It means that Market Financial Solutions (MFS), which celebrated its 15th birthday in October 2021, is something of an elder statesperson in the bridging sector. More than that, this milestone also presents an opportune moment for reflection and what is a curious time for both the bridging and property markets.
Bridging market grows at pace
It makes sense to first establish the growth and evolution of the property market since 2006 when myself and the MFS co-founders first began providing bridging loans. Back then, there was just a small group of lenders operating in what was a relatively niche, unknown corner of the alternative finance sector. In truth, the bridging sector suffered from a poor reputation, with the loan shark imagery haphazardly attached to short-term lenders. Positively, however, over the past 15 years, this misconception has been challenged, with bridging finance becoming more and more popular, particularly among property investors.
A key turning point came in 2007 with the onset of the global financial crisis, which naturally had a significant impact on all types of lenders. For bridging loan providers, the credit crunch that followed presented a significant opportunity; banks quickly became more risk-averse and, in short, more reluctant to lend – products were pulled and the criteria that borrowers had to satisfy became more extensive, not to mention more rigid. Bridging lenders were on hand to fill the gap, providing specialist solutions to those unable to access traditional credit lines.
Since this point, we have seen impressive, sustained growth. Estimates suggest gross bridging lending in the UK stood at around £400 million in 2010; by 2019, this figure had reached £4 billion. And while the pandemic did result in an almost inevitable dip in lenders’ loan books – given the property market ground to a halt for around a third of the year – the signs since late 2020 have been positive, suggesting that the market has begun to expand again.
Bridging becomes more diverse and creative
The above narrative is, of course, an oversimplification of how the bridging market has changed since 2006. Yes, it has grown significantly in terms of both the number of lenders that are active in this space and the volume of deals being completed. Of more interest, though, is the way in which bridging products themselves have changed. Indeed, at MFS, the difference between our product range during our early years of lending compared to today is stark. It is a trend that has been seen across the industry.
Residential, semi-commercial, commercial; first-charge, second-charge; auction finance; buy-to-let (BTL) products; hybrid loans; development exit; refinancing – there are almost too many types of bridging loans on offer today to list. But it is positive to note just how creative and diverse bridging lenders have become in creating specialist solutions for all manner of clients and the potential complex circumstances they find themselves in.
To that end, the bridging industry has also had to adapt to some challenges related to reform and regulation within the UK property market. The changes that have taken place relating to BTL investments perhaps best exemplify this.
An additional 3% stamp duty surcharge was introduced in April 2016 for second-home purchases. A year later, the Government introduced a tapered reduction in mortgage interest tax relief – BTL landlords now receive a 20% tax credit, meaning those paying basic rates will be unaffected, but landlords who pay higher and additional rates will be charged more.
In 2018, changes were introduced for houses in multiple occupation (HMO) standards, which resulted in many landlords carrying out significant refurbishment and renovation works within their property portfolios. Then, of course, the pandemic arrived in 2020 – this saw many tenants placed on the Government’s furlough scheme, which was set up to protect businesses and employment rates. To help protect financially-affected tenants, the Government introduced The Coronavirus Act 2020, which protected tenants by delaying landlords’ ability to evict. Landlords had to provide six months’ notice before starting the process.
Bridging loan providers have had to evolve in line with these changes and challenges, thereby ensuring they can support BTL landlords, which are key clients for many of the lenders. Products have been introduced and revised to enable property investors to manage and adapt their portfolios effectively. Similar examples can be seen in the ways that bridging firms have assisted businesses, international buyers and property developers by establishing new solutions tailor-made to their particular needs. For me, this is the main story of how the bridging sector has evolved since 2006 – not simply growth, but innovation and improvements.
Speed and flexibility remain key
Since MFS was founded, we have witnessed the global financial crisis, multiple recessions, Brexit and the Covid-19 pandemic; there have been five Prime Ministers and a vast amount of regulatory and legislative reform in the property market. Clearly, it has been a turbulent period; the wider political and economic landscape has been reshaped several times over.
Through it all, two qualities have remained integral to the success of bridging lenders: speed and flexibility. And the pandemic – or, more specifically, the stamp duty holiday – illustrated just how important both factors are.
It goes without saying that the SDLT holiday triggered a huge uptick in activity across the property market; data from the Office for National Statistics shows that UK average house prices increased by 10.6% over the year to August 2021 as a result of increased demand among buyers, something that made the market fiercely competitive.
In the face of such strong competition, property buyers needed to act fast – delays in accessing finance, which became common as mortgage providers struggled to satisfy the increased demand for loans, could often result in a buyer losing out to a rival bidder. In many instances, bridging lenders stepped in.
The fact that bridging loans can be delivered in a matter of days, rather than weeks or months, has long been one of their defining features. During the stamp duty holiday, this speed became not just attractive, but essential – it was the difference between completing a deal, meeting the deadline and preventing any untoward gazumping. Similarly, flexibility is a critical reason for the increased use of bridging loans. There are simply many clients – such as BTL landlords, international buyers, high net-worth individuals and property investors – whose financial profiles and wealth structures are deemed too complex for traditional lenders. With fewer regulatory restrictions, bridging providers have the ability to be more flexible when assessing enquiries, which means they can serve parts of the market that are otherwise not adequately catered for.
Reflecting on the past 15 years, the growth and evolution of the bridging market has been impressive. Put simply, the industry is far better established and, in general, lenders are acting with greater maturity in the way products are devised and delivered.
As ever, though, there is no room for complacency – as the UK’s lending and property markets adapt and change in the coming years, so too must bridging firms to ensure they remain relevant and can meet the needs of clients. Given the evidence I have seen to date, there is every reason to think that the best lenders will take up this challenge.
About the author: Paresh Raja is the founder and CEO of Market Financial Solutions (MFS) – a London-based bridging loan provider. Prior to establishing MFS in 2006, Paresh worked as a senior professional consultant in one of the top five management consultancy firms, and also set up an independent investment group.
The dominoes have been falling one after the other for the past few months, and the tension peaked on 13 September when hundreds of people rushed into Evergrande’s headquarters in Shenzhen to demand repayment of loans. Now the company has warned of its growing default risk and is exploring options to divest assets quickly. Many analysts are now chanting “the sky is falling” and “it’s 2008 all over again” citing concerns over global contagion. But let’s see if all this doom and gloom has a root in reality. To understand what all of this means for international investors, we need to first look at the big picture and see where all of this started.
The road to disaster
As always, a couple of factors need to fall into place perfectly for such a giant crash to happen.
- Overbuilding
In 2009 hedge-fund manager Jim Chanos famously claimed that China is “Dubai on steroids”. Maybe that’s because every year since, more than 10 million new home units have been sold… every year. That number is five times higher than the US and EU combined. Just looking at it from afar and seeing pictures of China’s ghost towns (towns full of uninhabited residential skyscrapers), one can see that something is not right. But why is that boom lasting for over a decade now? The answer many people point to is the lack of an alternative. Due to the many regulations the government has placed on the finance industry, it’s very difficult for retail investors to invest in anything else other than real estate. That’s why it was commonplace to see people buying 4–5 homes. Ever since, ordinary people have been fighting to circumvent every possible restriction on buying more homes. When the government introduced a restriction on married couples buying only one home — people started divorcing to buy more. The demand in big cities was so feverish that lotteries were introduced, with chances of buying a home as big as 1 to 60. Though greed is rampant, and people are buying property hand over fist, simply because they are confident it will go up in value, developers have built so many units that can’t possibly be inhabited, even if they were free. Currently, the official property vacancy rate stands at 22%, though some analysts claim it’s way higher.
- Demographics
There’s only one world in which such overbuilding could have been justified. In a situation where the population was rapidly growing, an argument could’ve been made that there’s a chance for all of these homes to find their inhabitants eventually. Though looking at China’s demographic picture today, that’s difficult to imagine. The UN analysis shows that the Chinese population would peak in 2030, citing census data. Though, some analysts are suggesting that the population has already peaked in 2020. A quick takeaway, do you know which country’s demographics also peaked during a real estate boom? That’s right — Japan, and it didn’t end well for the property market. The actual situation is even worse than the chart shows and indicates that the demographic decline will be substantial. First, the one-child policy absolutely gutted one generation, so now there are not enough young parents. Second, selective-sex abortion is common in China which is why males outnumber females; and in some regions with more than 20%. The third factor is that industrial companies prefer to hire females because, allegedly, they are easier to manage. That’s why in big cities, females outnumber males, and in the rural regions, it’s vice versa. All in all, the demographic decline seems almost inevitable at the moment, and that puts added pressure on property prices.
- CCP’s dilemma
The other issue that stands out in this crisis is the tough choice the CCP has to make. A home in China is much, much more than a sanctuary - by some estimates, real estate accounts for more than 70% of household wealth. That fact by itself albeit concerning is not the end of the world. What’s making the situation worse is that the real estate industry is crowding out the other, much more productive industries when it comes to investments which has created a huge headwind when it comes to consumer-led growth in the country. That’s what I refer to as the CCP dilemma: Do you A) let the housing market crash and destroy a huge portion of household wealth, or B) continue on the same road, while not investing enough capital to create a high-tech export sector and a true middle class that can lead to domestic growth. We can see that the Chinese Government is moving in a direction where they’re trying to limit leverage in the construction business. Back in August 2020, the CCP introduced the “3 red lines policy”:
- Liability-to-asset ratio (excluding advance receipts) of less than 70%
- Net gearing ratio of less than 100%
- Cash-to-short-term debt ratio of more than 1x
By doing that, I can imagine that they were ready to take some sort of a hit, but perhaps didn’t quite understand just how much leverage there was in the sector. When the measures were introduced, only a few of the B companies were up to par, and hardly any of the CCC.
Needless to say, leverage is the oil that fuels every fire and considering that household debt to GDP rose 30% for the past three years to 62%, the amount of leverage is only making policy decisions harder.
The Catalyst
After this long introduction, we can return to present-day events. By summer 2021, it was evident that residential home sales were slowing, with the highest drop happening in August - a -20% drop in value sold YoY. That’s huge for every developer in the market, and for Evergrande — which was levered up to the gills, it was the last nail in the coffin. That’s why around the start of September, strapped for cash, the firm stopped payments in its wealth management program. Truth is that the problem could’ve been seen even before, around the end of August, when the yield on the Evergrande bonds exploded to the upside.
What was the government’s immediate reaction? With Evergrande’s $320 billion of debt outstanding and fearing contagion across the whole financial sector, the CCP injected $14 billion in the banking system via reverse repurchase agreements. Although if the stress continues, much more stimulus will be necessary.
Contagion risk — real or overblown?
Now that we mentioned the word everyone fears, let’s explore the current market environment and see if there’s really a cause for panic. In the Bloomberg Asia ex-Japan HY index, the top 10 constituents are all Chinese companies and out of them, only the real estate companies are experiencing a rising yield. That being said, this index is highly real estate heavy — 66%. So for the moment, a contagion is apparent. Though it’s only across the real estate sector. We are not preaching that “there’s nothing to see here” or “everything’s perfectly fine”, but we need to be very clear about the type of contagion that’s being observed. For the moment the problem is primarily in the real estate companies - on Monday 21 September, yields went up, while a lot of the financials’ stocks went down in the Hong Kong trading session. Evergrande has a large bond payment outstanding on Thursday 23 September and if they don’t manage to find liquidity for that, the over-leveraged Chinese banks with a large exposure could start sweating.
International contagion
If you’re closely monitoring the news, it’s not hard to be left out with the impression that we are at the brink of a global banking crisis and that the “sky is falling”, but we need to be adamant that for the moment this issue is really China-centric and there are only a few mild signs of international effects. Though we should still mention them. As a consequence of the drop in new construction, the Dalian Iron Ore index has to be closely monitored. It’s down a lot from the July heights, and during August, we’ve also seen the biggest drop in steel output. As we know, China is the biggest import market for a number of commodities, which were necessary to fuel the endless construction. With new construction dropping sharply, this poses a serious headwind for the industrial metals. That’s why we also saw the 3 biggest Australian miners shed a combined market cap of $100 billion on Monday 21 September.
All in all, the situation is far from pretty, and the global market could definitely take a hit on this news. However, we need to be realistic and agree that the current problem is largely isolated to China since their domestic credit market is over-levered, but international banks don’t have nearly as much exposure as they had in 2008. We believe that international contagion is possible, thus investors need to be careful, though it’s highly likely that this contagion will be limited to only a few sectors and companies that have an especially large exposure to China. For the bigger part of the S&P and European companies, I strongly believe that any panic is unjustified.
And for the journalists comparing the current situation to Lehman in 2008, I’ll just point them to one number:
Evergrande has $19 billion in international debt, US federal reserve buys $120 billion bonds per month. Let that sink in.
What impact did the first nationwide lockdown have on the property market and bridging sector in the UK?
The sudden spread of COVID-19 caught many sectors off guard. And the nationwide lockdown announced in March 2020 posed significant challenges for the property market – with strict social distancing measures in place, viewings and valuations became impossible and prospective buyers were discouraged from moving properties. Consequently, the market essentially came to a standstill.
During this time, those in the middle of a property transaction were suddenly in a precarious position. Banks were taking longer to deploy mortgages, not accepting new applications, or rapidly withdrawing products in the face of economic uncertainty. Thousands of homebuyers and property investors were at risk of their deal collapsing.
As a result, MFS experienced a surge in demand for bridging loans during the first lockdown as property buyers hoping to complete on transactions sought loans that could be deployed quickly. I’m proud to say our ability and willingness to take on these cases ensured these sales were completed without the buyer losing out on their property. If specialist finance was not available, I imagine we would have seen a much larger number of sales falling through.
On 13th May, Housing Secretary Robert Jenrick announced the property market was once again open for business, relaxing social distancing measures. How significant was this announcement in reigniting the property market?
The government’s “reopening” of the property market in May was essential. It meant people could once again move homes. On top of that, it meant that agents, lenders, removal firms, brokers and professional services firms – which are all totally reliant on property transactions taking place – could start to operate once again.
It was striking how quickly the wheels started turning again. Rightmove reported its busiest day on record on 27th May 2020, with more than six million visits to its listings. To put this in perspective, this was 18% higher than the number of visits recorded on the same date in 2019.
Here at MFS, we also experienced a surge in enquiries due to the pent-up demand. Of course, we have to remember that prior to the lockdown, the property market was thriving; Boris Johnson’s election victory (resulting in the so-called ‘Boris Bounce’) coupled with Brexit progress had resulted in increasing property prices and transaction numbers.
How important has the Stamp Duty Land Tax holiday been in unlocking this pent-up demand?
The stamp duty holiday that was announced by Chancellor Rishi Sunak on 8th June has been hugely influential. Suddenly, lenders and estate agencies faced a surge in enquiries, with buyers hoping to take advantage of potential tax savings of up to £15,000.
According to Halifax, average UK house prices in May 2021 were 9.5% higher than a year earlier, their biggest annual increase since June 2014. This is remarkable, given this rapid price growth has taken place in the midst of a pandemic, with economic uncertainty an ever-present concern for many.
With demand for real estate rising since the start of the stamp duty holiday, there has also been considerable demand for loans to finance these transactions. This is where prospective homebuyers wanting to take advantage of the holiday are encountering some problems.
While buyer demand was booming, the number of mortgage products available fell sharply. Data from Moneyfacts shows that borrowers seeking a 90% LTV deal would have had 779 options to choose from at the start of March. Six months later, their choice was down to approximately 60. This has resulted in brokers and prospective buyers looking beyond the high street and considering alternative options, like bridging loans.
Bridging loans have been increasingly attractive to many buyers over recent months as the stamp duty holiday has drawn near. In a bid to get their transaction across the line before the initial deadline on 30th June, many buyers have looked for bridging finance, which can be deployed in a matter of days.
Has the Stamp Duty holiday increased demand for MFS’ bridging loans?
Yes, it has, and this has to do with the needs of homebuyers in the UK at the moment. With so much uncertainty in the air, buyers want to act quickly and complete property transactions without delay. However, mainstream lenders are taking longer to process applications, particularly when the circumstances of the borrower are complex.
It has been clear for some time that the backlog of applications being experienced by some mortgage providers will result in many buyers missing out on the tax relief.Specialist providers like MFS deliver bespoke loan solutions, meaning that our bridging loans are tailored to the individual needs of each borrower. This personalised and professional service is exactly what borrowers and brokers are after at the moment. What’s more, loans are deployed quickly, meaning that clients are not at risk of missing out on a transaction.
With mainstream lenders still treading carefully, I anticipate market demand for bridging loans to remain consistently strong in the coming months and years.
How has COVID-19 affected MFS’ products and services?
The pandemic has made all businesses consider their products, services and how they engage with clients. MFS is no exception. While we have been very busy, we have also had to adapt to changes in the market, not to mention the ways we operate internally.
Positively, MFS has grown its team by more than 40% since the start of 2021. We have attracted three new funding lines this year too, which are worth a combined £400 million.
In April 2021, we amended our bridging loan criteria as well. For one, we have increased our maximum loan amount to £30 million, lengthened our maximum loan term to 24 months, and launched a new development exit product. The changes reflect the changes in demand we have experienced from our lenders.
More recently, we launched 753 (75-cubed), a new initiative designed to fast-track residential property deals in the coming months. We committed have £75 million of funding for residential bridging loans (since bolstered with an additional £50 million of funding) at a loan-to-value of 75% and an interest rate of 0.75%.
Again, these creative initiatives are all about adapting to the market. As a bridging lender, we could not stand still during the pandemic – we constantly had to evolve to deliver the best possible products and services to brokers and private clients.
Finally, what do you think the future holds for the bridging loans market? Where does MFS sit within this?
Despite the obstacles posed by COVID-19, the fact bridging lenders have been actively working with brokers and borrowers to meet their finance needs throughout the course of the pandemic has been extremely significant. At MFS, we have been busier than ever and have experienced significant growth over the past 12 months.
Looking to the future, I believe this will continue to be the case. Borrowers are seeking bespoke finance solutions and want to engage lenders who provide personalised solutions specific to their circumstances. With mainstream lenders still treading carefully, I anticipate market demand for bridging loans to remain consistently strong in the coming months and years. At MFS, our aim is to support the wider recovery of the economy through innovative bridging loan products.
Alpa Bhakta, CEO of Butterfield Mortgages Limited, explains below why HNWIs often have trouble with their mortgage applications.
Applying for a mortgage can be a stressful and time-consuming experience for many buyers who find themselves in a complicated situation. Deal with the wrong lender, and the risk of a mortgage application being delayed or ultimately rejected becomes extremely high. This can have significant consequences, particularly if the buyer in question has reached the critical closing stages of a sale.
Importantly, these experiences are not confined to a certain type of prospective homebuyer. In reality, all buyers need to overcome certain hurdles to ensure they successfully receive the finance needed to complete on a property purchase. This is particularly true when it comes to high net worth individuals (HNWIs).
For many, this might come as somewhat of a surprise. After all, there is some truth in assuming HNWIs are better placed to take on debt due to the value of the assets they own. The challenge, however, is that the income structures and financial portfolios of wealthy individuals are anything but simple.
Having worked closely with HNWIs for the best part of two decades, I can say that the wealthier an individual is, the more complicated their financial circumstances are likely to be. There are plenty of reasons why this is the case.
First off, HNWIs tend to have their capital locked up in illiquid assets. These can range from residential and commercial real estate to stocks with low trading volumes. It is also common for wealthy individuals to have their capital tied up in hedge funds which have strict lock-up periods and only a handful of withdrawal intervals.
A second reason has to do with their income structures. Whereas the majority of mortgage applicants regularly receive income payments from their employer, some HNWIs are not employed, or otherwise rely on income being generated from their existing investments. All of this makes incredibly difficult for high street banks to assess the applicant’s ability to regularly pay off existing debt.
Whereas the majority of mortgage applicants regularly receive income payments from their employer, some HNWIs are not employed, or otherwise rely on income being generated from their existing investments.
The fact that mainstream lenders have become risk averse in recent years only makes things more complicated. As a consequence, HNWIs are forced to comply with rigid application processes that do not effectively cater to their needs or unique circumstances.
The mortgage struggles of HNWIs
As a prime property mortgage provider, Butterfield Mortgages Limited (BML) has sought to understand just how common it is for wealthy individuals to be denied credit. To achieve this, BML surveyed a sample of HNWIs living in the UK in January 2021, asking them about their experiences when applying for a mortgage.
There was a standout finding from the survey – just under a fifth (18%) of HNWIs said they have been denied a mortgage in the last 10 years. What’s more, 51% of those who have successfully or unsuccessfully applied for mortgages in the past decade have been rejected at some point. These statistics reaffirm the points I made earlier in this article – namely, that HNWIs are not immune from the complications that could arise from a mortgage application.
What then were identified as the common reasons why mortgage applications were being rejected?According to BML’s research, many of the frustrations arise from the rigid application processes in place. Four-fifths (78%) of wealthy individuals feel that banks rely too much on “tick box” methods when reviewing applications. On top of this, 63% said their complicated income structures ultimately led to their mortgage application being rejected.
These experiences have led to a general sense of frustration among HNWIs who feel that mainstream lenders are simply not equipped to meet their needs. For this reason, 62% of the respondents told BML they have lost faith in their high street bank’s ability to cater to the needs of buy-to-let landlords and property investors more generally.
Looking beyond the high street
BML’s research has uncovered the extent of the problems being faced by wealthy individuals. No doubt, the additional complications posed by COVID-19 would have only exacerbated the issues raised in the survey. While it is not likely to deter investor appetite for bricks and mortar, high street banks are at risk of losing potential clients to competitors.
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While property is likely to remain a popular investment opportunity in the UK, the challenge for HNWIs is ensuring they have the necessary finance in place. This means seeking out and dealing with lenders who have experience dealing with wealthy individuals and are willing to work with the clients to deliver a mortgage best suited to their circumstances. Doing so reduces the chances of a mortgage application being delayed or rejected, thereby ensuring the buyer in question can act with confidence.
Scott Bozinis, CEO at InfoTrack UK, explores the changes we have seen in the property market and the path ahead post-pandemic.
21 June 2021: it is a date already engrained into the minds of people across the UK. It is the day when Boris Johnson hopes to lift all forms of lockdown and social distancing measures; it is the day life is due to return to normal.
In many respects, however, life will not return to normal – at least, not the normal we knew before the pandemic. Certainly, when it comes to the ways businesses operate and industries function, irreversible changes have taken place, meaning the long-term outlook is not one of returning to the past but preparing for a future defined by new processes. The most prominent of these is the adoption of new technology.
The property sector is a prime example of this. From estate agents and conveyancers through to homebuyers and sellers, the industry is in the midst of many interesting trends which look set to shape the year ahead.
The need for technology will only get stronger
Technology has been embedded in our lives for many, many years. However, when COVID-19 began to spread rapidly in early 2020, forcing offices to shut and people to remain in their homes, there was a further leap from the physical world to the digital.
In the property industry, lockdowns and social distancing rules have caused many headaches. It is, after all, an industry that has traditionally been slow to embrace technology, instead remaining reliant on offline processes and masses of paperwork, particularly when it comes to the transfer of property from one person (or organisation) to another.
In the property industry, lockdowns and social distancing rules have caused many headaches.
In a very short space of time, businesses throughout the property sector had to adapt; digital transformation strategies were greatly accelerated, and entirely new practices were adopted almost overnight. This is especially true when we look at the way in which people buy property, with virtual house viewings, e-signatures on documentation and new compliance requirements quickly becoming the norm.
But it is the conveyancing space that has perhaps been the greatest beneficiary of the sudden rush to embrace technology. With buyers, sellers, agents and solicitors all involved in a property transaction, the conveyancing process has historically been blighted by inefficiencies in coordinating activities, providing updates to stakeholders and securing all the necessary documentation. However, when this process is put through a single digital platform, it becomes exponentially easier, saving time, money and stress for all parties. What’s more, the risks of human error are also removed.
In short, the pandemic has underlined what was already becoming clear to many businesses: technology can provide both competitive advantage and significant efficiency gains. When it comes to conveyancing, technology enables firms to streamline the entire process, automating cumbersome and time-consuming manual tasks so that skilled employees can instead focus on delivering a better service to clients.
There might be a timeline for the easing of lockdown measures in the months ahead, but the property sector’s reliance on technology will not recede in line with these changes. Faced with no alternative, firms have found better ways of working by using digital tools. These tools will not only help them through the limitations of lockdowns but ensure they are better positioned to win more business in the future and maintain higher caseloads.
Will there be an exodus away from British cities?
Away from the fundamental, technology-driven changes that have taken place behind the scenes, the property market could also be facing another notable shift over the coming year. It could be about to witness a significant change in demands from homebuyers, which will have ramifications on businesses in this sector.
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COVID-19 has, in the short-term at least, sparked an “exodus” from cities. Unable to enjoy the vibrancy of life they are used to (pubs, bars, restaurants, shops, theatres, museums and galleries all being closed), data shows that urban homeowners have been selling up in their droves so they can move into rural areas.
For example, Londoners bought 73,950 homes outside of the city in 2020, a four-year high, according to Hamptons International. Meanwhile, during June and July last year, the number of city residents enquiring about village properties via property portal Rightmove rose by 126% when compared with 2019.
Will this trend continue throughout 2021? Only time will tell. The reopening of leisure, retail and hospitality businesses may reignite the appeal of city living – or maybe the desire for more spacious properties and greener surroundings will win out.
Either way, it is an important trend for businesses in the property space to monitor. It will, of course, have an impact on house prices and may affect the areas in which they operate.
Tax reforms are on the horizon
Public debt has spiralled as a result of the pandemic, with the Government having little choice but to borrow eye-watering sums of money. This debt will need to be brought under control in the years ahead, making tax hikes almost inevitable.
There are some we already know about: as of April 2021, for instance, non-UK residents that purchase properties in England and Northern Ireland will be subjected to a 2% SDLT surcharge. Coupled with the impact of Brexit, this may result in fewer overseas buyers looking to invest in UK property.
For now, the extension of the stamp duty holiday, as announced in the Spring Budget, will ensure the property markets in England and Northern Ireland remain hives of activity. However, buyers, sellers and property businesses must monitor prospective reforms closely.
Public debt has spiralled as a result of the pandemic, with the Government having little choice but to borrow eye-watering sums of money.
One thing is for certain: even as the virus abates, the transformation of the property industry will not. That’s why I believe we are set for a disruptive 12 months which will radically redefine the property market as a whole.
John Ellmore, Director at NerdWallet, outlines the current state of the UK housing market and the things a homebuyer should keep in mind in 2021.
A study from Halifax in 2019 revealed that 57% of renters aged between 18 and 34 believed they would buy their own home in the foreseeable future. However, a recent survey of over 2,000 UK adults, commissioned by NerdWallet, revealed that 38% of people had put their long-term savings goals, such as a deposit for a house, on hold due to COVID-19. This figure jumps to 60% among 18- to 34-year-olds; the “first-time buyer” demographic.
This trend is understandable. Millions of people have been put on furlough or made redundant, in turn shifting their financial priorities. Without the guarantee of a regular salary, Britons will be more likely to concentrate on the short-term – affording basic necessities or making credit card payments, for example – as opposed to planning for the long-term.
Positively, throughout the pandemic the Government has stepped in to offer both short- and long-term supports. The 2021 Spring Budget on 3 March included further initiatives – prospective homebuyers will no doubt have welcomed measures such as extending the stamp duty holiday and ensuring access to 95% mortgages.
At face value, these are all strong support mechanisms from the Government. However, such generosity may not be as beneficial to first-time buyers in the long-term.
Stamp duty holiday extension
The stamp duty holiday was originally introduced on 8 July 2020. It had the aim of reigniting the property market after several months of inactivity and it has been largely successful.
According to the Office for National Statistics (ONS), average UK property prices grew by £20,000 last year to reach £252,000 at the close of 2020. Similarly, transactional activity has surged in recent months.
A study from Halifax in 2019 revealed that 57% of renters aged between 18 and 34 believed they would buy their own home in the foreseeable future.
In light of this success, the Chancellor has extended the holiday by three months until 30 June 2021. The measure means that homebuyers do not need to pay any tax on the first £500,000 of a purchase, which could save homebuyers up to £15,000. Between 1 July and 30 September, the Government will lower the threshold to £250,000. From 1 October, the stamp duty threshold will return to its usual level of £125,000.
Even now with the extension, the looming end to the stamp duty holiday will encourage thousands of Britons to push ahead with plans to purchase a property in the months ahead. But I would urge buyers not to make any impulsive decisions.
As stated above, there are tax savings to be made in the short-term. However, unless time is taken to conduct careful due diligence, people may find themselves worse off in the long-term. For instance, buying a property that needs considerable repairs work, paying above the market rate for a house or flat, or not spending time to search for an appropriate mortgage provider could cause serious financial issues in the long-term.
The arrival of 95% mortgages
The recent Spring Budget also saw the Chancellor announce the availability of 95% mortgages. This scheme means that the Government will offer guarantees to banks, encouraging them to offer homebuyers mortgages even when they only have a deposit of 5% the value of the property.
Again, this will be viewed as a positive move by many first-time buyers. Particularly during a period when house prices are rising, the opportunity to get onto the property ladder without needing to have as much money in savings will open up homeownership to many more people.
That said, savers should consider the potential drawbacks of 95% mortgages before committing to a lender. Firstly, they could have a knock-on effect on monthly repayments. This is because borrowing a large amount to pay for the property will result in more interest having to paid over the term of the loan. Lenders could also charge higher interest rates for 95% mortgages.
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Additionally, the concept of negative equity must also be considered. This occurs when the value of a property drops, and the owner ends up owing more money than the property is actually worth. This can make repaying the mortgage in full when the owner sells their home particularly problematic. However, the higher the percentage of a property an individual owns, the less likely this becomes – so, savers might want to consider saving a bit longer for a larger deposit.
Of course, the Government’s measures to boost confidence among first-time buyers and reignite activity within the property market are largely positive for UK savers. Indeed, the extended stamp duty holiday and 95% mortgages will help many more people buy a house than otherwise could.
However, savers would be wise not to rush into a house purchase or make any snap decisions. While they may feel like they are making savings in the short-term, it could cost them more later down the line.
Instead, I urge Britons to conduct careful due diligence on their homes of choice and carefully research various mortgage lenders to find one that suits their requirements. Doing so will mean people can take their first steps onto the property ladder and buy with confidence.
Operating a property rental business during a pandemic and economic downturn double whammy is one of the worst scenarios business owners can be in. There is uncertainty as to the collection of rent from tenants. It is also possible for many tenants to leave, as they can no longer afford to pay the rent unless they get a government subsidy, which will only be there for a limited period.
So what can businesses do to make the most out of the dire situation? Can businesses involved in the rental of apartments, residences, or other real estate properties survive the difficulties brought about by a major disturbance in the economy?
The good news is that there are ways to stretch resources and profitability while mitigating risks and adverse outcomes in the rental market. Here’s a rundown of what businesses can do to avoid suffering massive losses or completely going bankrupt.
Enforce a renters insurance requirement
Unless there are specific local laws that prevent a business from doing it, it is legal for apartment or rental home owners to require new tenants to obtain renters insurance. This insurance provides most of the benefits of a homeowner’s insurance except for dwelling and structure coverage.
This insurance mostly protects the tenants, but it also indirectly affords some degree of protection for the property owner. With renters insurance, landowners can be sure that they will be obliged to worry about the welfare of tenants in case an accident happens. Even in the case of man-made incidents like fires started by the tenant’s children, the insurance can pay for the possible damage.
Unless there are specific local laws that prevent a business from doing it, it is legal for apartment or rental home owners to require new tenants to obtain renters insurance.
Apartment owners can go after tenants for damages they cause to a property, but it would be better to have renters insurance cover for everything. In the economic situation the world is facing now, there is a high likelihood that tenants will be unable to pay for damages. Many are even having a hard time paying their rent. It is advisable to learn all you can about renters insurance coverage.
Get business property insurance
As a rule of thumb, every business should sign up for business property insurance. This is an insurance plan intended to compensate for the damage to or loss of properties used in the operation of a business.
Business property insurance can provide the cash necessary for a business to resume operations as soon as possible. Not all property insurance plans provide the same coverage, so it is crucial to carefully look at the terms and conditions. Most policies only cover a certain percentage of the insured property’s market value.
Also, there are specific cases that are not covered. Negligence or the violation of building codes, for example, can be used as grounds by insurers to avoid providing compensation. Regular property wear and tear are also not covered by this kind of insurance.
Moreover, some insurance companies only provide certain coverages if the insurance holder pays for add-ons. Businesses should be mindful of this, as it is quite common and largely acceptable for insurance companies to run ads that may be misinterpreted by consumers.
Make use of the LLC protection
Many apartment and rental property owners operate their business as sole proprietors or individual business owners. This can be disadvantageous in the face of major problems. That’s why some legal experts advise rental property owners to make their businesses LLCs or limited liability corporations.
LLCs protect business owners from liabilities that may arise from the operation of a business. An LLC company, an artificial entity, becomes the sole party answerable to liabilities that may be incurred in the course of business activity. As such, only the assets of the LLC are exhausted to pay for liabilities or claims for damages. The individual business owners will not be legally compelled to cover all liabilities.
LLCs protect business owners from liabilities that may arise from the operation of a business.
Additionally, it is possible to take advantage of pass-through taxation. According to Legal Nature, this means that the LLC does not pay the taxes. Instead, taxes become the responsibility of the business owner. This gets rid of the double taxation instances for single-member LLCs, wherein the business is taxed as if it were a sole proprietorship.
However, there are some intricacies involved in going with the LLC option. It is advisable to consult a corporate law specialist to be acquainted with the pros and cons as well as the process and requirements.
Be in close communication with tenants
Treat tenants well to avoid losing them. When the economic tumbles, it is only logical for many to look for ways to reduce their expenses. Many will likely move to smaller apartments to save on their recurring expenses.
Avoid losing good-paying tenants by communicating with them to address problems they may have with the property. It is also not a bad business decision to strike short-term compromises to help them get through the economic hurdles. It can be a temporary reduction in the rent amount or the limited deferral of payments.
It would be better to keep tenants with good track records than to find new ones, who will likely end up defaulting on their obligations because of the prevailing economic situation. Besides, it will be very difficult to find new tenants when there is a recession or some other similar condition.
Seek government assistance
There are many government programs designed to help small businesses survive during an economic crunch. These include the Economic Injury Disaster Loan (EIDL), Paycheck Protection Program (PPP), and other programs administered by the Small Business Association (SBA). These can provide valuable support to businesses while the economy is still in bad shape.
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There is a reason why people and businesses pay taxes. The government is expected to provide assistance when times get rough. However, do not expect the government to cover everything. It would be wise to exert all the effort to avail of government aid programs, but it is preferable to plan things as if no aid is expected.
The still ongoing COVID-19 pandemic should have taught businesses that nothing is predictable and consistent. Serious tumultuous situations can happen without any warning, so it is a must to be ready and to have contingency plans for various possible challenges.
Sezer Sherif, Founder and CEO of investment group Vector Capital, explores the strengths of alternative property investment in the UK.
There is no question that COVID-19 has completely torn through the UK economy, with signs of initial recovery towards the end of 2020 largely dashed as the country continues to navigate through a third round of lockdown restrictions.
Yet, one sector that has continued to fair well despite initial and ongoing restrictions is the residential property market, with data from HM Revenue and Customs confirming an estimated 129,400 house sales in December 2020 – which was nearly a third (31.5%) higher than December 2019 and 13.1% higher than in November 2020.
However, according to a recent study by Citizen’s Advice, the same positive stats cannot be reported for the rental or buy-to-let sector, which found that almost a third of renters across the UK had lost income during the pandemic and 11% were in rent arrears. Furthermore, the number of private renters behind on their rent has also doubled over the last 12 months.
In addition to the challenge of rent arrears, landlords haven’t been able to generate viable yields on buy-to-let for a long time, with evolving landlord taxes resulting in an average annual return of 3.53% for the UK market; a figure even considered to be ‘over-performing’.
When compared to the projected returns and no hassle promise of property bonds, it is clear to see why hundreds of thousands of landlords are now selling up and reinvesting funds into the alternative market, with COVID-19 standing as the final catalyst for making this change.
Asset-Backed Investment, No Hassle
In brief, alternative property investment enables high net worth or sophisticated investors to invest funds into the construction of large-scale property developments, without the hassle of actually owning or managing it.
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By essentially ‘lending’ funds under a legally binding agreement, which usually comes with a fixed rate of return, investors don’t have to worry about managing tenants, finance or maintenance issues and instead reap a financial reward of between 6 – 10% for helping to fund the build – a somewhat significant increase when compared to buy-to-let.
Savvy Investors Diversify
The COVID-19 pandemic has completely obliterated many investment channels in addition to buy-to-let, with the stock market having also taken a serious hit – something repeated when details of the new COVID-19 variants came to light.
However, the savvy investor has been circumventing volatile markets for years, particularly following the Brexit referendum several years ago together with political uncertainties overseas.
Although COVID-19 has taken investment challenges to a new level, it is these periods of uncertainty that force investors to think differently and to diversify their portfolio and investment decisions in order to make viable returns.
The alternative property investment market is one such route, and with construction not impacted by secondary lockdown restrictions, both developments and resulting returns are more likely to remain on track.
As it stands, there is no definitive end to the current COVID-19 pandemic. However, the initial pangs of panic have disappeared and there is definitely a stronger resolve amongst business leaders, developers and investors to fight back, disrupt and diversify, where one great place to start is with the alternative property market.
Private rents in some of the UK’s largest city centres have fallen drastically in the wake of a post-pandemic exodus from major urban areas, according to new data from online estate agent Rightmove.
Rightmove’s latest rental trends report, released on Wednesday, showed that inner-city rents dropped by as much as 12% in Q4 2020 as tenants fled to the suburbs. Inner London was the hardest hit, with annual asking rents falling by 12.4% on average in the three months to 31 December.
Edinburgh city centre and Manchester city centre followed close behind London, their average rents falling by 10% and 5.3% respectively.
Further, all ten of the UK’s biggest city centres saw an uptick in the number of inner-city residents enquiring about properties outside their area. 53% of renters in Inner London asked about properties outside the city centre during Q4, up from 45% in 2019, while central Edinburgh’s proportion rose to 37% from 29%.
As a result of this migration, there has been a significant increase in properties available for rent in city centres. Vacant properties available in Leeds, Inner London and Nottingham have more than doubled.
“There's no doubt that higher rents will return once life goes back to some form of normality,” said Tim Bannister, Rightmove’s Director of Property Data, “but it will be the city centre properties with gardens and balconies that will be able to command the biggest premiums."
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Marc von Grundherr, Director of Benham and Reeves in London, said that the pandemic had reduced tenants’ willingness to commit to the high cost of renting in central London and other urban areas.
“At present, the vast majority of the capital remains closed for business,” he noted. “As a result, demand has fallen dramatically causing rental stock to flood the market. This excess level of stock means that landlords are being forced to accept dramatically lower levels of rent just to avoid lengthy void periods between tenancies.”
Paresh Raja, founder and CEO of Market Financial Solutions, offers Finance Monthly his predictions for the UK property market in the new year.
2020 has been, by far, one of the most impactful years of the last couple decades. COVID-19 has had a sizeable impact on the world economy, national governments, and health systems around the globe. No industry, nation, or continent has been exempt from the virus’s economic and epidemiological affects, and we are all now beginning to understand the long-lasting changes that have been brought about by the pandemic.
Despite all of these challenges, it is important not to let these developments overlook the successes of 2020. While some industries have struggled, other sectors like property have been able to quickly recover. In fact, one could argue the real estate market is the strongest it has been since the EU referendum in June 2016.
In my mind, the positive performance of bricks and mortar will continue in 2021. As such, now is an ideal time to take a step back and consider just how investors and prospective buyers can take advantage of property investment over the coming 12 months.
A standout performer of 2020
Of all the positive developments witnessed in the UK this year, the ability of the real estate market to sustain a consistent rise in transaction numbers and house prices should be applauded. However, it was necessary for the market to also recover from the initial disruption caused by the first lockdown.
Obviously, property professionals were concerned during this initial stage of the pandemic; with the UK government actively dissuading people from moving home. Lenders retreated from the market, and this resulted in buyers turning to specialist finance providers to complete on sales and prevent existing transactions from collapsing.
Of all the positive developments witnessed in the UK this year, the ability of the real estate market to sustain a consistent rise in transaction numbers and house prices should be applauded.
In May, the government announced that people could once again move home, and that those who worked in the property sector could go back to facilitating transactions. However, in a bid to further incentivise buyers and sellers back to the market, in July the government offered the real estate sector another helping hand.
8 July saw the introduction and implementation of the stamp duty land tax (SDLT) holiday. This means that buyers could now save up to £15,000 when purchasing a new property in England or Northern Ireland. Those who were skittish about completing a property transaction during a pandemic were incentivised back to the market, resulting in a new wave of transactional activity which has been maintained up until today.
Transaction numbers began to grow, and house price indexes recorded a rise in the value of British property for the first time since the 2016 EU referendum. Nationwide, Halifax and Rightmove recorded house price growth between January and November 2020 of +6.5%, +7.6% and +5.5%, respectively.
However, although buyers were keen to take advantage of the SDLT holiday, another obstacle stood in the way of many. In a bid to minimise risk exposure, mainstream lenders are still hesitant when it comes to lending. Some have tightened their lending criteria; others have taken financial products off the shelves, and it is being reported that the time it is taking to deploy loans is increasing.
There is clear buyer appetite for property, and I believe this will be the case so long as the SDLT holiday remains in play. For this reason, property investors and brokers must familiarise themselves with all their finance options, looking beyond mainstream lenders and mortgage providers.
The rise of specialist finance
A survey from September commissioned by Market Financial Solutions found that 52% of the homeowners were keen to take advantage of the SDLT holiday but were put off by the increased likelihood of being denied the necessary financing.
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Prospective buyers whose transactions were at risk of collapsing from a delay in the deployment of their mortgage have, in turn, been looking to alternative lenders. These lenders typically have access to in-house credit lines and can tailor loans to meet the unique circumstances of each buyer. As a result, specialist finance products such as bridging loans can be deployed within a matter of days.
As we enter into 2021, I can only imagine that this trend will continue. The scheduled end of the SDLT holiday on 31 March, combined with the implementation of an overseas-buyer 2% SDLT surcharge on 1 April, means there is likely to be a rush from buyers looking to complete on transactions before these dates.
From reviewing their performance this year, there is a risk that mainstream lenders will struggle to ensure that financing is deployed in time to finalise transactions before these two deadlines. As such, there is a growing case for prospective buyers to seek out mortgage alternatives, such as fast loan solutions.
An optimistic outlook for 2021
Looking to the coming 12 months, it is clear that property investment will play a defining role supporting the post-pandemic recovery of the UK economy. The SDLT holiday has been a success, and there is clear buyer appetite for bricks and mortar. For this reason, it makes sense for buyers and brokers to also familiarise themselves with alternative loan options. Doing so will ensure they can confidently complete on transactions without delay.
Jamie Johnson, CEO of FJP Investment, offers his thoughts on the trends that will influence the UK real estate market in the year to come.
With the Pfizer/BioNTech vaccine starting to be administered to UK citizens, it’s safe to say that the end of COVID-19 could be in sight. After almost one full year of lockdowns, social distancing measures and job retention schemes; we may be soon returning to something resembling normality.
However, our transition to the “new normal” will be notably different to the pre-COVID-19 environment. Tax reforms and spending cuts are looking likely, as the UK government scrambles to make up the shortfall for what it spent combating COVID-19’s economic impact.
The UK has been long been heralded as one of the world’s leading investment destinations. There is good reason to believe this will remain the case, despite the obstacles on the horizon. A recent piece of research commissioned by FJP investment revealed that 42% of investors are confident the UK shall remain a global investment hub following COVID-19 and Brexit.
So, given all of this, which assets have investors been retreating to amongst all of this uncertainty? Based on what we have been witnessing at the moment, there is no denying that residential property remains high on the list for sophisticated investors.
Spotlight on property
Amidst all the market volatility and global uncertainty witnessed throughout 2020, British real estate has demonstrated strength, resilience, and perseverance.
In fact, market demand for property has been rising at an impressive rate. If we use house price growth as measure of buyer demand, this is evident. Halifax’s House Price Index for November revealed that house prices have risen annually by 7.6%.
Amidst all the market volatility and global uncertainty witnessed throughout 2020, British real estate has demonstrated strength, resilience, and perseverance.
Understandably, it looks as those some buyers are investing in UK property to hedge against any financial uncertainty. While other asset classes are suffering from high volatility as financial markets adjust to new COVID-19 developments, the price of UK property has consistently trended upwards throughout H2 2020.
This is a reflection of the positive sentiment investors hold towards bricks and mortar. FJP Investment’s aforementioned research also found that a majority (51%) firmly believe UK real estate will remain a sound investment regardless of how Brexit and COVID-19 play out. And, as the year comes to a close, I believe that this optimism will soon translate into record levels of transactions. Already transaction numbers are high, with October 2020 witnessing approximately 8.1% more transactions than October 2019. What’s more, with the Stamp Duty Land Tax (SDLT) holiday coming to an end on 31 March 2021, we are likely to see transactions numbers spike further.
The SDLT holiday, implemented in June and potentially saving house buyers up to £15,000, has been credited with successfully luring investment back into British real estate after the first summer lockdown earlier this year. Given the considerable savings this tax break allows for, I suspect that investors will flock to property in the new year before the holiday ends.
Constructing new builds to meet demand
With regards to infrastructure and potential new builds, it’s up to the government as to whether they wish to push forward with their plans from earlier this year for a "housebuilding revolution". The UK is still suffering from a mis-matched housing sector, with demand far outstripping supply, so fulfilling the promises made during the 2019 General Election to ‘level up’ the nation via pouring billions into new builds should be welcomed by investors and seasoned property experts alike.
Allocating such funds for infrastructure and housebuilding not only fulfils electoral pledges but is paramount for facilitating a wider post-COVID-19 economic recovery. For this reason and others, I’m confident that Prime Minister Boris Johnson will push forward with previous plans to help fund construction and development projects in 2021.
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Regarding other plans, such as extending the SDLT holiday or implementing negative interest rates, it is difficult to make assured predictions at the moment. However, for property investors and housing developers, I’m personally optimistic about what 2021 may hold. Given the incredibly strong performance of UK property throughout this year’s pandemic, I’m confident that this sector will remain a prime destination for investment and a source of impressive long-term gains for the foreseeable future.
Taxes have always been a bit of a confusing matter for many people – now more than ever, due to the impact of COVID-19 on tax. There are so many things that can be overwhelming when it comes to taxes, such as which bracket you fall into, whether you need a UTR number, and many more.
One of the main things that confuses people is the fact that there are so many different types of tax. It can be hard to know whether you need to pay tax, and even once you know that, you may be unclear on what type of tax you need to pay.
There are various lesser-known types of tax, such as tax when you travel, or tax for gambling winnings, but in this post, we’ll be focusing on three of the most common types of tax: income tax, consumption tax, and property tax.
Income tax
This is the type of tax that tends to cost people the most. As the name suggests, income tax refers to compulsory money you need to pay to the government for any income earned. Keep in mind that this doesn’t just refer to money you earn form your business or job, but other forms of income as well.
There is usually a minimum income required in order for you to have to pay taxes, so if your income falls below this threshold, you might be exempt from paying. There are also various income brackets, which means the more you earn, the more taxes you’ll need to pay.
Consumption tax (VAT)
Consumption tax, also known as VAT, is the tax we pay on most of the products or services we buy. This varies from place to place. In the UK, the standard rate for consumption tax is 20%. This is the type of tax we encounter most often, since most people will pay VAT on nearly a daily basis.
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While the majority of goods and services will require you to pay consumption tax, there are a few that are exempt. These differ depending on where in the world you live. Some places don’t charge VAT on what is viewed as basic necessities, and instead only charge for items viewed as luxuries. In the UK, for instance, insurance is exempt from VAT.
Property tax
Property tax refers to money that is levied on real estate. The way that property tax works is dependent on where you live. In some areas of the world, you only need to pay property tax on a property when you buy it and it is over a certain value. Generally, property tax is taxed annually.
Property tax is the responsibility of the owner of the property, which means that renters are not liable to pay property tax, although a portion of their rent will probably be used towards it. If you don’t pay your property tax, your house could get taken away from you, so it’s important that you pay the amount that you should, and that you pay it on time.
