VAT AND THE UPSIDE OF BREXIT

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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.