1031 Exchanges Must Be Like-Kind
Section 1031 of the Internal Revenue Code specifies that no gain or loss shall be recognised on the exchange of one piece of investment real estate for another, as long as they are of like kind. That doesn’t mean that you have to trade your apartment building for another – it just means that you have to trade it for another investment property.
You Need An Intermediary
In order to perform a 1031 exchange, you need to find a qualified intermediary. The qualified intermediary will hold the proceeds from the sale of the first property on your behalf, and use it to buy the property you’re swapping for. Because the intermediary handles your money, you can’t be said to have received any proceeds on the sale of your initial property.
There Are Some Important Deadlines
Sometimes, you can perform a 1031 exchange if you happen to find someone with a property you want who wants your property. In that case, the sale of your old property and the purchase of your new one can take place at the same time. But you’ll usually need some time after the sale of your initial property to find another property to invest in. In that case, you can do what’s called a delayed 1031 exchange, and buy your replacement property some weeks or months after you’ve sold your initial property. You can even do what’s called a reverse 1031 exchange, in which you buy the replacement property first and then sell your original property.
If you’re doing a delayed 1031 exchange – which is the most common type – you’ll have 45 days from the sale of your initial property to designate some properties you’re interested in buying. You should designate the replacement properties in writing to your intermediary. Once you’ve designed your three properties, you‘ll have 180 days to close on a replacement property.
You Can Do As Many 1031 Exchanges As You Want
As long as you do your 1031 exchanges correctly, you can do as many of them as you want. You can roll the capital gain on your initial property over into a new property, and then sell that property and roll those capital gains into a new property, over and over for as long as you want. Eventually, if you do sell a property outright, you’ll have to pay long-term capital gains taxes, but you can defer paying capital gains tax for years and have that much more capital for your property investments.
1031 Exchanges Can Help With Estate Planning
You can only use 1031 exchanges to defer capital gains, not to avoid them – with one exception. If you die without ever selling your replacement property, your heirs will inherit it at its current market value, and they won’t have to pay capital gains taxes on the appreciation in the value of the property.
You Can Only Exchange Investment Properties
Prior to 2004, when the tax code was changed, you could use 1031 exchanges to swap one holiday home for another, and even turn that home into a primary residence while still delaying the recognition of any capital gains on the property. You can’t do that anymore – now you can only buy a holiday home through a 1031 exchange if you’re renting it out for income. If you want to swap your current holiday home for another property using a 1031 exchange, you’re going to have to rent it out for six months or a year to convert it into a rental property.
Conversely, if you want to move into a property you bought in a 1031 exchange, you need to wait at least two years, during which you rent the dwelling at market rate for at least 14 days each year, and during which your personal use of the property can’t 10% of the number of days each year that the property is rented, or 14 days, whichever number is greater.
1031 exchanges can be a great way to save on capital gains taxes, especially if you want to pass the investment property down to your heirs. With a little advance planning, you can use 1031 exchanges to significantly increase your real estate holdings and personal wealth.
The announcement by Chengdu comes after several real estate firms, led by industry giant Evergrande, fell into a financial crisis after China began a regulatory drive to end speculation and leverage. The move left companies struggling to meet their debt obligations, exacerbated by the fact they were unable to offload properties or borrow more cash.
However, addressing the issue, Chengdu said it would speed up approvals for home sales and property loans and would ease restrictions on the use of pre-sale proceeds.
There had been some signs that Beijing was shifting away from its tough line on the property sector. In September, the central bank asked financial chiefs to help local governments support the housing market amid dramatically slowing growth in the country’s economy.
The crisis has been highlighted by the struggles of Evergrande. The property development giant currently has debts worth $300 billion and is facing a serious threat of collapse. If Evergrande were to collapse, the crisis could further spread into the wider Chinese economy and could even impact the global economy.
1. Consider Your Finances
Most people can get a home loan from most lenders as long as you provide at least a 5% deposit from the house’s price. In general, though, you want to have at least a 20% deposit since the deposit amount impacts your loan-to-value ratio (LVR). From a lender’s perspective, LVR makes up your risk as a borrower and your borrowing power.
Other than the upfront costs of buying a home, you also need to make sure you can pay your mortgage loan repayment. Thus, it’s important to evaluate your finances before you invest in a property. Do you have enough cash to make a down payment or can you afford to take on the cost of repaying your mortgage? You’ll also want to keep an eye on the interest rates. The impact of your mortgage interest rates will depend on the type of loan you get.
For instance, if you choose a floating-range mortgage, the size of your monthly payments could fluctuate alongside the interest rates. Meanwhile, a fixed-rate mortgage means your rate is locked in, regardless of which direction the interest rates move. Any small differences in your mortgage interest rate can add up quickly, which might cause you to spend too much or save a lot.
Make sure to check for mortgage rates in the area. If you’re looking for a house in New Zealand, then you can compare NZ rates here. Lastly, it’s better to talk to a home loan specialist or your lender about your options and help you find out how much you can borrow.
2. Check The Market
Depending on current economic situations and other factors, the real estate market can move either to the seller’s or buyer’s favour. A buyer’s market means that there are more houses for sale than buyers. A seller’s market, on the other hand, occurs when fewer homes are on the market than buyers.
These market conditions can determine how much room you have when making an offer. Talk to a real estate agent who can help you understand the real estate market in your area and how it’s currently affecting buyers.
3. Think About The Location
Whether you’re moving to a different country or staying in the same neighbourhood, you need to research before spending your hard-earned money.
Most people want a home close to school, a shopping district, or their workplace. Consider if you’ll have easy access to the main roads and check for traffic flow. Some people want proximity to the city, while others prefer a more peaceful, suburban life. The location also has an impact on the price of a house. For instance, houses in city areas tend to be more expensive than those in the suburbs. Most locations have their own unique advantage. So, make sure to research what suits your needs or budget before deciding which property to settle in.
4. What Are Your Lifestyle Needs?
Your lifestyle can also help in determining the kind of house you want and can afford. Do you need extra space for accommodating an elderly relative who can’t live alone? Is there a new baby on the way? Do you love to cook? Then you might need a home with a larger kitchen. Meanwhile, getting a home with a bigger backyard can satisfy your habit of planting your own food or accommodating your pets.
In addition, your lifestyle can also impact your budget and mortgage payments. Do you need to take a weekend getaway every month? Do you have a gym membership or maybe working out with a personal trainer? Do you love collectible items?
In general, you need to give yourself a little financial room by subtracting the cost of your expensive activity or hobby from the payment you calculated. If the balance is not enough to buy the house of your dreams, then you need to cut back a bit or start thinking of getting a more affordable home.
Endnote
If done right, buying a house can be both a good investment and a smart purchase. It is a contradicting experience of stress and excitement. As a result, it’s important that you keep in mind the above factors before closing a deal on a new house.
It comes down to personal choice, but as life becomes harder for most people nowadays, they need to invest even in small capitals is an ideal way of earning an extra on the side. Today, when people talk about small investments, cryptocurrency is a viable option. It does not require a huge sum of money to get started, but it’s an advantage if enough budget is allocated to achieve financial targets. On the one hand, real estate is often associated with large investments. This type of investment has also been generating more profits among investors because the demand is constant. Both of these investment types can be included in your portfolio; that’s what diversification is all about. But if you’re stuck between choosing only one, the following facts may be of help to make the right decision. To start an investment one should use a regulated crypto trading platform such as the Bitcoin System.
Overview Of The Cryptocurrency Industry
Cryptocurrency started way back in 2009, with bitcoin as the first coin ever introduced to the market. It aimed to simplify payment transactions and served as a better alternative to the existing financial system. But its platform has a wide-ranging use to facilitate other transactions such as trading with other types of currencies. Many investors were attracted to the opportunities that it offers, and it proved to be a good decision when some of them were able to acquire more profits. There were investors who even became millionaires in a short span of years. Presently, there are over 4,000 cryptocurrencies that cater to the needs of millions of users worldwide. Most people see this trading platform as a practical way to secure and grow their assets.
Analysing The Real Estate Market
Some financial experts believe that investing in real estate is one of the best ways to save for retirement and build wealth. It has been a steady market that has already stood the time as an investable asset. There are multiple ways that you could invest your money in this industry. You may invest with developers, house flipping, wholesaling, and Real Estate Investment Trusts, among others. This is a popular type of investment, and it offers promising advantages that other assets may not be able to provide.
So, Which Is Better Between The Two?
To answer the question, you have to look at the pros and cons of each investment type. They are both good investments, but depending on your priorities, you can judge based on their potential to grow your assets.
Fact #1: Cryptocurrency has a low barrier to entry because investors can purchase coins with smaller capital. On the other hand, real estate is costly to own and maintain. You may have to allocate thousands to millions of funds to make an investment. There are also responsibilities that real estate owners have to comply with, unlike the case of cryptocurrency, which is decentralised, and users can make trading transactions on a peer-to-peer basis.
Fact #2: Real estate can bring a steady source of income through sales and monthly rentals. It can also provide tax breaks and deductions that could reduce operational costs. On the other hand, cryptocurrency can have long-term gains, just like what happened to successful bitcoin investors. Other coins also have the potential to grow small investments, especially when the market is performing well.
Fact #3: Cryptocurrency is not a tangible asset, meaning you cannot hold a bitcoin in your hand because it’s a digital currency. It can expose your asset to cyberattacks, and the lack of transparency may make it hard to determine the exact value of a coin. On the other hand, real estate is a tangible asset that has intrinsic value. It is also a necessity as people will always need a place to live, work, and do other things.
Fact #4: Real estate is not as liquid as other investment types, meaning it cannot be traded quickly. It may take several months or years to find a buyer for a property. On the other hand, cryptocurrency is highly volatile, meaning the prices of coins may be highly unpredictable due to factors at play. Investors may need to study the market properly in order to make sound trading decisions.
Conclusion
Cryptocurrency and real estate are both good investment options. Whether which one is better would primarily depend on your criteria. You have to weigh the pros and cons and decide whether you can handle the risks and requirements for your chosen investment. Likewise, you may consider investing in both vehicles because it’s always possible as long as you have enough capital.
The global real estate crowdfunding market is expected to grow a CAGR of 33.4% between 2020 and 2028. The EU REC market size is currently at approximately EUR 7 billion, and with that growth rate, the EU market would be EUR 93.65 billion in 2028.
This stratospheric projection illustrates the potential of real estate crowdfunding. Stipulations protecting consumers and crowdfunding platforms provided by new EU regulations coming into play in November will foster legitimacy in the industry and draw the focus of new investors.
To determine what drives the crowdfunding community, BrikkApp recently spoke to five real estate crowdfunding industry leaders from Shojin, Reinvest24, Kuflink, Max Crowdfund, LendSecured.
New EU regulation bolsters the market
Faced with substantial industry growth, the European Union has decided to implement regulatory actions that will formalise the service provision process for crowdfunding and widen the potential pool of investors exponentially.
For Jatin Ondhia, Co-founder and CEO of Shojin, the regulations are a necessary step to gain new economic opportunities: “At times, the regulatory costs and process can become burdensome, but they are essential if we want this market to grow.”
Per the regulations’ due diligence requirements by platforms, investors will feel secure in their investment decisions. Terms on suitability and appropriateness will further enhance that sentiment. New passport and authorisation processes will make sure that platforms are held accountable for their listings and work in the best interest of their clients.
Under the new scheme, real estate crowdfunding platforms can collaborate seamlessly with developers and construction corporations across the European continent if their projects total under €5 million.
Given that the regulation works to rule out non-compliant practitioners, there will be fewer market participants—but those participants will present safer investment opportunities, according to the Latvian crowdlending platform LendSecured.
“We find it more complex to spot deals that suit the vetting process. The volume might be smaller, but you can be sure that it has the highest quality,” explains Nikita Goncars, CEO of LendSecured.
The unrelenting interest of new retail investors will bring liquidity to the market and entice developers.
Crowdfunding platforms increasingly make use of the power of collaborating
Shojin provides global investors with direct access to institutional-style debt and equity investments in the UK. Crowdfunding platforms like Shojin work best when they can balance the number of investors with a high deal flow. “Sometimes, there is an imbalance due to the economic and societal environment. This is where collaboration between platforms can be extraordinarily effective,” according to Jatin Ondhia, CEO and Co-founder.
As crowdfunding gains popularity, more and more high-quality platforms will operate in the industry. Increased cash flows and investments deepen the liquidity pool and broaden the range of projects that can meet investors’ and developers’ requirements.
Recently, most crowdfunding platforms have felt the market is too fragmented. To become a mainstream marketplace, the sector needs to attract a much broader crowd and cooperative market opportunities.
In addition, the associated costs with new EU regulations may leave several companies in a difficult position. Thus, collaborations of various platforms play a vital role in the sector. Collaboration is not simply a matter of costs but combining expert knowledge and business strengths: If the market specialists blend their skills and help each other out, this will lift the whole industry to a higher level. Potential joint areas include tech development and research to understand and predict the market’s evolution better.
The EU regulations hit the point of the time. Max Crowdfund, a Dutch crowdfunding platform, forecasts that if real estate crowdfunding continuously grows into the mainstream, cross-border investments and the international interest in the EU market will become commonplace. The new standards and the ability for crowdfunding agents to work seamlessly with developers all across the European continent ensure a fertile ground for the industry.
Interest Rates and Returns
A growing number of real estate platforms ultimately stimulate a higher output for aggregation platforms such as BrikkApp. For investors, it brings higher diversification between investment opportunities. From the current point of view, the size of the platform is becoming less important.
Still, the quality of the project (e.g., well-funded, location, housing prices) investors can crowdfund attracts enormous interest. If the quality of investments and returns will be the decisive factor for the crowdfunding community, this allows a fairer investment fund distribution across European real estate.
Due to the global pandemic, interest rates have been lowered worldwide to stimulate consumption. As a result, banks fear the trend going towards negative interest rates.
One of the downsides of the EU regulations could be a potential split between regulated and unregulated platforms. The latter could try to offer higher returns that don’t face restrictions by any legislation. Fortunately, this won’t stop regulated platforms from offering healthy returns, and it will establish them as more trustworthy than unregulated businesses in the long run.
Lastly, due to the global pandemic, interest rates have been lowered worldwide to stimulate consumption. As a result, banks fear the trend going towards negative interest rates.
“Facing the likelihood of negative interest rates, investors prefer P2P real estate lending platforms as a potential option for their funds. This happens because they could earn significantly higher returns,” agrees Narinder Khattoare. He is the CEO of Kuflink Group, a company developing and leveraging P2P investment models. Higher returns will positively impact the industry and create an enormous leverage effect for those who invest now.
“In our case, we are currently able to offer returns up to 16% because we are working on developing markets, with a big potential for capital growth. By developing most projects by ourselves, we are lowering the expenses as much as possible”, says Tanel Orro. Tanel is the CEO of Reinvest24, a real estate investment platform based in Estonia.
The new EU regulations will not be smooth sailing for every platform. For example, Max Crowdfund operates using blockchain technology, and banks and payment providers are still reluctant to work with the technology. Currently, Max Crowdfund can offer debt-based real-estate-backed loans to their investors.
“Once we have obtained the license per the new European regulation for crowdfunding platforms (CSPR), we will add equity-based deals and a secondary market,” reveals Mark Lloyd, CEO of Max Crowdfund.
The European crowdfunding real estate market shows promising progress. Particularly the Baltics and countries in Eastern Europe, including Estonia, Moldova, and Latvia, are attracting investors’ interests. “We see great potential in the real estate sector, as the competition is still low, due to the small size of the market,” concludes Tanel Orro from Reinvest24.
As soon as crowdlending platforms start to diversify their portfolio and collaborate with each other and developers alike, the alternative property market is ready to become a mainstream capital source.
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.
What’s been the pandemic’s effect on real estate in Connecticut? Have you seen an increase or a decrease in the number of people looking to buy property?
One of the many unfortunate consequences of the COVID-19 pandemic is an increased demand for homes in Connecticut and New York. Home sales increased 18-20% over the past year, driven in large part by a huge influx of buyers leaving New York City and coming to Connecticut in search of more space. There is also extremely low housing inventory, which drives up prices. While this may have a benefit to current sellers in the short term, there are thousands of income-constrained families who are competing for the few homes that are still affordable to them. Sellers are receiving multiple offers, some of them over the asking price and low- and moderate-income households cannot compete.
What has this meant for HDF and the work you do there?
HDF will need to pivot and innovate in order to meet the needs of the Connecticut communities we serve. For example, we have utilised technology to provide counselling and lending services to clients remotely. In addition, we are anticipating the need for a robust foreclosure intervention program as the eviction and foreclosure moratorium ends in June. After the market crash in 2008, HDF provided foreclosure intervention counselling to people who were in danger of losing their homes to foreclosure with the goal of helping homeowners keep their homes. We have been awarded some start-up grant funding and have launched an updated version of that program.
Home sales increased 18-20% over the past year, driven in large part by a huge influx of buyers leaving New York City and coming to Connecticut in search of more space.
Also, the economic fallout from the pandemic has deepened the need for more housing stock that people can afford, both rental housing and homeownership opportunities. To that end, HDF has launched a Community Land Trust, an initiative that is new to Fairfield County, Connecticut but builds on a successful model. HDF’s first CLT is in Stamford, Connecticut and will bring 22 condo-style homes that will be sold to very low-income families. These hard-working families will benefit from the financial security gained from homeownership. The Community Land Trust model allows HDF to place the land that sits under these condos into a trust, thus preserving the affordability forever. The CLT structure also allows HDF to sell the condos at prices far below the market rate since the cost of the land is removed from the sales price of each condo.
What are the challenges of being at the helm of a non-profit organisation in the financial sector?
Our biggest challenge right now on the residential side of the business is that down payment assistance and counselling programs cannot alone help people buy their homes if there’s no inventory. That’s why we need new and creative strategies to create homeownership opportunities, like our Community Land Trust.
HDF also finances the building/rehab of affordable rental housing in the state. This is a lesser-known side of our business, but an essential one as there will always be a need for affordable rental housing and the interest income generated from this lending supports HDF’s operational expenses. HDF is constantly trying to raise awareness that we offer this type of financing.
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.
Alpa Bhakta, CEO of Butterfield Mortgages Limited, explores the current landscape of London property investment and how it may soon shift.
During the last five years, the prime central London (PCL) property market has witnessed significant shifts and spikes in demand and supply. However, nothing could have prepared the market for the immense impact of the COVID-19 pandemic and the consequential UK-wide lockdowns.
The economic ramifications of the novel coronavirus pandemic will undoubtedly be felt across the global economy for some time. But, when it comes to the UK prime property market, there is more than one reason to be optimistic about the future.
Alongside numerous other measures introduced to encourage consumer spending and investment activity, the UK government announced a series of measures to support transactional activity across the real estate market.
And, in this, the government has been successful. Recently, the property market witnessed its fastest rate of house price growth in over four years. This is very much a result of the Stamp Duty Land Tax (SDLT) holiday. No wonder, given that the tax relief policy allows anyone – from first time buyers to seasoned buy-to-let (BTL) investors – to save up to £15,000 on British property purchases.
Based on experience helping clients navigate the PCL property market, I’ve noticed multiple trends that potential PCL investors should keep abreast of over the coming months. As England navigates its second nationwide lockdown, the precise nature of the capital’s property market remains uncertain. Nonetheless there are certainly things for those interested in prime property in the capital to be on the lookout for.
Recently, the property market witnessed its fastest rate of house price growth in over four years.
London: the jewel of UK property?
With remote working set to remain a reality for many of London’s professionals, some property commentators feared a collapse of the PCL market as newly homebound workers fled to the countryside. This has demonstrably not occurred.
Although some shift in buyer demand away from central London and towards quieter, more suburban areas was recorded by Rightmove, this trend’s impact on the PCL market is seemingly minimal.
Despite the so-called working-from-home revolution, the market for properties in central London worth in excess of £5 million has been one of the most active sectors of the UK’s real estate market throughout 2020. The number of transactions involving such properties was 13% higher during Q1 2020 than during the same period in 2019; and Q3 saw more PCL housing sold than during any other quarter since 2015.
Even within the £5 million + London property market, over half of all such sales are located in just five postcodes, according to Savills.
The driving force behind this spike in activity is multi-faceted. Yes, the previously mentioned government initiatives to support the UK property market are partially responsible. But, given that the SDLT holiday only protects the first £500,000 of a purchased property’s cost from the tax, there must be other underlying forces at play.
One such force is the SDLT foreign buyer surcharge. Due to be implemented on April 1, 2021, this added 2% tax for those purchasing British property from abroad represents a massive intervention into the PCL market. In H2 2019, such buyers represented 55% of all PCL transactions.
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A motivating factor for many foreign buyers at present, then, will be to avoid this added cost. This trend will likely continue until the currently scheduled end of the SDLT holiday on March 31, 2021, with international investors keen to complete on transactions before this key date. Reportedly, 22% of such buyers are so keen that they’ve purchased property without a single viewing, according to London Central Portfolio.
With such an impressive year for transactions numbers then, I believe that the PCL property market’s prospects should only improve as COVID-19 is brought under control. At the moment, that could be sooner rather than later based on recent vaccine announcements.
As it currently stands, the PCL property market looks set to remain strong for the foreseeable future. Buyer demand from domestic and non-UK residents is increasing the number of transactions taking place, demonstrating the underlining attractiveness of prime property as an investment venture.
The average UK home sold for more than £250,000 last month, marking the first time the average has crested a quarter of a million pounds.
New data was released in Halifax’s latest House Price Index, a leading authority that gauges the state of the UK property market, showing that prices rose 7.5% higher in October than their average during the same period in 2019 – reaching as high as £250,547. The increase also marks the highest rate of annual growth since the middle of 2016.
The increase follows a surge in house prices in September, with a combination of the stamp duty holiday and a pent up demand from the initial lockdown period pushing the price of the average UK home up to £249,879.
Halifax managing director Russell Galley credited the continuing effects of the pandemic for creating “clear headwinds” for the UK property market. He added that stamp duty cuts and rising interest in moving “supercharged” demand and pushed prices higher.
“Overall we saw a broad continuation of recent trends with the market still predominantly being driven by home-mover demand for larger houses,” Galley said, adding: "The country's struggle with COVID-19 is far from over.”
While Halifax’s new index showed year-on-year growth to be strong, the rate of monthly price gains appeared to be slowing sharply. Prices rose by 0.3% between September and October, a notable decrease from the 1.5% rise seen a month earlier and 1.7% in the previous two months.
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Halifax warned that economic fallout from the COVID-19 pandemic, likely to arrive in early 2021, would put “downward pressure” on home prices.
Jamie Johnson, CEO of FJP Investment, looks into the resurgence of the UK property market and how the government could sustain it.
After so many months in lockdown, attracting the investment needed to help bring back market activity to pre-pandemic levels is by no means an easy task. However, there have been some signs that government initiatives have, thus far, been successful in coaxing investors back to the market; most notably in the real estate sector.
Following the introduction of the stamp duty land tax (SDLT) holiday, property listing site Rightmove recorded a massive 75% increase in the number of buyer enquiries recorded on their site. And according to Nationwide’s House Price Index for August, house prices experienced their biggest monthly increase in over 16 years.
While undoubtedly a positive sign for the sector, the big question is whether such momentum can be maintained. Property investors need to feel confident enough that COVID-19 has been successfully handled by the Government and that the country can fully recover from the pandemic.
To gauge investors' sentiments towards the Government’s tackling of the pandemic, FJP Investment recently surveyed over 900 UK-based investors with assets in excess of £10,000; excluding residential property and workplaces pensions. Our research showed that, while the SDLT holiday has proven successful in reassuring some investor’s worries, there is still much more than can be done to help sustain a strong post-COVID economic resurgence for the UK.
Following the introduction of the stamp duty land tax (SDLT) holiday, property listing site Rightmove recorded a massive 75% increase in the number of buyer enquiries recorded on their site.
SDLT holiday a hit
Of the investors FJP Investment surveyed, a quarter (24%) plan on buying one or more properties to take advantage of the SDLT holiday, a figure that rises to 43% for those aged between 18 and 34.
Given that buyers can potentially save up to £15,000 through this tax break, it makes sense that those who may be making their first foray into the housing market would be keen to take advantage of the comparative discounts on offer.
However, a larger proportion of investors––43% of those surveyed––believe that the Government needs to offer further support to homebuyers and property investors beyond the SDLT holiday. Just over half (54%) are in favour of extending the mortgage payment holiday relief scheme beyond 31 October 2020, and 57% believe that more financial relief is needed to support the businesses affect by COVID-19.
It would serve the government well, then, to offer extra assistance to those seeking access to real estate opportunities, be it extending by extending SDLT holiday or providing additional financial relief for those affected by the pandemic.
Long-term worries
Perhaps a more pressing worry, though, is that 54% of UK investors that have lost confidence in Boris Johnson’s government generally based on its handling of the COVID-19 pandemic thus far. Investors will be wary of making any large financial decisions if they do not believe that the pandemic is under control.
Fears surrounding a mishandled second spike may limit the success of the SDLT holiday if the Government isn’t able to inspire confidence amongst homebuyers and property investors. The point is that there is clear demand for residential real estate – the challenge is ensuring buyers are given all the tools and incentives they need to make a fully-fledged return.
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The pressure is very much on Boris Johnson and Chancellor Rishi Sunak to assuage these concerns and boost investors’ confidence in the UK. Doing so will ensure that investors’ feel confident in injecting life back into the financial markets; and subsequently triggering a wider recovery of the UK economy. I am happy to say that current signs are indeed promising.
