Covid-19 Daily Briefing

Daily briefings on the most relevant news affecting our industry from the past 24 hours.

It’s time to take out Tourism VAT for good

A permanent VAT cut for the tourism sector would boost one of the UK's most vital exports.

What will build-to-rent look like after COVID-19?

The pandemic has impacted all real estate sectors in some way or another - but which are going to come out stronger?

Commercial landlords should brace for more pain

The second rent quarter day of 2020 was dire but the third will likely be worse.

Budget 2020: what’s the outlook for real estate?

Blackstock Consulting's clients' share their analysis of what the new budget means for the property industry.

VAT on Homes Built to Rent

Yes tax is boring, but it’s important too, and despite what you may think it’s extremely important for the Build to Rent sector.

While we may be banging the drum on separate use classes or affordable housing methodology, perhaps we should turn more attention to how VAT is applied on homes for rent.

Homes sold on the open market are ‘zero rated’ and so pay no VAT. But If I rent you the flat, because it is an investment, I have to charge you VAT at 20% on the rent.

But you are not going to pay that, so I would have to make it VAT exempt, meaning I am unable to claim back my own VAT charges.

Given the majority of BTR developers are building new homes – rather than digesting those built for sale as buy-to-let investors do – Build to Rent investors should be treated differently, as far as VAT is concerned.

You can offset it through capital gains, but you cannot avoid it and it is a needless drag and a disincentive that may reduce likely investment into the sector.

As I said – it may not set the front pages alight or be the top recommendation of any white paper, but it’s important none the less.

man at desk reading about property pr

Banks’ real estate lending losses revealed

New research has revealed for the first time that UK banks collectively made no profit from real estate lending during the market cycle from 1992 to the 2008 crash.

Bad commercial real estate (CRE) loans were a large part of the reason HBOS and RBS needed bailouts a decade ago. According to the research, produced for the Property Industry Alliance, an umbrella group of listed property firms and fund managers, these problems were not unique to 2008: banks also failed to profit from lending to real estate during the previous two cycles – a period spanning over 50 years.

Authored by Rupert Clarke, a 35-year veteran of the real estate and financial services sector who was previously chief executive of Hermes, the report says commercial property lending generated profits of c.£7.0bn during the last cycle. This was dwarfed by £19.3 bn of write-offs, mainly from loans made towards the end of the cycle.

According to the report, at the lowest point in June 2009, more than £50 billion of capital was at risk of total loss. The research says that loan-to-value (LTV) ratios (a measure of how much value risk is being taken) were not adjusted to reflect increasing risks as property market values rose significantly towards the end of the cycle. It is vital that as the cycle progresses, LTVs should be proactively managed to reduce risk.

Clarke is calling on banks and their shareholders to take a more proactive approach to ensuring institutions have strategies for lending towards the end of cycles and processes in place to fully understand the risks they are taking on.

Lord Adair Turner, chairman of the Institute for New Economic Thinking and chair of the Financial Standards Authority between 2008-13, said:

“Commercial real estate lending has been central to almost all financial crisis of the last half-century. This report explains why, revealing the huge financial impact of irrationally exuberant late cycle lending which destroys value in the industry and in the wider economy. Any banker, real estate investor or regulator who wants to learn the lessons of the past should read the report, and design strategies to avoid similar mistakes in future.”

Rupert Clarke, chair of the Property Industry Alliance Long-term Value Group, said:

“Organisations, and those that run them and invest in them, need to be confident that CRE lending activities are sustainable and that appropriate governance is in place. It’s vital lending activities are not only well managed and successful in the short term but robust and sustainable throughout all stages of the lending cycle.

“Investors, banks and regulators need strategies in place to address specific challenges around lending during the latter part of property cycles. Without such measures, future cycles will continue to see shareholder capital eroded and economic stability undermined.”

Saker Nusseibeh, chief executive of Hermes Investment Management, said:

“Sustainable investing demands that Boards, investors and shareholders have strategies that deliver value over the long term. The findings of this ground breaking report on CRE lending make it clear that all the stakeholders in CRE lending, both in the UK and internationally, need to commit to putting in place strategies and governance that fully recognise the lessons from the past.”

The research concludes that the “profitability Black Hole” from CRE lending was almost certainly experienced in previous UK property cycles. Given the similarities between the UK CRE lending market and others internationally, it also concludes that other CRE lending markets internationally have experienced similar through-the-cycle profitability challenges.

Read the CRE Lending Report here.