8 MAY, 2017 by Paulina Carl

Residential rents have increased both month-on-month and year-on-year across all areas of the UK apart from London and Northern Ireland.

The index was put together by Landbay and showed that national rents went up by 0.82% over the last twelve months and by 0.04% month-on-month.

A breakdown of these figures showed that rents showed a monthly increase of 0.04% in England, of 0.09% in Scotland and of 0.1% in Wales. In London and Northern Ireland, however, rents fell by o.o9% and 0.37% respectively.

The index also revealed that younger adults who lived on their own in a rental home would spend one third, or more, of their monthly income on rent. In the age bracket of 18 years to 39 years, the average rental costs come up to £1,102 a month, which equals 69% of the average salary after tax.

This means young adults who choose to live on their own have little to no money left to spend or save for a deposit. Furthermore, the report also points out that rental costs in the UK have increased by 9% over the last five years.

Once two people are sharing on home with a total rent of £1,152 a month, each tenant will only spend 39% of their income on rent. Once there’s a third person added, the average monthly rent goes up to £1,322 and every tenant’s monthly income proportion spent on rent drops to 30%.

John Goodall, chief executive of Landbay, explained:

“Whether tenants are renting as a stepping stone on the way to home ownership, or choosing to rent for life, this generation are relying on a well-served buy to let market to ensure rental growth doesn’t become unbearable.
What is now needed is some firm Government commitment to improving standards, affordability and supply of rental properties. Institutional investment and the subsequent growth and professional lisation of the private rental sector are already helping control rental growth and improve living standards for renters.”

MAY/JUNE 2017 (MAGAZINE)

Will Brexit affect student numbers and hurt the appeal of the sector in the UK? Not necessarily, say Joanna Turner and Rocco Versace

In a post-Brexit vote environment, investors in the UK property market are increasingly looking for defensive ‘safe haven’ investment opportunities to protect portfolios against any upcoming economic uncertainty and potential increases in market volatility.

Student housing offers many of the defensive characteristics investors are looking for. This has been borne out by recent activity. There was approximately £3.1bn (€3.7bn) invested in the UK purpose-built student accommodation market in 2016, making it the second highest year on record after the exceptional 2015, when 74,500 beds were traded at a total value of £5.9bn.

Although this still only represented around 7% of the total £44bn invested in UK commercial property last year, it has seen exceptional growth since 2010 – when only £500m was invested.

The sector has also been a stellar performer. The CBRE Student Accommodation index outperformed the MSCI benchmark over the 12-month period to Q3 2016, showing a total return of 10.2%, compared with the MSCI (IPD) Quarterly UK Property index return of -2.3%.

Given the higher-than-expected investment performance and stable income returns, investor appetite for student housing has never been stronger. But what has driven this extraordinary growth and why is it so attractive to investors? Is it really ‘Brexit-proof’? What about lenders’ appetite for the student accommodation sector?

In an economic environment characterised by ultra-low interest rates, there are many key drivers, including a solid demand base, attractive yields and steady rental and capital growth. There are also diversification benefits resulting from the low correlation between student housing and traditional property sectors. As figure 1 shows, higher rental yields on student accommodation make the sector appear far more attractive on a relative basis than current low bond yields, which have been distorted by monetary policy intervention and quantitative easing. This is likely to remain the case over the next few years.

However, as figure 1 also shows, average student accommodation yields have compressed significantly in recent years, due to increasing investor demand and a shortage of investment-grade purpose-built student accommodation.

Investors targeting income opportunities have seen prime yields in the sector fall by around 40bps over the past two years, due to the fall in bond yields and a flight to safe-haven investments. A good example has been Aviva Investors’ recent £76m acquisition of a forward-funded accommodation building in Coventry, at a reported yield of 4.24%.

With top prime London student accommodation yields now at 4.5%, compared with 3.5% for prime central London office yields, the sector is starting to look keenly priced, particularly considering the additional risk premium required for investing in a less mature sector displaying lower levels of liquidity than the well-established central London office sector. Therefore, investors are increasingly seeking higher yielding opportunities outside the capital.

For example, better value investments can be found in historic and emerging regional locations with excellent education systems, good quality infrastructure and limited supply. Historic towns with restricted supply – such as Oxford and Cambridge – offer yields of about 5.2%, while prime regional cities with mature markets and a healthy supply-demand balance – such as Glasgow, Newcastle and Southampton – offer 5.5%.

Given a recent supply increase across the UK, investors now need to think more broadly about where to invest and how to find value in student accommodation. Investing in cities where universities have plans to grow and/or relocate campuses, as well as looking at cities where the supply-demand balance is favourable, should be key factors.

For instance, Bristol University is planning to invest £300m over the next five years in a second campus, which should be able to accommodate an additional 5,000 students. Another example is Belfast, where Ulster University is building a new campus in the city centre to relocate 12,000 students from Jordanstown.

University towns like Hull, Guildford, Egham, Brighton, Swansea and Norwich could also be interesting investment targets, given the shortage of student accommodation facilities. However, planning constraints, poor official data about the local student population and high residential values are factors to be aware of.

In addition, a key concern for investors is whether the strong demand for student accommodation seen in recent years will continue, given uncertainty about the impact of Brexit on student numbers coming from the EU. There are concerns surrounding immigration controls, a possible introduction of student visas, higher tuition fees and the relatively high cost of study in the UK for foreign students.

While the longer-term picture is still unclear, figures from UCAS, the university admissions centre, suggest that after modest growth in overall student numbers of 1% pa in 2017-18, there is likely to be a decline in EU student numbers. This is expected to be counterbalanced to some extent by a modest increase in non-EU and domestic students, suggesting broadly flat overall student numbers beyond 2018.

Demand from students is expected to be strongest for high- and mid-tariff universities, while a decline is expected for low tariff universities. Overall, it should be sufficient to sustain rental growth ranging from 2% to 3.5% pa in 2017 and 2018. The largest owner/operator, Unite Students, said it is expects rental growth at the top end of these forecasts, with continued full occupancy.

There will be big differences between various cities and regions, as well as weak and strong universities, so investors will need to carry out detailed risk-return analysis and due diligence on target towns and cities and select stock carefully. In general, rental growth forecasts are stronger for regions outside of London, particularly those undersupplied and seeing increasing student numbers.

Until recently, though, there were significant barriers to entry for investors, as it has been a fairly illiquid and fragmented market, dominated by a few specialist owner/operators. Apart from Unite Students, which has 50,000 bed spaces under management, half of the top 30 operators/investors in the UK market, by number of operational beds, have less than 10,000 beds.

However, with Unite recently converting to a REIT, and other major owner/operators now following suit, this will open up new investment opportunities and diversification benefits to smaller, retail investors, while providing greater liquidity to the market.

Additionally, private operators are working with universities to develop new investment products and are creating new operating platforms to compete with the private rental sector. Examples include Vero Living, Liberty Living and Campus Living Villages, as well as Hello Student, a platform set by Emperic Student Property (ESP). These developments are creating more choice for students looking to stay in new, innovative, technology-led community hubs.

Major institutional investors and Sovereign Wealth Funds – such as BlackRock, GIC, GSA and Goldman Sachs – have also been investing recently in major portfolio deals of existing assets and developments in order to acquire scale quickly.

Among the ‘alternative’ property sectors, student housing has been the preferred asset class among lenders, particularly non-bank lenders such as insurers, private equity players and international lenders.

While major UK banks have viewed the sector favourably, they will continue to be constrained by increased regulatory requirements and costs, which are likely to dampen lending. In contrast, insurers will continue to deploy their balance sheets to the sector to diversify their portfolios and gain further exposure to a maturing asset class offering further growth potential and defensive long-term income streams to match liabilities. These institutions are able to offer tailored facility terms to borrowers, meeting a broader level of funding demand.

For example, Canada Life Investments recently provided a £40m loan to premium student accommodation owner/operator ESP – with a loan-to-value of 50%. The loan was secured against four forward-committed assets and completed in time for the 2016-17 academic year. This was the second loan provided to ESP by Canada Life, bringing the total combined loan to the student accommodation investor to £71m, secured against eight assets.

Longer-term debt facilities will become increasingly available in the future. With more attractive lending margins on student housing than on traditional mainstream property assets – ranging from 200bps above LIBOR for low-risk senior debt on existing assets, up to 550bps for a high-risk development, according to property consultant CBRE – the debt market is expected to grow further as the sector matures.

The strong growth in investment activity in the purpose built student accommodation sector seen over the past few years is likely to continue. Investors will continue to be drawn to the sector’s attractive yields, particularly outside London, as well as steady rental and capital value growth, and diversification benefits.

The main risk is on the demand side as a result of the outcome of the Brexit negotiations, with potential future restrictions on visas for EU students. However, the UK is recognised globally for its higher education. Despite short-term uncertainty, the UK is likely to continue to attract a large number of students from around the world, further attracted by the weak pound.

On balance, the future still looks bright for investment and lending in this sector, as it continues to grow and mature as an asset class. However, as always, careful stock selection and detailed due diligence are essential.

This article is part of a series in collaboration with the Society of Property Researchers

By Tim Wallace

3 MAY 2017 • 1:43PM

Building work is growing at a steady but not spectacular pace CREDIT: SIMON DAWSON/BLOOMBERG

Britain’s builders are getting back to work as housebuilders try to meet demand for new homes and large civil engineering projects get under way, following a modest slowdown at the start of the year.

Last month growth accelerated in the construction sector, encouraging companies to hire more staff to meet the rising demand.

Overall construction output grew at its fastest pace so far this year, according to the purchasing managers’ index from IHS Markit.

UK Property Market ‘Bottoming Out’

3 MAY, 2017 by Paul Collins

In a statement that may surprise those outside of London who had yet to see a decline in the property market, property professionals believe the UK market is bottoming out, boosted by a rise in international demand.

David Adams, a Director of Humberts’ new Mayfair office, has called the bottom of the market and says it is already experiencing a notable increase in demand from Europe, reports OPPToday.

London’s commercial property sector attracts record investment in first quarter

“With the Brexit shake up and the uncertainty surrounding the French Presidential elections in particular owning property in Central London makes good sense. We’re expecting at least a 25% increase in demand from overseas buyers as the year progresses and the dust settles.”

Hugh Wade-Jones, Managing Director at Enness Private Clients, called the end of the market last year. “At the end of 2016, we predicted 2017 would see the bottom of the market, so it’s no surprise to see data from property experts reflecting this.”

It has also seen a significant rise in international buyers. “We have absolutely seen a shift in property investment activity from our high net worth clients; we’re doing fewer residential deals above the £2million mark, but many more in the commercial and international space.

Our commercial enquiries have increased over 60% in the six months to April, highlighting an increased demand for financing in this area. Our international enquiries have also experienced a spike in the last six months, with a huge increase of 400%.

Foreign nationals who are wary of the prime London market are investing in commercial units in the City, for example, or releasing equity from residential property to invest overseas. They no longer want to have all their eggs in one basket and our data is representative of this.”

At the same time, property developers predict upswing in PDR-enabled office to residential conversions with limited impact on the housing shortage.

Three quarters (74%) of property developers expect to see an increase in the number of conversions of under-used office buildings into new homes over the next two years as a result of the government’s decision to extend property development rights (PDR) legislation.

Of these, nearly a third (30%) of developers expects to see a significant growth in PDR-related conversion schemes. This is according to a new study commissioned by Amicus Property Finance, the specialist short term property lender.

More than two thirds (69%) of property developers welcome the PDR extension, which was designed to enable thousands of new homes to be built by making use of neglected industrial and office property while preserving the green belt.

In the UK between July 2015 and June 2016, a total of 1,066 office to residential development applications were permitted with prior approval not required and a further 1,480 applications granted with prior approval.

Despite the predicted growth in PDR-enabled conversions, only 4% of property developers believe this will have a major impact in addressing the UK’s housing shortage with the overwhelming majority (86%) thinking it will help only slightly towards narrowing the gap.

Property developers are also sceptical of the government’s targetto build one million homes by 2020 with only one in five (21%) believing this target to be realistic.

Posted by Alliance Investments Manchester Properties

Overall, the housing market in the North of the UK is strong, with Manchester particularly feeling the benefit of increased global interest, ever increasing housing demand and substantial development activity.

The UK Government’s Northern Powerhouse initiative is continuing to pick up momentum which is allowing Northern cities to look to the future with assurance.

The figures back this positive rhetoric, with 16% in capital value growth in Manchester last year. JLL have recently forecast house prices in Manchester to grow by up to 28.2%, and the North West to rise 18.1% until 2021.

The region is expected to welcome almost 42,000 new households each year, many of these making cities their home – this projected increase in population will add to housing demand, pushing up both house and rent prices.

Politically, further devolution for the northern cities should continue to benefit the region; funds will be allocated to where they are needed, resulting in better places to live.

The HS2 and HS3 high speed train lines will close the gap between the North and South and between Manchester and Leeds. This, along with the Northern Powerhouse, will encourage business in the north and further boost economic prosperity (Predicted economic growth in the region of 1.5% between 2017 and 2021)

With current and projected figures painting a good picture for the Northern housing market and Greater Manchester particularly, investors may be wise to turn their focus away from London and more further up north.

Knight Knox Tenant Survey

Property Trends: What to Expect In 2017

4 APR, 2017 by Contributor

The property market has already had a strong start to 2017, with many estate agents reporting their busiest start to the year.

In fact, property specialists Leaders announced a 67 per cent increase in the amount of properties coming into the market during the first week of January 2017 compared with the monthly average in the fourth quarter of 2016.

With a potentially busy year ahead, it’s important to stay ahead of the game and look at what property trends are on the horizon – particularly when you take into consideration the effects that stamp duty taxation and the United Kingdom’s decision to leave the European Union will have on the economic and political landscape.

Here are some predictions as to how the property market will adapt throughout 2017.

Buy-to-let changes could equal higher tax brackets

On April 1st 2017, a phased reduction on mortgage interest tax relief for buy-to-let properties will be introduced and this could potentially affect landlords’ profits.

The reduction will see interest relief capped at 20%, instead of the usual 40% or 45%. The National Landlords Association estimates that this will push around 400,000 landlords into a higher tax bracket as a direct result of the changes.

The restrictions are due to be introduced in phases, which are all outlined below:

• Tax Year 2017/18:
  Deductible finance costs will be restricted to 75%, with 25% available as a basic rate income tax deduction.
• Tax Year 2018/19:
  Deductible finance costs will then be restricted to 50%, with 50% available as a basic rate income tax deduction.
• Tax Year 2019/20:
  Deductible finance costs will then restricted to 25%, with 75% available as a basic rate income tax deduction.
• Tax Year 2020/21:
  100% of the mortgage interest will be added back to the rental profit and the tax calculated according to the tax bracket in which the landlord falls into. A 20% deduction of the interest disallowed will be taken from the payable tax.

House ownership falling to its lowest level – what’s next?

In 2016, home ownership fell to 64% – the lowest level since 1986.

One of the reasons for this dramatic decrease in home ownership can be attributed to the fact that young people are opting to rent instead of purchase their own homes. In fact, the Local Government Association found that the number of 25-year-olds who owned their own properties in 2016 had fallen from 46% in 1996 to 26%.

The proportion of people who own their own home has fallen across every part of the UK since peak figures occurred in the early 2000s. In July 2016, Theresa May pledged to tackle the housing deficit, stating that:

“Young people will find it even harder to afford their own home. The divide between those who inherit wealth and those who don’t will become more pronounced. And more and more of the country’s money will go into expensive housing.”

It will be interesting to see how Theresa May will actually tackle the housing deficit by introducing schemes that will aim to create more affordable housing for UK residents.

Midlands and the North West expected to rise

Despite the fall in home ownership, the Midlands and the North West are expected to see increases in house prices.

A report by the Royal Institution of Chartered Surveyors (RICS)indicated that the North West and West Midlands are expected to become property hotspots in 2017.

The report found that house prices in the area could rise higher than the national average of 3%.

Article provided by LPC Living.

Replacement of Domestic Items Relief

Replacement of Domestic Items relief is introduced in letting of residential property business to replace the 10% wear and tear allowance that has been removed. The relief is available only for tax year from 6 April 2016 onwards.

If you are calculating your income tax for rental income falls in period prior to 6 April 2016, you may claim the 10% wear and tear allowance.

Domestic items

From 6 April 2016, you may be able to claim a relief for the cost of replacing furniture and fittings, also called the domestic items, in your buy to let properties. The relief covers the following domestic items.

• movable furniture for example beds, free-standing wardrobes
  • furnishings for example curtains, linens, carpets, floor coverings
  • household appliances for example televisions, fridges, freezers
  • kitchenware for example crockery, cutlery

The Replacement of Domestic Items relief is available and apply to unfurnished, part furnished or fully furnished residential property.

Replacing old furniture – beyond repair

You may claim the replacement of domestic items relief when you replace, say, a piece of broken and beyond repair furniture in your buy to let property. You buy a new furniture for your property for use by your tenants in that property.

This relief only available for replacement of domestic items not the initial cost of getting the items for your property.

Upgrade of old furniture – modern furnishing

If you are replacing your broken furniture in your buy to let, an upgrade version, say, a sofa with a sofa bed, the allowable deduction is limited to the cost of purchasing an equivalent of the original item. So if a new sofa would have cost you £400 but a sofa bed cost you £550, you could only claim the £400 as a deduction and no relief is available for the £150 difference.

When considering if the new item is an improvement on the old asset, the test is whether the replacement item is or is not, the same or substantially the same as the old item.

Changing the functionally, say from a sofa to a sofa bed, means the replacement is not substantially the same as the old item.

Changing the material or quality of the item also means the replacement is not substantially the same as the old item. Say you upgrade from synthetic fabric carpets to woollen carpets, the replacement is not substantially the same as the old item so there has been an improvement.

Importantly, if the replacement item is a reasonable modern equivalent, say a fridge with improved energy efficient rating compared to the old fridge, this is not considered to be an improvement and the full cost of the new item is eligible for relief.

In the example above, if you later purchase a replacement sofa bed for use in that buy to let property, you would be able to claim the full cost of this new sofa bed. This is provided there was no improvement on the old sofa bed and the old sofa bed is no longer available for use in that property.

Calculate the replacement of domestic items relief

When calculating the relief, you must take into account if your old domestic item is sold or part exchanged for the new item, and also the incidental costs of disposing of the old item or acquiring the replacement item.

The formula to work out the relief for the new item is as follows:

• the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent) plus
• the incidental costs of disposing of the old item or acquiring the replacement less
• any amounts received on disposal of the old item 

  Example

  Sheila has replaced a single, wooden framed bed in her rental property with a new double divan bed. The new double bed is an improvement on the old bed and Sheila paid £400 for it which is significantly more than the £150 it would have cost if she had replaced the old bed with a new equivalent wooden framed bed. Therefore Sheila cannot claim more than £150 of the purchase cost as a deduction. Sheila also paid an additional £20 to have the new bed delivered but managed to sell the old bed online for £30.

  Sheila needs to work out how much he can claim as a deduction:

  1. Cost of new replacement item limited to the cost of an equivalent new item £150
  2. Add the delivery charges £20
  3. Less proceed from selling the old bed £30
  4. Amount deductible under Replacement of Domestic Items Relief is £140.

  Furnished holiday Let

  If you replace a domestic item in a property which qualifies as a Furnished Holiday Let, Replacement of Domestic Items relief is not available. You will continue to be able to claim capital allowances on these items.

  Rent A room

  If you use the Rent a Room Scheme, Replacement of Domestic Items relief is not available.

  10% Wear and Tear allowance

  You cannot claim the 10% Wear and Tear allowance while also utilising the Replacement of Domestic Items relief.

Should Manchester be Britain’s capital city?

Top journalists at The Economist certainly think so, arguing the move would smash the north-south divide and save taxpayers millions on Westminster repair costs.

The argument over whether Manchester or Birmingham is the UK’s second city could finally be laid to rest.

Brummies may soon have to argue it out with Londonders.

Economist journalists reckon making Manchester the country’s capital would ‘change British politics for the better’, making it more affordable and accessible.

They say the move would ‘drive urban integration’, raise productivity and boost living standards.

Politicians on our patch have long argued the need the burst the establishment bubble. Economist bosses agree, insisting leaders would be much closer to ‘ordinary voters’ if our city took over from London.

Repairs to the Palace of Westminster are long overdue. The Victorian complex is crumbling, with at least £4bn needed to bring it up to scratch.

Moving both houses of Parliament out for up to eight years would be a massive undertaking.

Economist bosses say creating a ‘modern political centre’ has nothing to do with the state of Westminster, but about fixing the country’s traditional divide.

They argue the ‘establishment’ in many countries is split between multiple locations – Berlin and Munich, Toronto and Montreal, Sydney and Melbourne, Barcelona and Madrid.

That, they argue, makes the establishment ‘less complacent, blinkered and self-regarding’.

The Economist says Manchester could be the perfect counterbalance to London, capable of attracting government staff, the media, think tanks, investors and business leaders.

The magazine’s Bagehot column reads: “Manchester clearly has the edge. Its position as Britain’s de-facto second city is well-established.

“Its infrastructure is better than that of Birmingham, it has more space to grow, its airport already has twice the traffic and twice the number of international connections.”

The Manchester Central Convention Complex is suggested as the place to house the two houses of Parliament, with nearby rundown mills and warehouses perfect for offices for MPs and government departments.

The Prime Minister could work from Central Library, the column suggests.

“Perhaps moving Britain’s cockpit from the pompous, forbidding, Oxbridge-college air of Westminster to these airy Victorian temples of manufacturing and entrepreneurial ingenuity would improve politics, making it more optimistic, accessible and ambitious,” the column adds.

Manchester council leader Sir Richard Leese said addressing the north-south divide isn’t about where the capital is, but where cash is invested.

He said: “While it’s encouraging that Manchester’s strengths and potential are being increasingly recognised both nationally and internationally, we see our role as complementing London rather than competing with it.

“We know most Mancunians would consider our city the capital anyway. This is a bit of fun, but there is an important message behind it.

“If the government is serious about rebalancing the national economy and reducing the dominance of London, what matters most is not where is designated the capital city, but where the investment takes place.

“That’s why we are continuing to push for infrastructure investments such as HS2 and new transpennine route Northern Powerhouse rail to improve Manchester’s north-south and east-west connections and continuing investment in Manchester’s distinctive strengths – whether it’s pioneering research into advanced materials such as graphene led by our world-class scientists or groundbreaking cultural content as exemplified by Manchester International Festival and the Factory.”