon by 2019. Mr Darling also announced that the government is pushing the EU for tougher emission targets and considering raising the UK target for cuts to 80% by 2050.

There were a couple of measures which businesses and accountants would have dearly loved to see, but which in actuality were unlikely to feature: these included a lowering of corporation tax and a reform of the stamp duty regime. Corporation tax is already set to fall slightly, from 30 to 28 per cent, but with many other countries now offering highly attractive headline corporation tax rates (Ireland’s rate is 12.5 per cent, for example), the UK is in danger of losing its international competitiveness.

Stamp duty has proved a tidy earner for the Treasury: thanks to the increase in house prices the tax now yields 10 times more than it did in 2007. But this has come at the cost of keeping increasing numbers of first time buyers off the property ladder, as well as creating severe distortions in the market because of the way in which the tax is levied.

Given the amount already announced in the Pre-Budget Report, it is perhaps not surprising that the Budget did not result in significant new initiatives. However, in an effort to clarify the mechanics of measures previously announced, additional detail has now been revealed.

Written by Paula Hawkins – Paula writes on the residential property market for a range of national newspapers including The Times, The Independent, The Sunday Telegraph and the Evening Standard. Paula has also written a guide to personal finance, published by Penguin Books.

ECONOMIC AND MARKET NEWS

Base Rate Balancing

After February’s base rate cut, the Bank's Governor, Mervyn King, warned that inflation is likely to prevent a successive dramatic slashing of rates. This held true in March and rates remained at 5.25%. The Bank fears that a short-term spike in inflation (caused by higher energy, food and import prices), will lift inflation expectations and affect the medium-term behaviour of price and wage setters. That, in turn limits the Bank's ability to reduce interest rates as much as it would like to, in order to try to restrict the downside risks to growth. But as Neil Young, CEO - Young Group, pointed out, short-term base rate fluctuation should have a negligible effect on the buy-to-let sector. “Investors who approach property investment in the same way that they would any other asset class will be looking at the overall trend in interest rates rather than short term fluctuations.”

Housing Targets Under Threat

A new report from the All Party Urban Development Group has confirmed that the Government’s target of 3 million additional homes by 2020 is under threat and that demand is expected to outstrip supply over the coming decade. The report, released at the beginning of March, highlights the fact that large parts of the south east are grappling with the challenges of demand and affordability and urged the newly formed Homes and Communities Agency (HCA) to do more to further develop the private rented sector, to bring to market quantities of affordable, good quality homes, which people actually choose to rent, rather than buy. The Campaign to Protect Rural England (CPRE) represents a further threat to the target for new homes; March saw it launch a high-profile advertising campaign to protest against the Government’s plans.

Prime Central London Prices Rise Again

Prices for prime property in London for sale have increased in February, showing that although the increases are slower, house price inflation has not halted in the capital. House prices in prime central London remain robust, according to a new report from Knight Frank. Prices grew by 0.6% month-on-month, which is the average figure for the past six months, indicating a degree of stability to the market, and the three-month growth rate of 2.8% also strikes an optimistic note. However, annually the figures indicate a slowdown with the rate now at 23.8%, the lowest point since August 2007.

House Price Inflation

Nationwide revealed the annual rate of house price inflation stood at 2.7 per cent at the end of February with the average price of a property in the UK being £179,358 (which is an increase of £4,653 over the last year). Nationwide said that prices were weakening, but admitted that the fall in annual price rise exaggerated the rate of decline, due to soaring prices in February of last year.

Rental Returns Surge

Landlords in the UK buy-to-let sector saw rental yields continue their upward trend during February, with returns at their highest level for two years. Latest figures from mortgage provider Paragon’s Buy-to-Let index show average yields increased to 6.3 per cent during January – the highest level recorded since March 2006. The figure represents a 0.3 per cent increase over the six per cent recorded in December. The specialist buy-to-let lender also finds yields have increased largely in line with rising rents – which were up 0.2 per cent in January – to an average of £11,604. The increase in rents follows a steady upward trend since last summer, with tenants paying on average eight per cent more for a rental property than they did in September 2007.

Growing Confidence

Figures released this month from the Council of Mortgage Lenders (CML) supported growing confidence among buy to let investors, and reflect the results of our latest Young Index survey of market sentiment. According to CML’s data from the last quarter of 2007 there were 84,800 loans advanced, which was a noticeable increase from the last quarter of 2006. The CML also confirmed that buy to let landlords were securing better deals than homebuyers and, as a result, were taking advantage of their improved negotiating power. Buy to let landlords are now regarded as a safer credit risk than the average home owner, and accordingly, interest cover calculations over the period dropped typically from 125 per cent to 120 per cent. This could reflect the fact that rents are rising strongly.

ECONOMIC & MARKET NEWS

Barratt Develops in Dalston

Barratt has been appointed by the London Development Agency for the residential element of a £160m regeneration of Dalston, east London. Barratt will develop fourteen blocks of apartments as a mixture of social rented housing and homes for sale, the first of which is due to be completed by the end of 2009. The project also also includes a library, new shops and restaurants, a public square, and a new London Underground Tube station, set to open in 2010 on the East London line. The regeneration project will further transform the area close to Young Group’s development, The Interchange, which is now approaching completion.

The London Development Agency has Selected Barratt

Olympics on Track

The International Olympic Committee this month completed a review of progress towards the 2012 Olympic Games, concluding that progress on the Olympic park and village are on schedule. Building work at the Olympic stadium is expected to start three months ahead of schedule in April.

Another crystal tower at Canary Wharf

Plans for a new 45 storey tower on the fringes of the Canary Wharf estate have been unveiled. The 'state of the art' office development at Park Place will tower 600ft on East London's skyline and is set to replace an old office block in the 'Westferry' gateway to the Canary Wharf estate. The proposal includes shops, restaurants and bars on the waterfront and a 16th floor roof terrace. A planning application is expected to be made by Grattan Property to Tower Hamlets Council at the end of March.

One Park Place

Reception at One Park Place

5bn Greenwich Regeneration

The initial part of a new Greenwich Peninsula regeneration has been given the go ahead, which will see work begin late this year on the first 289 homes. When fully developed, the Greenwich Peninsula regeneration project will see a total of 10,000 new homes, 150 new shops and restaurants, a new business district and 48 acres of open spaces and parks at the 190-acre site.

Mayor Pushes for Southwark Development

Mayor for London, Ken Livingstone, has intervened to bring forward the consented redevelopment project at Potters Field in Southwark, issuing compulsory purchase proceedings against Southwark council to force the sale of land to Berkeley Homes. The scheme - which includes eight residential towers between 12 and 19 storeys - gained consent in November 2005, after then Deputy Prime Minister John Prescott overruled Southwark's concerns about the proposed heights.

Potters Field, Southw

LATEST YOUNG GROUP NEWS

Young Finance

With The Interchange development in Dalston fast approaching completion Young Finance consultant, Jessica Hodgson, is already working with our clients to secure the most appropriate mortgage product for their circumstances. Many homebuyers have been waiting to see whether the base rate would be further reduced, assuming that mortgage products would reflect any positive movement. However, Jessica notes; “Being close to the market – and having access to products from all lenders – Since December 07, lenders have generally not passed on the benefit of either base rate cut as they seek to improve their profit margins. Lenders are continuing to tighten their lending criteria, but good mortgage products remain and borrowers with good credit ratings and correctly valued property are having no problem securing finance.” Due to the increased due diligence being carried out by lenders across the board, Jessica is urging anyone looking to organise finance to begin the process as quickly as possible as decisions on applications are now taking much longer.

Building Bridges in Canada Water

Young Group clients who invested in The Water Gardens, Canada Water, saw their apartments complete at the end of February/March. But several months prior to completion, Young Group was working hard behind the scenes to secure a joint venture with leading serviced apartment operator BridgeStreet Worldwide. BridgeStreet provides high quality serviced apartments to an international corporate client base and has a hard-earned reputation for delivering maximum rental yields and enhancing asset value. The Water Gardens apartments were furnished to a high quality and made available to BridgeStreet within a week of completion, and the first corporate tenants have already moved in.

Young Property Presentations

Following the news that the legal structure for Young Property’s London Development Fund had been finalised, the interest in the development fund has been superb. Young Group’s senior management team has since been meeting with small groups of clients to provide an overview of the fund’s structure, focus area, land acquisition criteria and development rationale. The fund’s developments will be managed by Young Group management. The fund itself is a collective investment, managed by specialist fund managers Consortium Investment Management, who are regulated by the FSA. For further information or to attend a briefing, please contact Portfolio Director, David Mackenzie, dmackenzie@younggroup.co.uk or call +44 (0)845 356 1000.

Young Furnishing

March sees the launch of a new range from Young Furnishing. Selected with great care to ensure that the furnishing options are not only stylish and contemporary, but also robust and hardwearing, the new range can be seen here. The Young Furnishing team works closely with developers throughout the completion process to ensure that properties are furnished and ready for occupation as soon after the apartments are released as possible, enabling investors to sit back, secure in the knowledge that all is in hand. The all inclusive prices are; £2,950 for a one bedroom apartment and £4,200 for a two bedroom apartment.

Property Woman of the Year, 2008

We’re incredibly proud to be able to share that Young Group’s co-founder and Chief Operating Officer, Sylvana Young, has been named Bradford & Bingley’s Property Woman of the Year, 2008 for London. The national awards, which invited nominations from throughout the industry, recognise the accomplishments of women who are an inspiration to others. The competition was fierce and Sylvana has been praised for her business prowess and the achievements that she has made in building a property focused wealth management business, which has transacted over 1,700 residential properties with a value of more than £700 million since 2003. The overall national winner will be announced from the shortlist of regional champions at an awards ceremony on 13th March, to be held at Claridges Hotel London and we wish Sylvana the best of luck.

Landmark Updates

Progress on The Landmark development in Canary Wharf is racing ahead with Chalegrove, the developer, aiming to add a floor each week. The impressive structure of the East and West Towers can already be seen from far and wide, but for those not on the development’s doorstep, progress is being charted on The Landmark microsite via monthly construction update photos at www.thelandmarkE14.com.

About Young Group

Young Group specialises in providing Property Portfolio Management services to private investors; offering the best off-plan direct investment opportunities in London, as well as access to indirect, development fund investment opportunities through its development arm, Young Property. Young Group manages the entire investment process. For direct investments this spans from sourcing the opportunities through to financing, furnishing and letting.

Young Group owns all the property that it sells, and also retains a number of units in each development for its own portfolio. As the principal in every transaction, Young Group does not realise any profits until completion and has transacted in excess of 1,700 apartments, with a retail value of £700 million. The Group’s lettings division, Young Lettings, has successfully let the majority of investors’ apartments within a week of completion.

Young Group supports NORWOOD and CHILDREN with LEUKAEMIA, two charities particularly close to our heart, donating £50 per property exchange.

t:  +44 (0)845 356 1000   e: info@younggroup.co.uk