Property Week submitted their "Call Off Duty" petition to the Government this week with 5 carefully considered demands.
Each of these demands are supported, in some measure, by the industry. It seems sensible to help first time buyers as much as possible and the 'downsizers' issue is becoming more prominent. Adjusting
tax brackets in London to encourage more affordable family units is something people in most other parts of the country don't care too much about as is the lowering of top rates which again, is
largely a London centric problem. However, London, like it or not, as the country's powerhouse, needs an active market at all levels. SDLT at elevated levels + the 3% surcharge has proven to be a
bridge too far.
But it's really point 5 that I'm interested in.
The contention is that not exempting the institutional investors from the 3% surcharge, which was intended the curb the BTL market, has had a choking effect on the institutional PRS and Build to Rent
sector. But is it true?
In reality, the investors have options. If they buy more than one dwelling in a single transaction they qualify for Multi Dwelling Relief (MDR) I'm sure everyone knows how this works but just in case
your memory is a little rusty, here's an extract from HMG:
Of course, the example shown also includes the 3% surcharge which is applicable to MDR over the whole of the acquisition price. Naturally, location has a significant impact on the MDR outcome.
Investors buying 100 units in London's Zone 2 may be looking at an average unit cap value of £500k where £1,000per sq.ft. is not unusual. In this case, the total SDLT liability would be £3 million at
an average of 6%. Clearly, further afield, in other parts of the country, it's possible that using MDR may result in the average price being less than £125k per unit. In this case it's just the
surcharge that's payable. But 3% of a big scheme can be an awful lot of money wherever it is.
The sharper eyed of you may have noticed, in the example given, the phrase "non-residential rates" (NRR) This is where the investor can opt between MDR or NRR. NRR is applicable, if one chooses, on
purchase of 6 residential units or more at the same time. Importantly, NRR doesn't attract the 3% surcharge. But, here's the catch: the rates are, largely 'slab sided' with only three bands, the top
rate of which, 5%, starts at a lowly £250k.
So whilst, in my example of buying 100 units in Zone 2 an investor would save over £500k in SDLT, for investors in the rest of the country the liability using NRR will be substantially more.
Clearly then, the institutional investor is paying a hefty price for measures intended to curb the BTL market. That's going to impact viability and ultimately will be reflected in the 'price at the
pump' so to speak. Property Week's petition is a welcome, and hopefully, influential addition to the SDLT narrative.
There is, of course, as Tony Blair once said, a third way. (or varying degrees of a third way) And that's for Institutions to be the developer. It's riskier, demands a whole new range of skill sets,
but the only SDLT liability is on the acquisition of the site at NRR. (PD excepted)
We know that the government consulted widely, giving notice of the surcharge well before it was applied and noises coming from the Treasury at the time hinted strongly of an exemption for the
institutional investor. So why the blanket application of the 3%? Avarice, ignorance, ideology, fear of BTL backlash? Or just plain misreading of the market? Whatever the drivers behind the decision
at the time, it's clear to see that the government is in a very different policy place right now. The Housing White Paper and the Build to Rent consultation document gave a clear indication of support for the sector and in reality, was the White Paper the proper place to discuss SDLT?
If the Government are going to make good on their support for the sector, Philip Hammond, should be looking closely at SDLT in his 2017 Spring Budget on 8th March. Whether he will take on board all
of the Property Week demands is a moot point. The Government has shown that they can be flexible and reasonably policy agile so perhaps there will be good news for Build to Rent in the Budget.
Timing though, is everything. And timing might just be against the sector in the form of Brexit. Not that it could have a material impact, just that in the run up to the end of March, where A50 is
intended to be triggered, hearts and minds are likely to be elsewhere. If they are, it would represent an opportunity missed.
Richard Berridge. Blackbird RE. Magister Ludi: PRS Build to Rent