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THE PROPERTY SUPPLEMENT
  
Comment: Why does Osborne hate buy-to-let investors?

This has not been a good year for Britain’s buy-to-let landlords.

In the emergency summer Budget in July, the Chancellor of the Exchequer cut tax incentives for small landlords by reducing mortgage interest relief on rental properties so that it can only be applied at the basic rate.

Then wear-and-tear costs were replaced with a new system that is much less favourable.

Finally, in the Autumn Statement, he raised stamp duty for those who own more than one home.

The last of these measures is especially unfair. It means that an existing property owner searching for a source of stable income who buys a £200,000 home will be forced to pay a massive £7,500 in tax costs compared to the previous amount of £1,500. However, someone who owns 15 or more properties will not have to pay the additional charge. Moreover, the Government is now consulting on further possible exemptions for large investors and companies.

As if all of the above wasn’t bad enough, it has recently been decided that capital gains tax (CGT) on residential property will have to be settled within one month of any taxable house sale after April 2019.

Paul Emery, the real estate tax partner and head of stamp taxes at PwC, was quoted in the Daily Express as saying: “Taken together these recent measures seem to show the Chancellor encouraging a shift in the residential rental sector away from amateur landlords. The government does not intend to make residential property less attractive for institutional investors and will consult on exemptions. Investors will be keen for clarification given the short amount of time until the first of April 2016 implementation. It remains to be seen how ‘second homes’ will be defined particularly with regards to overseas buyers. Stamp duty is a tax on capital; buy-to-let and second home owners will now need more funds to enter the market as a bigger chunk of their deposit will be spent on stamp duty.” Quite.

From the Chancellor’s comments during the Budget, it appears he feels the new moves will help families wanting to buy a home. He said: “Frankly, people buying a home to let should not be squeezing out families who can’t afford a home to buy.” David Cox, Managing Director of the Association of Residential Letting Agents, had a different perspective: “Increasing tax for landlords will increase rents and reduce property standards for tenants.” He felt that landlords would pass on the increased stamp duty costs to tenants and that the changes would deter new landlords from entering the market, increasing the gap between dwindling supply of available property and growing demand even further, which would also, in turn, push up rental costs.

Comment: What does Corbyn believe in?

What does Jeremy Corbyn’s election as leader of the Labour Party mean for residential landlords? I thought it would be interesting to look through his various speeches and comments on the subject. This is what I discovered:
  • Corbyn believes the most important thing a Labour government could do in the area of housing is build more council housing at the rate of 240,000 a year.
  • He has suggested that local authorities should be allowed to borrow more and has also suggested the establishment of a national investment bank to cover the building of public housing.
  • Public land should be made exclusively available to councils for building and not to private developers.
  • He believes there should be land value tax on undeveloped land that already has planning permission.
  • He does not believe in the recently created extension of permitted development rights to increase the size of extensions.
He has spoken about what he calls “the free market, free for all in housing”. He believes that “only the government is able to play the strategic coordinating role to tackle the housing crisis”. He has proposed a national register and local licensing of landlords, longer tenancies and the application of the Decent Homes Standard to the private rented sector. He would ban ownership of property by non-UK-based entities.

Although many believe that Corbyn will never be elected that doesn’t mean some of his policies will not be adopted by other leaders. Moreover, George Osborne’s recent tax changes (see above) suggest that even the Conservative Government wishes to put an end to private buy-to-let landlords.

Comment: Long-term property tax planning

Are you planning to build a portfolio of property investment? If you are, you will probably experience three very different stages of growth. To begin with, you are likely to lose money till you buy, build and renovate. The next thing that is likely to happen is an improvement to your cash flow and, with any luck, an opportunity to use up the tax losses generated during stage one. Finally, in the third stage, having used up all your initial tax losses, you are likely to find yourself generating substantial profits and to face a need for a different type of tax planning. Your long-term investment objective and, of course, whether it is possible to reduce your capital gains tax liability will determine whether you hold onto your property portfolio or sell it.

In my experience, many investors do not optimise the opportunity for tax losses in the early stages. Such losses can arise from lower revenue (especially where a property has been bought mid-year and won’t generate 12 months of income), finance costs (such as arrangement fees), refurbishment costs and rental set-up costs (such as fees and Energy Performance Certificates). It is important in this early stage to watch your cash flow. Confusingly, cash flow can be fantastic even when you are losing money. It is important, too, to plan ahead. One mistake that new property investors make is to assume they will pay the same amount of tax going forward. In truth, by year four or five your tax bill may begin to dramatically increase (once you have used your losses up). One of the many benefits of property investment is that it is usually possible to anticipate income and costs for a long period into the future.
  
Property news and tips
  
Ski property: It is not all going down hill

Over the last few years, the number of people taking to the slopes in Austria, the US, Canada, Switzerland, Italy and France has been dropping. And dropping quickly. In Switzerland, the total number of people skiing has fallen by more than 15% in the last 10 years. Why? Various factors have been at work, including the state of the world economy, a couple of poor seasons of snow and in the case of Switzerland the comparative strength of the Swiss franc.

However, the news is not all bad. If you own sterling, dollars or another strong currency then the weak state of the euro offers some unique investment opportunities. Where should you buy? Knight Frank estimates that the price of a prime ski chalet in Gstaad, Switzerland is 400 times the equivalent to property in the French resort of San Gervais. The best homes sell for €31,000 per square foot. The average ski property price in Switzerland is an eye-watering €4.5 million.

Where Prince Charles leads
  
If you are someone who loves beautiful property and appreciates pristine countryside then consider the benefits of buying in one of the Saxon villages of the Transylvanian Alps or Southern Carpathians in the south-central region of Romania. I’ll explain why in a moment. Let me just tell you about prices. For as little as €7,500 you can buy a small, rundown, two-bedroom house in need of complete renovation on a 100 square metres of land. Increase your investment to around €30,000 and you will be able to afford a three-bedroom house on roughly 2,000 square metres, whereas €60,000 will buy you a fine, five-bedroom farmhouse with a large courtyard on a plot measuring 3,000 square metres.

Romanian property, then, is not expensive.

Moreover, the whole region has managed to preserve its traditional farming practices (including the horse and cart) and is almost unchanged since the Middle Ages. It was this, rather than the low prices, which attracted Prince Charles to invest. Indeed, he has become a leading player in local conservation efforts.

The region has an interesting history, too. It was settled by ethnic German Saxons and Hungarians more than 800 years ago and in the early 1990s, in accordance with its policy of repatriating its ethnic populations from abroad, the German government invited the Romanian Saxons to migrate to Germany, where they were given housing and stipends. As a result of this extraordinary mass exodus, thousands if not tens of thousands of homes were abandoned and left vacant. Membership of the EU, which occurred in 2007, has helped the rural economies but we are still talking about one of the poorest agrarian societies in Europe.

A definite ‘buy’ recommendation.

Sean Connery’s wife accused of property tax fraud

Micheline Roquebrune, 86, has been charged by the Spanish government with participating in an alleged plot to defraud the Spanish revenue of millions of euros in property taxes. If convicted, she could face a fine of up to €16 million and a jail term of up to two and a half years. The apparent irregularities relate to the sale of the couple’s property in Marbella in 1998. Their home was sold, demolished and a luxury complex built on the site.

Public transport and property prices in London

It has long been recognised by property investors that public transport – indeed, the entire transport infrastructure – can have a major effect on property prices. In no place is this truer than London. London’s transport infrastructure has always been a work in progress. Every year extensions and improvements occur. Moreover, as prices in more desirable areas increase people have moved to other previously unpopular but well-serviced suburbs. There is, perhaps, no greater example of this than the recent rush to Walthamstow, which is a mere 20 minutes from Oxford Circus on the Victoria Line but where, even now, prices are fairly reasonable.

So, what developments and schemes are coming up and how are they likely to affect the property market? If you are looking for new opportunities you may like to consider:
  • Crossrail. This is the largest transport project in Europe, linking Berkshire and Heathrow Airport in the west through Central London to Essex and Kent in the east. The idea is to provide six stations in central London and 33 in the suburbs and fringes of London. It will start operating towards the end of 2018 and should be fully up and running by the end of 2019. Crossrail is not building any new stations. Instead, its purpose is to expand capacity and to shorten journey times. The general idea is to allow some 1.5 million more people to commute to central London in 45 minutes or less. Many property commentators feel that residential prices in and around most Crossrail stations already reflect the forthcoming improvements. However, there could still be opportunities for future games.
       
  • Crossrail 2. This is still a proposal. The concept for Crossrail 2 is to run a north–south line from Hertfordshire to Surrey stopping at Kings Cross, St Pancras and Victoria. Approval is being sought for 2017 and if it goes ahead it should be completed by 2030. Fifteen years is a long time away. If I were a gambling man – oh, hang on, I am a gambling man – I think I would look at potential property purchases in the Lee Valley area.
  • Thameslink. Thameslink currently serves 68 stations across an extremely wide area that includes Bedford, Brighton, Luton and Gatwick. The plan is to add 32 more stations to the network by 2018. Areas that could benefit include Wimbledon and Hendon. It is also likely that a number of South Coast towns including Lewes, Eastbourne, Hastings, Worthing and Littlehampton may get included in the Thameslink network. This would have a substantial effect on property in those areas.
  • The Northern Line. This is being extended at the moment to include Nine Elms and Battersea.
  • The Croxley Rail Link. The Metropolitan Underground line is being rerouted to serve Watford High Street and Watford Junction. There are two new stations being built at Cassiobridge and Vicarage Road.
  • Bakerloo Line. There are plans to dramatically extend the Bakerloo Line down to Bromley and Hayes.
  • Docklands Light Railway. There is a proposal to extend the Docklands Light Railway to Charing Cross and possibly Victoria.
  • London Overground. There is a plan to extend the existing network from the Gospel Oak to Barking route to include Barking Riverside. Incidentally, a 2014 Hamptons International Report shows that the London Overground Network added an additional 3% growth per year to the price of homes within a few minutes’ walk of its stations.
  • Other new stations. Other new stations are planned at Raynham, Beam Park, Meridian Water and New Bermondsey.
There are a couple of other interesting plans afoot: the idea of cycle superhighways and various minor new road schemes.

There is no doubt that the more remote and less expensive parts of Greater London are going to see fairly substantial gains as the above improvements and extensions begin to take effect. If you want to make a long-term play on London property, it is well worth studying the various plans and proposals outlined above.

The gold/house price ratio

I was fascinated by an article forwarded to me (I’m afraid I can’t credit the author, because it wasn’t mentioned on the attachment) about the relationship between gold and house prices.

The article suggests that by following the relationship between gold and house prices it is possible to dramatically increase one’s investment returns.

Let me explain.

What I am talking about is the average number of ounces of gold typically needed to buy an average house. So, for example, between 1975 and 2015 the average amount of gold typically needed to buy a house in the US was around 300 ounces. The idea is that when the ratio moves away from that average you shift your investment strategy. For example, you should move your savings from gold to real estate when it only requires 100 ounces of gold to buy a house (gold, at this juncture, being expensive relative to property) and you should then move back to gold when it requires 500 ounces and property has become expensive relative to the precious metal.

The anonymous author worked out how much money you would have made in the US had you begun with $50,000 of gold in 1975, when gold cost $180 an ounce. I won’t take you through each twist and turn but basically over a 40-year period, by switching in and out between gold and property, you would have seen a 10,000% return. If you had stuck to just property over that period you would have seen a return of 810% and if you had stuck to just gold you would have seen a return of 630%. The author points out that you would be more than 12 times wealthier had you used the gold/property ratio as a guide to tell you when to shift between the two investment sectors. Moreover, you would only have to buy and sell three times in 40 years, which can hardly be described as active investment.

Interestingly, the same author applied the same formula to London property. For the last 40 years, if you had just held London property you would have seen a return of around 3,010%. If you had just bought gold, you would have seen a return of around 929%. But if you had switched between gold and property, you would have seen a return of 7,182%! The author concludes that we are approaching a time when property investors should be moving out of London property and into gold. Although the returns are not as great on the gold/UK property price ratio, you would still make about double the return by switching in and out than by sticking simply to property.