London Update

May 2007

Tax & Regulation Update – By Paula Hawkins
House Price Statistics - Greater London
Economic Outlook
Market Comment
Other News
Young Group's May Highlights
About Young Group

Tax & Regulation Update – Paula Hawkins

As the property investment sector has grown over the past decade, so too has the regulatory landscape for investors. The National Association of Landlords (NLA) estimates that there are now no fewer than 50 Acts of Parliament and 70 separate sets of regulation affecting landlords and new rules are being introduced all the time. June 1 was the date set for the next major piece of regulation – one which affects the entire property market: the Home Information Pack (HIP). However, thanks to a legal challenge from the Royal Institution of Chartered Surveyors (RICS) and a last-minute reprieve by Communities secretary Ruth Kelly, the introduction of the HIP has been delayed until August 1.

HIPs

In addition to delaying the introduction of HIPs, Ms Kelly announced other changes, too. Initially, the packs will only be compulsory for homes with four bedrooms or more, a development denounced as “nonsensical” by the National Association of Estate Agents. In addition, sellers will only need to have commissioned a pack, rather than have a completed one, when they put their property on the market.

The decision to delay the introduction of HIPs came the day after a judge ruling in a case brought by the RICS said that energy performance certificates (EPCs), which form a key part of the pack, should not be included. Ms Kelly hopes that by delaying the introduction of HIPs, this will give the Government time to ensure that EPCs can be included. However, critics of the packs believe that this latest in a series of Government u-turns on HIPs could eventually end in the packs being shelved altogether.

HIPs, or sellers packs, have been on the agenda for several years, forming part of Labour’s original 1997 manifesto pledge. The packs are made up of several elements, including terms of sale, evidence of title, a property information form, a fixtures and fittings form, planning consents, replies to standard searches and an energy performance certificate (EPC). HIPs for leasehold properties must also include a copy of the lease, details of service charges and regulations made by the landlord or management company.

The likely cost of the packs has been a much debated point. They are likely to set sellers back anything from £300 to £600, although some estate agents – including Hamptons and Douglas & Gordon – have announced that they will offer HIPs free as part of their sale service. The penalty for failing to obtain a HIP is £200 – note that this fine can be levied repeatedly if the seller fails to purchase a HIP.

Some estate agents have issued warnings of dire consequences should HIPs go ahead, with Paul Smith, Chief Executive of the Spicerhaart Group, claiming that the introduction of HIPs would lead to a housing market crash. But most commentators are a good deal more sanguine about HIPs’ likely impact, with the majority saying that, given the relatively low cost of the packs, they are unlikely to deter sellers from coming to market.

Other notable regulatory changes include:

Tenancy Deposit Protection

On April 6 this year, the Government introduced the Tenancy Deposit Protection (TDP) scheme which aims to protect tenants against unscrupulous landlords and to ensure that disputes over deposits can be handled fairly. Under TDP, landlords are no longer permitted to hold the deposits that they collect for assured short hold tenancies in England and Wales, but must instead hand over the funds to a tenancy deposit protection scheme. If there is a dispute between landlord and tenant at the end of the tenancy, the scheme will hold onto the funds until the dispute resolution service or the courts make a decision about how the money should be allocated.

Energy performance certificates

From October 2008, landlords will be required to purchase energy performance certificates identical to those included by sellers in HIPs. The certificates, which are likely to cost around £200, will give homes a rating of A to G (just as white goods such as washing machines are at the moment), depending on where they rank on an energy performance scale. There is no pass or fail point, all the certificates will do is to give tenants an idea of the energy efficiency of the property, and therefore an idea of how much they might have to spend on gas and electricity.

The impact of EPCs is likely to be minimal; it will be a minor irritation for landlords having to obtain the certificate in order to let out their properties, but the good news is that this will only need to be done once every 10 years, so the hassle – and the outlay – will be minimal. Moreover, it is unlikely that for the vast majority of tenants, a low energy rating will be a deal-breaker. Those who want to live in older properties with plenty of character will probably not be deterred by the fact that the home costs a bit more to heat.

Changes to the planning application system

On May 21, the Department of Communities and Local Government published a White Paper proposing wide-ranging reform of the planning system. While the proposals include a quicker system to decide major infrastructure projects, a simplification of the local planning system for householders and measures to tackle climate change, there will not be significant review of Green Belt boundaries, a real opportunity missed according to the Royal Town Planning Institute.

The focus of the proposals is to allow greater freedom for industrial and commercial development, including the building of new airport runways, road-widening schemes and the building of nuclear power stations. Despite this commercial focus, the Home Builder’s Federation says that the White Paper will deliver “more and greener homes”.

It is not just the regulatory burden on property investors that has been growing. Property tax revenues in the UK are now the highest (along with the United States) in the developed world.

Inheritance tax

IHT is payable at 40% on assets which exceed the IHT threshold, also known as the nil rate band, which is currently £300,000. Halifax estimates that there are now 2.3 million properties valued above the threshold, up from just 1.3 million homes 2001. The nil rate band, is set to rise to £350,000 by 2010. However, had it kept pace with property price inflation since 1995/6 it would now stand at £460,000.

Stamp duty

Total stamp duty revenues from residential property was £4.6 billion in the 2005/6 tax year, an increase of 114% on the 2000/01 figure. The staggering increase in the amount of stamp duty collected is largely due to fiscal creep: there are now a great deal more homes that fall into the higher tax bands than there were a few years ago. The lower threshold for stamp duty, above which buyers pay 1% of the property value, was doubled in 2005, rising from £60,000 to £120,000; it was then raised again in 2006 to £125,000. The higher bands have remained unchanged since Labour came to power in 1997: buyers pay 3% on properties worth more than £250,000 and 4% on those worth more than half a million pounds.

Capital gains tax

CGT is payable on disposal of investment property, and is charged at 40% on any gains above the annual CGT exemption, which is currently £9,200 per person. Figures from Landlord Mortgages, a specialist buy-to-let lender, suggest that UK landlords collectively face a CGT bill of some £4.1 billion – an average of £48,600 each - thanks to the increase in property prices. The longer investors hold onto their assets, the lower their eventual CGT bill will be: taper relief reduces the amount of CGT payable by 5% per year after three years, up to a maximum of 40%. This means that someone facing a CGT bill of £50,000 in year four would see it reduced by 10%, or £5,000, but if they faced the same bill in year 10, the bill would be reduced by £20,000.

Over the medium to long term, property has proven to be a solid out performer within many investment portfolios. In reality, regulatory and tax regimes are no more onerous than other commonly held asset classes - indeed it can be argued that property is much more transparent in this regard.

Written by Paula Hawkins – Paula freelances for The Times, Sunday Telegraph and Evening Standard.

House Price Statistics - Greater London

Prime and mainstream property markets (Base - March 06)

Click to view a larger image

Economic Outlook

A sign that the decision to raise interest rates, twice already this year, is having the desired effect of bringing inflation back to its 2% target - is the news that the April pay bargaining round saw a departure from January’s high awards. The first quarter of 2007 saw an average pay increase of 3.5% which was the highest in over 8 years and many expected inflation to follow suit, which it could be argued it did as it rose to 3.1% last month. But the 3 months to April saw the lowest pay increases for 9 years, just 2.7%, which is likely to ease pressure on the Bank of England to introduce further rate rises to check inflation.

But it appears a further quarter point rise is still likely this year, as the Bank of England’s Quarterly Inflation Report states inflation will return to the long run average of 2% within 2 years but only if rates rise in line with market expectations. The report went on to say the markets expected the main swap rate to rise to 5.7% in the third quarter of this year, remain there until the third quarter of 2008, before falling to 5.5% by the end of the 2 year cycle.

Market Comment

Continuing a recent theme in our newsletters, the latest rate rise has done nothing to dampen demand in the capital. According to research by residential estate agent, Knight Frank; prices in Central London have risen by 33% in the past 12 months, the highest rate of increase since 1979. Liam Bailey, head of residential research at Knight Frank, said: “It is our experience that while there have been growing numbers of deals completed by City workers, it is the influx of overseas buyers, European, Russian, Indian and increasingly Middle Eastern, which is the key to the substantial price growth seen in many areas of Central London.”

The Royal Institution of Chartered Surveyors’ (RICS) headline net balance of surveyors reporting higher prices rose to 28.9% from 26.9% last month. This is the 18th month in a row that more surveyors have felt prices are rising rather than falling. Ian Perry, a spokesman for RICS, said: “Last week’s rate hike may not be the last as the housing market has not slowed as quickly as expected. With prices buoyant and conditions still tight, another looks likely in the summer.”

Other News

It wasn’t long ago we reported the UK’s biggest ever single property deal when the ‘Erotic Gherkin’ sold for £600 million, but that pales into comparison with the latest record breaker. Spanish property company, Metrovacesa SA, recently paid £1.09 billion for 8 Canada Square, HSBC’s UK headquarters. It will now lease the building back to the bank for £43.5 million per year, representing a yield of just 3.8%, which is not even as high as a HSBC savings account!

One lucky home owner has managed the impossible, having bought a detached property, with land, in Willesden, North West London for just £400,000. Being over 100 years old means the property has plenty of character too - it’s just a shame the local scout group won’t be able to use their hut any more!

Young Group's May Highlights

Property Portfolio Management

The umbrella service that links each of the Young Group divisions. All clients with completed apartments will now have received their annual portfolio reviews. Additionally, self assessment tax schedules have also been sent out to those investor clients taking advantage of Young Groups’ array of integrated services.

Young Property

The last month has seen sales of The Landmark continuing at a great pace, we have now sold over 70% of the 276 apartments. We are hosting exhibitions in the Far East; one in Hong Kong and another in Singapore, where we expect to sell a significant proportion of the remaining apartments.

Union Wharf, a previous Young Group development marketed 18 months ago, is nearing completion. The valuations on the apartments are very positive, one client has enjoyed an £80,000 profit on their £300,000 purchase.

Young Lettings

Young Lettings are in the process of finalising the details for the imminent completion of the Union Wharf development. A huge amount of interest has already been received by prospective tenants and due to the volume of enquires the first open viewing event for Tuesday May 29 has been scheduled.

Young Lettings is now registered with the Tenancy Deposit Scheme (TDS). Following changes in legislation on April 6, all landlords and agents are now legally required to register all details of new tenancies through the TDS. Under the scheme all deposits will be protected during the tenancy and if there are any disputes about the return of a deposit it will be dealt with fairly by the Independent Complaints Examiner.

Young Finance

Following the recent Bank of England base rate increase earlier this month, Young Finance are still receiving a steady stream of mortgage applications. Despite a rise from 5.25% to 5.5% both buy-to-let and residential mortgage products are still extremely competitive. With some great short term fixed rate products on offer we have seen a heightened interest in one year deals which allow short term security against further rate rises and the opportunity to review again in a years time.

Young Furnishing

Young Furnishing have recently appointed new international suppliers and have expanded and refreshed the look of all furnishing solutions.  For more details on furnishing packs or individual furniture items please visit our website.

About Young Group

Young Group was established in 2003 and has since transacted in excess of 1,000 apartments, with a retail value of £360m.

Young Group specialises in providing Property Portfolio Management services to private investors, identifying the best off-plan opportunities in London on their behalf and managing the entire investment process - from sourcing the property through to financing, furnishing and letting.

Young Group owns all the property it sells, and also retains around 10% of properties for its own portfolio. As the principal in every transaction, Young Group does not realise any profits until completion, giving investors 100% confidence that properties will ‘value up’ and that financing will be secured.

In 2006, Young Group sold in excess of £150m worth of property, with over 50% of units bought by repeat Young Group investors. The Group’s lettings division, Young Lettings, has successfully let all investors’ apartments shortly after completion.

For each property exchange, Young Group donates £50 to Norwood, the children and families charity that provides support to families facing social difficulties, and to Groundworks, the environmental regeneration charity.

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