Posted by: Jules Birch29/03/2011
Is the curtain finally about to come down on housing’s version of a play by Samuel Beckett?
Waiting for Godot has been described as one in which ‘nothing happens - twice’. Over two days in two acts, Vladimir and Estragon wait in vain for the mysterious Godot. At the end they agree to leave but they do not actually move.
After 20 years of writing about the chances of institutional investors returning to private renting, I know how they feel. Every time something happens to imply that they might come back - rent deregulation, assured shortholds, the business expansion scheme, real estate investment trusts, HCA initiatives - nothing happens. And the wait goes on.
Last week’s Budget finally removed what are seen as two of the last remaining barriers to institutional investment with reform of bulk purchase stamp duty and REITs. The British Property Federation hailed a ‘Budget for property’ and hoped it would ‘tip the balance in encouraging institutional funds into building homes’ while the RICS said it would ‘help encourage large investors including pension funds into the sector providing a revolution in how rented homes are supplied’.
The attractions seem clear. Five individual investors who buy five £200,000 flats in a block currently pay 1% stamp duty on each, a total of £10,000. Without reform, an institution buying all five would have had to pay 5% stamp duty on the bulk purchase price of £1m, a total of £50,000. After the Budget, they will pay stamp duty on the average price per unit.
The change was almost included in the 2009 Budget but was dropped at the last minute and the property industry believed that the chance had gone under current economic conditions. So there was genuine surprise that the chancellor included a measure that the Budget red book estimates will cost £560m over the next five years.
The details of the change on REITs will go out to consultation. However, it is clear that the 2% charge to convert to a REIT will go. This was designed to stop existing property companies converting to avoid their capital gains tax liabilities but it also applied to all new trusts. The Treasury now seems to have been convinced that most existing companies have converted and paid up. Also on the agenda is the removal of the requirement that all REITs have to have an expensive stock exchange listing.
Taken together, those reforms should remove a significant upfront cost for institutional investors. In the meantime, another objection to investing in residential property seems to hold less water now. Investors in commercial property look to the income yield - rents - rather than capital values. The opposite has applied in residential property as soaring house prices have reduced yield.
However, the respected IPD Index shows that residential investment has offered better total returns than commercial over the last three, five and ten years. The index for 2010, published two weeks ago, showed that residential under-performed commercial for the first time in four years, but even then if offered a total return of 10.4%.
So has the moment finally arrived? There’s certainly lots of chatter about the big institutions considering their options and the Scottish government has been talking to individual pension funds about investing in social and affordable housing.
But two more barriers remain. First, institutional investors need stock - lots of it. With housebuilding still stuck at its lowest level since the war, and most housebuilders retrenched into building fewer, more expensive, homes. Perhaps other Budget reforms to make it easier to convert commercial property to residential could help there.
Second, natural conservatism means that fear of being the first fund manager to take the plunge and risk making a loss seems to count for more than the hope of being the first to make a profit.
But sooner or later you feel it has to happen. The returns are good. The risks are lower than for a commercial sector still riddled with empty office blocks. And, with government investment slashed and the banks still not lending, the institutions look like the only realistic source of new investment over the next few years.
Unless of course we are all still Waiting for Godot…
From Inside edge
Housing commentator Jules Birch puts the latest news in context