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Time to jump off the fence

Following on from the theme of last week’s article, we are going to be looking at what affect a 3% hike in stamp duty will have on the London property market.  The property market is absorbing the news of the planned tax assault on buy to let by the chancellor, this change will force investors to pay thousands more in stamp duty on new purchases on top of the loss of tax reliefs unveiled in July.

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A new 3% additional stamp duty rate on any property bought as a buy to let or as a second home will see the tax on a £175,000 purchase jump sixfold from £1,000 to £6,250. For someone buying in London, say a two-bed flat for £400,000, the stamp duty rises from £10,000 to £22,000. This is a significant rise and agents are already seeing signs of heightened activity from those who wish to avoid this extra hike.

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As mentioned in last week’s article property is one of the few industries producing money for investors, a pie which the government is trying to get a piece of. The following example illustrates this: If an investor purchases a property to hold long term at £250,000 and over a good five year period the property rises to £400,000 the investor can refinance at say 70%. They then can extract £280,000 from the property. This will give them the 25% initial deposit back of £62,500 and about £217,500 in ‘profit’. The government gets none of this; there are only two types of tax on property one is on the income and the other is on the sale. If you don’t sell you do not pay. There are only two ways to profit on a property, one is the rental income and the other is the increase in value.

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The above scenario is impressive and realistic, if you had purchased a property in 2010 in the right location you could well be sitting on this type of gain. It is understandable the government therefore wants a piece of this pie. This will be the third round of stamp duty hikes, in recent years. The market has recovered well from the two previous hikes, though the top end of the market is still a little sluggish currently, which is expected considering the steep hike. The real blow would have been the mansion tax if it had crept in, this was likely if Labour had won the recent elections. Many were predicting the property market would not have recovered if this would have come in. Property however is more resilient than most assume, Hong Kong introduced a Mansion Tax, the property market was stagnant for a while and then once the market had absorbed the change it carried on rising.

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Therefore with a resilient London property market, the expected hike will cause a rise in activity which has already started to occur, this will increase up till April 2016 then the market will stop for a breath, giving the market a chance to absorb and put into perspective the rise, and then it will carry on rising again. Where else will investors both nationally and globally put their money? A property is a natural annuity. An annuity is a stream of payments; it’s a word I got to know well having studied this one word for many years at university. An annuity is what underpins many investment products, such as life assurance, bonds and pension schemes. With life assurance you pay in a series of payments and your estate gets a lump sum when you die. With a pension scheme the same scenario – you pay in, but the event of a payout is on retirement or a reduced sum on death. Interestingly both of these products have an end date, based on an event, death or retirement. At  university I learned complicated terms which surround these products, for example in the case of a pension scheme, you have terms like Annual Management Fee, Renewal Fee, Bid/Offer spread, Market Value Adjustment, tied into these products. Clever words to bamboozle the average person into thinking they are justified and bonafide. All these words mask the fact that the pension scheme is taking money out of your pocket and putting it in theirs – period –  from the sales agent to the fund manager and to top it all of the returns are usually abysmal.

In contrast, property is simple to understand. Income is only in two ways and expenses are the mortgage payments, maintenance and agent’s fees. The average lay man can comprehend this, you don’t need a university degree. Furthermore the property, assuming it’s freehold, does not have an end date to it. It will carry on producing a monthly payment stream long past when you’re gone. There are many typical Jewish families who had the foresight to purchase London property just after the second world war. They own thousands of properties in London which are now handled by the third generation of their families and they generally do not sell but carry on amassing. We only get to deal with the scraps left over.

Those who have been sitting on the fence for many years now is the time to move. I have met investors who have been contemplating buying property for even as long as ten years, they are the procrastinators. They move through life by looking in the rear view mirror, always looking at what has happened and how they have missed the boat rather than looking at the terrain ahead.

Looking backwards in property you will always feel you have ‘missed the boat’. But if you turn around and look ahead there is a chance you won’t miss the next one.

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I have heard people come and say the market cannot carry on like this, it has to come down. Well it hasn’t, and medium to long term it will not in my opinion. Of course there will be periods of down turn, but it’s not a crash. These periods are temporary periods of stagnation. Property does not crash, it drops in price for example by 10-15%, especially in solid locations like London.

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In a previous article I compared the price of a painting done by Picasso and London property.

The painting had gone up by 462% in 18 years; roughly 25% per annum.  There is no comparison to this piece and with age it will increase in value.

According to Nationwide London property prices have increased by 334% during the same period, this equates to an annual uplift of 18%. London property comes out on top because it produces income and it’s easier to get funding on it.

You have a short window of time to make a decision if you wish to save the extra 3%, it can take 3 months to complete a deal and Christmas is traditionally a slow period in the property market, therefore if you want to invest now is the time.

The Real Deal

A trophy asset in Mayfair, London, W1

Purchase Price: £3.6m

  • A large three bedroom flat in Mayfair’s most prestigious block
  • Share of freehold
  • Very good natural light
  • In the premier middle block which has been achieving the maximum price
  • Another flat in the same block was for £6.25m at £3,023 per sq. ft. in October last year while this is coming at around £2,568 per sq. ft.
  • We expect the value of this proeprty to be around £4.4m – £4.6m after refurbishment

Call us now if you would like to have a piece of the pie!

Suresh Vagjiani

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!Tips of the Week

The majority of money in property is made from capital growth, don’t sacrifice this for just rental yield as this is only a part of the return.

New properties generally have high service charges and ground rents and these will dampen the rental yield; while existing properties especially ex local flats have very reasonable service charges and ground rents and will give good rental yield, and if in the right location good capital growth too.

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