Blog Post No. 180
Landlords React to Interest Rate Hikes and Prime Property Market Dynamics – 8th Aug Property Bulletin
Reintroducing Mortgage Interest Relief for Landlords to Revive the Rental Market
By Carol Lewis The Sunday Times
There’s a growing narrative of landlords abandoning the rental market due to higher interest rates, rental reforms, and stricter energy efficiency regulations. The recent hike in interest rates by the Bank of England, marking the 14th increase, has further fuelled concerns. The National Residential Landlords Association (NRLA) reported that a third of private landlords intend to reduce their rental properties this year, potentially resulting in a loss of 735,000 rental properties across the UK if rates peak at 5%.
However, despite this apprehension, capital gains tax receipts do not indicate a mass sell-up just yet. In 2022, England alone saw 11,000 more rental properties compared to the previous year. Property sales to investors remain steady at 11%, slightly down from 12% in 2021 to 2022 but consistent with figures from 2017 to 2019.
The market’s landscape shifted in 2016 when the government introduced an extra 3% stamp duty for additional home purchases and gradually reduced mortgage interest rate relief. Still, a significant number of landlords selling properties last year, about 140,000 (73%), were retiring, having been early adopters of the first buy-to-let mortgages in 1996.
The allure of using property as a pension has diminished with rising interest rates and falling house prices, particularly in the south. The north offers more appealing yields, leading some southern landlords to invest there. Yet, many landlords find their profits now hovering around 4% of rental income, making property investment less attractive.
The current generation of landlords will eventually leave the market, leaving few financially capable young individuals to take their place. To ensure a stable long-term rental sector, the government should consider making buy-to-let viable again until it finds a solution to build more affordable homes.
While abolishing capital gains tax on landlord sales might benefit the wealthiest, it wouldn’t aid tenants or Treasury tax receipts. Instead, with interest rates set to peak this year, reinstating mortgage interest rate relief for landlords could be a more viable option. This relief could be tied to restrictions on rent increases, preventing landlords from using rate rises as a pretext to raise rents.
Both tenants and landlords are facing a crisis, and action is needed. Reintroducing mortgage interest relief for landlords could be a small price to pay for revitalizing the rental market and ensuring its functionality.
Cash buyers are gaining an advantage in the UK’s prime property market, while mortgaged purchasers are cutting their budgets in response to higher interest rates, according to research by estate agent Savills.
Most cash buyers (72%) reported that their purchasing budget remained the same, while around 60% of those looking to take out a mortgage with a loan-to-value ratio above 50% said they had reduced their budget. The demand for properties priced at £2 million or more has declined since April due to concerns about high interest rates and the economic outlook, but it remains higher than at the end of last year.
According to research from Savills, cash buyers, younger needs-based buyers, and relocators are the driving force behind the current prime UK property market. The analysis reveals that the commitment to move remains higher than in 2022, with a net balance of +24% looking to move in the next year. However, overall sentiment to move has fallen from levels in April 2023 due to concerns over rising interest rates and the economic outlook.
There is a clear distinction between cash and mortgage buyer motivations, with short-term sentiment falling for those looking to take on more than 50% debt, while cash buyers show a positive sentiment for moving within the next three to six months. Additionally, 22% of respondents have decreased their budgets in light of rising interest rates and the increased cost of living. The majority of cash buyers have kept their budgets the same, while almost 60% of those using more than 50% debt have reduced their budgets.
The Bank of Mum & Dad still plays a significant role, with a net balance of +22% agreeing to help family members out financially due to recent changes in the economic backdrop. The majority of respondents plan to use “other funds” for this support, with 62% specifically planning to help those getting onto the housing ladder for the first time. Younger buyers aged 40 and below are driving the desire to move, mainly for work relocation or to rightsize their homes for expanding families.
Sharia-Compliant Mortgages Still Require Stamp Duty Payment
A claim circulating on social media suggests that individuals following Sharia law are exempt from paying stamp duty on property purchases in the UK. However, this claim is inaccurate. Stamp duty must still be paid on liable properties even when using sharia-compliant mortgages.
In 2003, rules were changed to prevent the double payment of stamp duty on these types of mortgages. Previously, some sharia-compliant mortgages involved a two-stage process, with the bank initially buying the property and then selling it to the buyer. As a result, stamp duty was incurred twice.
The current regulations ensure that stamp duty on properties sold with sharia-compliant mortgages is only paid once, just like conventional mortgages. Properties purchased with sharia-compliant mortgages are not exempt from stamp duty altogether.
Sharia-compliant mortgages, also known as Home Purchase Plans, enable individuals to buy homes without paying interest. These mortgages involve a bank purchasing the property on the buyer’s behalf or jointly with them. The buyer then makes monthly payments to the bank until they either fully repay the financing or buy out the bank’s share, eventually owning the property completely.
It is essential to clarify that the claim regarding exemption from stamp duty for individuals following Sharia law is false. Stamp duty is always applicable to liable properties, regardless of the mortgage type used.
CapitalRise, a leading prime property finance firm, has provided funding for the airspace development of four luxury rooftop flats in Sloane Court East, Chelsea.
The project involves adding two storeys to the existing six-storey property, creating over 4,456 sq.ft of new space. Airspace development, where new homes are built above the rooftops of existing buildings, is gaining popularity in the prime central London property market as it offers a solution to the lack of new land opportunities in the city.
According to CapitalRise’s analysis of Google data, searches for ‘airspace development’ in London increased by 125% between January 2022 and January 2023, indicating a growing demand for such projects. The loan has been provided to Echlin Group, a property development company specializing in residential real estate in prime London regions, to carry out the airspace build. Voltaire Financial, a real estate advisory firm with expertise in capital sourcing, brokered the project.
Lee Francis, lending director at CapitalRise, expressed excitement about supporting airspace projects that contribute to London’s housing stock. Dorothée Dembiermont, partner at Voltaire Financial, highlighted the complexity of financing rooftop projects but praised the successful collaboration between all parties involved. Steve Clinch, head architect at Echlin, emphasized the unique proposition of airspace development and the opportunity to combine modern design with peerless conservatorship in architecturally and historically significant areas.
Life Sciences Pave the Way for the Future of London’s Offices
By Joanna Hodgson
The property market has experienced turbulence in the first half of the year, with cautious residential investors monitoring the UK’s mortgage crisis and London office landlords witnessing a decline in lettings. The pandemic-induced “gold rush” for warehouses has also subsided. Amidst this uncertainty, the life sciences sector, which encompasses labs and offices for specialist firms, has not been immune to economic challenges.
Data from Savills reveals that take-up of space in London, Oxford, and Cambridge’s “golden triangle” dropped 16% in the six months to June, while investment in life sciences properties or development sites also declined significantly. Nevertheless, experts believe that the appetite for life sciences as an asset class remains strong and predict a return in activity once economic stability improves.
The demand for lab space in London far exceeds the supply, making the creation of specialist life sciences sites an attractive prospect. Several major projects have been unveiled recently to address this demand. British Land plans to overhaul the Euston Tower, transforming it into net-zero workspace with labs for start-ups and scale-ups. Meanwhile, the Grade-II listed Victoria House in Bloomsbury Square will be converted into central London’s largest offices-to-life sciences conversion project, spanning 300,000sq ft. Additionally, Canary Wharf Group has obtained approval for a new 23-storey life sciences building, while Oaktree Capital Management and LS Estates will refurbish 17 Columbus Courtyard to provide 200,000sq ft of high-quality laboratory space and offices.
As traditional office occupiers downsize due to the rise of hybrid working, older properties may find a new lease of life through repurposing. Repurposing office buildings can be a cost-effective, quick, and sustainable alternative to demolition, especially with the high demand for life sciences space. London currently has approximately one million sq ft of stated life science demand, indicating a significant need for new science workspaces in the coming years.
Investment in UK biotech start-ups and scale-ups has seen remarkable growth, rising from £261 million in 2012 to £4.5 billion in 2021. While it dipped to £1.8 billion in 2022 due to global economic factors, the appetite for life sciences investments remains strong. The success of the UK’s development of the Covid-19 vaccine has further sparked interest from investors and real estate developers. London’s appeal as a global hub for life sciences is attracting both domestic and international companies eager to leverage the city’s scientific expertise, skilled workforce, and global connectivity to drive medical innovation.
To maintain its status as a leading global hub for life sciences, London must address the high demand for lab space, and the current projects in the pipeline show promise in meeting this requirement.