When then chancellor George Osborne announced he was slapping an extra 3% stamp duty surcharge on the purchase of second homes, his intentions were clear.
“More and more homes are being bought as buy-to-lets or second homes,” he said. “Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy.”
What he perhaps did not foresee - and is one of the key reasons Property Week launched its Call Off Duty campaign - was the impact the move would have on the nascent build-to-rent (BTR) sector, with institutional investors facing the same levels of tax as buy-to-let landlords.
Experts feared the worst when the charge came into force last April. British Property Federation (BPF) chief executive Melanie Leech labelled it a “huge blow”; L&G’s head of real assets Bill Hughes said it would stifle investment; and CBRE’s head of EMEA research Miles Gibson described it simply as a “tax grab”.
However, BPF data released in October showed that the number of BTR units under construction or completed in the UK had actually increased by more than 200% to 67,000 over the preceding year.
Given such huge and unexpected growth, were the industry’s concerns unfounded? Or has the stamp duty surcharge stymied what would otherwise have been an even stronger growth trajectory?
The major problem posed by the 3% levy for BTR investors is that it makes funding projects more expensive: they’re paying 3% extra for the land component of any forward-funding deal, or 3% more on the total cost of any forward purchase of PRS stock.
They do have the option of paying commercial stamp duty if they are buying land for more than six units (if the average cost of a unit is more than £250,000, then commercial stamp duty works out cheaper).
However, this rate was also raised by Osborne, from 4% to 5%. Whichever way you look at it, investors are paying more.
The tax also affects the end value of a scheme. If a PRS development were to be sold off to an investor, or broken up and sold to buy-to-let investors, then those buyers would end up paying 3% more for the units, and this amount is effectively taken off the value of a scheme.
Both short- and long-term investors will be hit hard, says LaSalle’s residential transactions director Tom Henry, who warns that the impact on long-term capital in particular could be serious.
“The short-term investors will find it much more difficult, but one shouldn’t underestimate the impact on returns for long-term investors,” he says.
“Since [the surcharge] we’ve missed out on a number of deals that have then not gone on to be bought by anyone else. They just didn’t work post surcharge.”
One shouldn’t underestimate the impact on long-term investors - Tom Henry, LaSalle
There is plenty of evidence to back up that view. As Property Week revealed two weeks ago, the tax has had an immediate and devastating impact on some schemes.
Fizzy Living managing director Harry Downes says that three of his company’s projects that were “in solicitors’ hands” fell apart in the aftermath of Osborne’s announcement. “We offered as much as we could offer and there was no budget in there,” he says.
Downes argues the surcharge has made it harder for PRS developers to compete with housebuilders for land, meaning that fewer PRS units have been delivered than would have been the case without the surcharge. Seeing as rental developments are typically built much quicker than for-sale stock, this has led to an overall reduction of supply.
This message is echoed by Henry Smith, chief executive of developer Aitch Group. Since the charge was introduced, landowners have been holding on to sites because PRS developers cannot offer them good enough prices, he says.
“Quite simply, the increased costs make new developments’ worth less,” he says.
“There is clearly a healthy appetite from developers to increase the pipeline of homes [but] punitive tax policies only hinder this enthusiasm.”
The increased costs make new developments’ worth less - Henry Smith, Aitch Group
Developers had hoped the Brexit vote would make the second half of 2016 a busy period for the sector, with housebuilders’ reticence making it easier to compete for land. However, the impact of the surcharge - combined with an influx of foreign capital - has made it as difficult as ever, according to Robert Sloss, chief executive of residential developer HUB.
“They’re legislating against PRS,” he says. “[The surcharge] is impacting on what are always very tight appraisals for new market PRS forward funds.”
These tight margins have created the trouble, Downes explains. “You had to cut corners or [find a way of de-risking] the bigger schemes to get a stable income stream. It’s another 3% on top. Where’s it going to come from? It’s not a level playing field.”
Martin Roberts, principal of investor Addington Capital, adds: “The stamp duty changes make marginal PRS [schemes] even more marginal. It makes owner occupation more attractive, but does nothing to help the supply chain.”
The 3% surcharge is making it more difficult to get PRS developments off the ground and it isn’t just the practical implications that are worrying.The tax and the current chancellor’s failure to reverse it in last year’s Autumn Statement also throw into doubt the government’s commitment to the sector.
Ministers are talking the talk and seem to be trying to move away from the previous administration’s concentration on home ownership, but with no real policy direction their words seem pretty empty.
“It doesn’t send the right signals at the nascent stage of the sector’s growth to new investors,” says Adam Challis, head of residential research at JLL. “The market is still clearly growing and strengthening. What we don’t know is how much stronger the market might have been [had the surcharge not been introduced]. It doesn’t suggest government understands the opportunity.”
Alex Greaves, M&G’s residential fund manager, says his company has enjoyed “fantastic returns” and feels “comfortable” in the current market - but nevertheless labels the 3% levy a “kick in the teeth to a fledgling industry”, adding: “It sent a really bad message out to institutional investors.”
The 3% levy is a kick in the teeth to a fledgling industry - Alex Greaves, M&G
However, while there is broad consensus that the surcharge has been damaging, some feel the impact has been overplayed. Steve Cook, co-founder of Investec’s structured property team, says that as most of the money in the sector is in it for the “long haul” investors can shrug off the charge.
“For the sophisticated investor with a long-term view, they’re just accepting the cost to entry is more than it used to be,” he says. “They will take it in their stride.”
He even suggests that in implementing the surcharge the government has succeeded in its intention to “shake out the amateur landlords”, leaving just those with a long-term outlook as the key players in the PRS market.
This is a claim backed up by Brian Dowling, a senior associate at Irwin Mitchell. “The fundamentals supporting BTR outweigh the increased exposure to stamp duty,” he says.
Andrew Screen, a senior director at CBRE who specialises in the PRS, agrees. “For long-term investors, I don’t think this is a significant issue,” he says, arguing that over a 20- to 30-year period the capital gain on a development will more than outweigh the extra stamp duty cost.
However, at a time when the government is so desperate to boost housing supply - and doesn’t seem to mind too much via which tenure - it should surely be doing everything it can to support a sector that has the potential to deliver relatively quickly a lot of relatively affordable homes. The surcharge hinders rather than helps that cause.
The surcharge was, of course, introduced before the nation voted for Brexit. According to LaSalle’s Henry, the time could well be right for the government to re-evaluate stamp duty in light of the UK’s decision to leave the EU.
“My understanding is that the government felt it may not be legal to give institutions an exemption under EU law, which is quite interesting given where we find ourselves now,” he says. “We’ve received advice, as have other PRS investors, that it would be perfectly legal to do it.”
Challis adds: “It was a decision made under the last government and there’s an opportunity for Theresa May to take a fresh perspective.”
A fresh perspective would not only help the burgeoning PRS sector become a mature investment class, it would help developers deliver more homes that the country desperately needs - and fast.
Two more reasons, if the government still needs them, to Call Off Duty.
20 January 2017