Today, the UK general election keeps pundits on the edge of their seats amid a predicted Conservative win. Brexit will be at the forefront of the discussion, with the NHS coming in close second. However, it’s important to look at the broader implications of the outcome of this vote. In any election, laws around tax and property sales will also be affected in the long run, and indeed, transaction tax is firmly on the agenda. 

The market factors of the general election,  Brexit and technology are truly ones to watch. We will now examine how the property market and sales tax may change, through the lens of these key market factors. We will then touch on how the “sell-side” can adapt to benefit from these changes 

The UK General Election

In the case of a Labour win, John McDonnell, shadow chancellor, reported that Labour would uphold “a fair taxation system, make sure we can fund our public services, make sure everyone actually pays their taxes as well so we do tackle tax evasion and avoidance”. This will certainly affect sales tax and property tax. Indeed, the ‘Land for the Many’ document created at the behest of the Labour party includes proposals to increase CGT rates on sales of any property that is not a main residence. This appears to extend to non-residents with UK property interests.

The outlook for property tax if the Conservatives win is similarly impactful. Foreign buyers of UK properties will be subject to a 3% higher stamp duty rate than UK residents.  

Brexit

Brexit is another factor affecting the property market. Immediately after Brexit’s announcement in 2016, a number of high profile commercial property deals were cancelled. This included the purchase of a landmark office block by German client Union Investment. Tracking that progress through to today, the market has stabilised somewhat. The office and industrial sector has significantly boosted UK commercial property values. In the third quarter of 2019, UK commercial property values were up 0.4 per cent. 

Retail property remains an area of concern and rapid change, though even that has shown some improvement. The decline in high street shop rents decreased to minus 0.8 per cent, from minus 1.1 per cent in the second quarter of 2019.  

Around the time of the general election, this is tempered by a feeling of optimism – if the latest developments in UK politics result in a solid Brexit deal, the UK real estate market may witness an uptick in investor sentiment and activity. 

Technology

As touched upon in our last article, technology is rapidly changing the commercial property market. For example, technology is allowing more and more people to work from home, while many firms employ remote workers. This reduces demand for larger, traditional office spaces. Meanwhile, retail also suffers as e-commerce takes over and the “retail apocalypse” results in hundreds of traditional store shutdowns. However, retailers working with, instead of against, the e-commerce trends are experiencing great success, with e-commerce popups and small stores opening in shopping malls across the US. 

When it comes to the sale of these properties, they must be enhanced and connected, in order to speak to the new digital world. Using property sales platforms, sellers are able to list these directly and buyers are connected to a plethora of vital information. However, tax information is one element not often included in this newly connected sector. Traditional commercial real estate brokers are still key players in ensuring that tax information is accurately communicated. 

Adapting to Change

So, how can the sell-side best benefit from this? Our advice: in the wake of the general election, calibrate your sell-strategy to best suit the upcoming regulatory changes. As always with technological innovations; get on board. Ensure that property sales are enhanced by the latest tech, to ensure the best deal. 

As mentioned in our previous article, no matter the outcome of the election and the associated Brexit plan, the external factors affecting the market will continue to affect property sales and property tax. These, namely, are the advances in technology and innovation which are sending shockwaves through the industry, reclassifying property value as they go. This is pulled into sharp focus within the retail property sector, in particular, and should be used as an example to us all. 

Want to speak to the team?
Jonny Towers – 07493107957 – jonny@bloomsmith.co.uk
Neil Petty – 07970740360 – neil@bloomsmith.co.uk
Nigel Smith – 07770914594 – nigelsmith@bloomsmith.co.uk

With the election only 10 days away it is notable that institutions such as Goldman Sachs seem able to take a firm but conditional position on the British economy. 

Upgrading their positive forecasts, the notorious Bank is forecasting a rise of 2.4% in the second half of 2020. For 2021 growth of 2% is expected, up from 1.6%, and in 2022 their forecast is raised from 1.8% to 2.1%. But, and this is the important bit, if and only if Brexit clarity and fiscal stimulus can be delivered

Whilst nothing in life is certain (death, taxes excepting), one thing that has become apparent is that pontification and politicisation does nothing to allow a positive engagement with the future. Plans remain just that and foundations cannot be laid.

The BloomSmith House view is that only part of the stasis that we find ourselves in can be laid at the door of the gnarly process of mixing political drinks like referenda and Parliamentary Democracy. We see this as the symptom. The cause is grounded to a large part in technology and the effect that this is having on the way that “normal” lives are conducted, business is done and how Government maintains its power, control and influence. 

Whilst commentary of this type may seem to be far removed from the business of providing liquidity for taxation elements of capital intensive real estate projects, there is a universality to such technological change that means close attention and intelligent thought is required universally….. This close attention and intelligent thought needs to come from principal Directors on the buy and the sell side, as well as advisors.

Technology is changing/has changed traditional property classifications and usage. It has fundamentally changed valuations relatively between sectors and specifically within sectors, a prime (sic) example being retail.  Technology will, as Government struggles to maintain its power, control and influence, mean that bases of taxation, such as business rates, will change to accommodate the effects of change. It will also mean that sales or transaction based taxes such as VAT will become more important in Nation states such as the United Kingdom where capital flows increase across borders and the dues required at the point of transaction become more important sources of revenue for the Treasury. 

In the next article we will expand on sales taxes and how the transactional taxes may change and how the “sell side” can use this to their advantage.

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Bloomsmith like to work with Principals and Professionals.

We like to work with Principals because it’s their money, their risk, their hard work. They care. It’s good to work with people who care. It makes you feel as if you are doing something worthwhile. We use our money so we understand.

We like to work with Professionals because they have a sense of duty and responsibility to their client. Their advice is their reputation. Our Professionals are our reputation.

Bloomsmith like to form relationships based on trust with people who understand the value of money, where the risk sits in a transaction and the worth of an assured provision of funds for a completion.

If you agree, one of the Directors of Bloomsmith would like to hear from you to discuss how we can work together.

100% VAT for Real Estate transactions. No Charge on the property leaving the equity in the ascendency. 3-day completions.

We think you will like working with us.

Due to changing priorities for investors, commercial property is becoming increasingly attractive to experienced and inexperienced property investors alike. This presents, however, some areas where new skills and understanding may be required.

As a lender of VAT on commercial properties Bloomsmith operate in one of the more fundamental areas where understanding is required.

Residential landlords have been challenged hard as of late. This can be attributed to the shifting tax landscape and changes in regulation for lenders. The results, market contraction and reduction in landlord activity in the residential arena have resulted in a shift of attention to commercial investment, where yields and the taxation environment can often be more attractive.

Faced with a wonderfully(?) uncertain political outlook there are reasons to be positive for the long-term investor. Anecdotal evidence and some specific research demonstrates that investors operating in the prime commercial space are postponing activity until there is a definitive Brexit outcome. An “unknown unknown” should then be replaced by a “known unknown” which can allow a market strength to develop out of a sense of relief.

Capital growth in the residential sector has for a long time given investors an excuse for not being too definitive or critical in terms of their yield calculations. As this growth has dissipated, opportunities from which to derive yield have become both “de rigour” and necessary.

Lenders in the commercial property market want to see maturity and a degree of sophistication and as such we hope that some of our observations prove worthy collateral. They are borne out of experience in both commercial development and investment as well as from the funding side of the fence complete with all learning experiences….

The UK commercial property sector is a highly developed international market with an estimated size of nearly £900 billion (2016 the Investment Property Forum estimated its size at £883 billion). Returns can be strong (out-performing the FTSE 100 between 2000 and 2018) and average yields of c 5% remain, save in the obvious sectors such as retail where yields are suffering from the added risk of increasing costs (e.g. business rates) and the advancement of e-commerce and online sales.

The primary sectors in the commercial property space include;
• retail as referred to above,
• commercial office space, and
• industrial property.

Of these, our House view is that industrial premises will form the main focus of investor activity and in particular in the west of the country and surrounding ports in particular. This will be due to a re-establishing of traditional trading patterns that have been artificially re-orientated east due to the “Rotterdam Effect” and EU membership. Other property sectors will also benefit indirectly from this rebalancing.

Commercial property is not highly correlated with other asset classes such as equities or bonds. This allows investors to offset broader stock market volatility on their portfolios, notwithstanding larger macroeconomic events.

With stamp duty capped at 5% over £250,000, (where SDLT can reach 12% on residential properties over £1.5m) and loan interest relief still available against commercial rental income, the profit and loss statement of a commercial investment now works very differently to a residential buy to let.

There are many wise words to be read on the merits of locations and sectors in the commercial property market and some will be right, and some will be wrong. Our suggestion is to be familiar with the sector and the location and the more personal your familiarity the better your knowledge will be. Our other suggestion is that if the property is VAT elected you will need to pay this on completion. This can mean another 20% of equity required which on top of the normal 30% equity required under LTV parameters set by a senior lender, can be frustrating and potentially jeopardise a deal. £400,000 on a £2m purchase is a significant amount to find, on top of the £600,000 of equity even for a three-month VAT quarter.

Bloomsmith is able to fund this VAT without a charge on the property allowing you to save your equity for the next transaction or to reduce your LTV and therefore your senior cost of borrowing. Its all in the understanding…..and your team.

BloomSmith specialise in VAT bridging loans, and have experience in dealing with clients from a wide range of backgrounds.

In most cases, our clients have come to us having decided that they require the additional help of a VAT loan facility. In a bid to make the phrase itself more digestible, and to add some much-needed context, we have listed below some of the scenarios in which this type of financial assistance might become necessary.

You have forgotten about VAT

One of the most common reasons people require the assistance of a VAT loan is simply that they had not realised they’d need to pay VAT. Often overlooked on commercial properties, VAT represents a large portion of the overall payment. With commercial property payments often reaching seven figures, 20% of that total amount is not easy to come by without significant notice. Often, therefore, a VAT loan facility or bridging loan represents the difference between being able and unable to complete the purchase successfully.

You are concerned about cash flow

With around 40% of the total property worth often required by mortgage banks, and then an additional 20% of VAT payable on completion, the total amount of money required to complete the purchase of a commercial property is extremely large.

Although VAT is often recoverable from HMRC, this process can take up to three or four months, causing serious damage to a business’ cash flow. In a bid to ease the financial strain of an already difficult time, many turn to VAT loan facilities.

You need help funding your dream commercial property purchase

We would always advise that anyone of the above mindset proceed with caution; VAT loans should never be used to buy a property you cannot afford. If, however, you are confident in your ability to monitor cash flow in the six months following your purchase, VAT bridging loans can actually open up the possibility of a more expensive commercial property.

Again, we should stress the importance of not viewing our loans as a means to buying an unrealistic property. Many people do find, though, that they are only a small percentage short of their dream premises. In that situation, we would advise that you speak to one of our advisers about the your individual situation. From there, we can work together to decide whether or not our VAT loan facility would be right for you.

Contact BloomSmith

If you have any remaining questions about whether you might benefit from a VAT loan facility, please get in touch with BloomSmith. You can reach us by emailing vat@bloomsmith.co.uk, or by calling 020 3488 3411.