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Sativa Finance Blog

Property Finance Newsletter


Sativa Finance update the blog regularly with comment and opinion on issues relevant to the property finance market.

By sativafin, Feb 1 2016 03:32PM

We feel the funding market for landlords and investors in residential properties is set to change significantly in 2016. Over the last few years there have been lots of options for small landlords owning one or two properties – these are typically lending options supported by high street banks and building societies. Also large institutions with portfolios of £10m / £20m +. Have also found funding, typically from insurance companies, pension funds and also certain banks. However the middle ground of professional landlords with borrowing requirements between £1m - £10m have been harder to place. Many of the smaller BTL lenders have restrictions on loan size, number of properties etc… that make it difficult for those with larger portfolios to get the funding they require and those funding the very large institutional investors typically have minimum loans around the £10m mark.

There have been a few tax changes that we feel will make a big difference to the market and a lender’s view. Firstly the one getting the most press has probably been the 3% SDLT – this will impact on buying appetite across the market but we feel this will put of ‘part-time’ landlords more than professionals and larger landlords. The latter tend to think long term and the residential market has consistently outperformed other commercial real estate sectors and many take the view that the additional costs will be more than compensated for in the long term. For smaller landlords we think that those ‘adding value’ through refurbish works to be less concerned than those buying new units off plan so we expect lenders in the market to be more open to allowing refurbishment works prior to renting.

Another change has been the way landlords will account for their interest payments and tax deductions. This doesn’t kick in until 2017 but ultimately an individual owning a property in their own name will not be able to deduct the interest payments against their income tax. However if the properties are owned within a company the interest can still be deducted as a business expense – we’re therefore expecting serious residential investors to be purchasing their properties into Limited Companies and LLP, if they aren’t already. Some BTL lenders historically won’t lend to limited companies however we’re seeing this change and also some of the Challenger and International banks are starting to lend more to serious residential landlords, typically to companies rather than the individuals.

We don’t feel that landlords will be ‘dumping’ property on the market and quite the rate certain media reports suggest and the ‘death’ of the BTL mortgage market certainly seems to be exaggerated. Also if a landlord has a well let property it is probably still not a bad place to invest their money and if they can find opportunities where they can modernise / refurbish a property before renting it out then the additional costs may be absorbed in the value being added. A significant interest rate hike may well damped the market further but whilst the residential investment market is changing, we don’t feel its dying and lenders are putting their money to work still in this space so they seem to agree.

By sativafin, Oct 23 2015 07:28AM

More or less every property developer we speak to at the moment is looking for sites that may benefit from new infrastructure works and the main talk in London is about Crossrail. The new line will make travel times to central London from certain locations to the west and east of the city far quicker, with property prices and rents expected to increase as a result. Crossrail 2 which will go north to south is also in the minds of many developers who might feel they’ve missed the boat on Crossrail 1 already or are simply looking to broaden their search for projects.

The true impact of major infrastructure works is difficult to predict but over the years there has certainly been an effect. Initially the announcement of projects may get some land buyers excited and when works start commencing with firm delivery times then investment in effected areas increases. However the biggest value gains seem to be once the infrastructure works are completed and the trains operational. For residential renters and to a certain extent buyers the improvement in travel times needs to exist rather than just be a future benefit. Therefore we certainly expect rental values to increase once Crossrail is in operation and this will drive values for investors who make up a large proportion of property buyers round the capital. Many homeowners will also give more consideration to Crossrail areas once the line is operational, although for many UK homeowners speculation on future values is an important part of their decision on where to live so they may already be pushing up prices in certain areas. For commercial tenants the increased footfall of a transport hub needs to be in effect before they start paying a premium on rents so again the impact of the infrastructure on commercial values will most likely come after the lines are operational.

The challenge for property developers is getting their numbers right day one. If reliant on third party finance then they will most likely require a Redbook valuation on the end values from their funders. A valuer will work of local comparables, which won’t incorporate any speculation on future growth, and this can have a limiting factor on what a developer is able to pay for a site. At the moment we’re seeing some developers pay noticeably over the Redbook value of a site – typically they’re being proved right on their numbers when sales come through but it’s not the job of a lender or valuer to be speculating on values. The lenders will typically buy in to the infrastructure as a positive to the project that will help on the sales of the units but won’t incorporate any future growth into the figures. Typically this means a developer will need to pay over the residual valuation of a site to ensure they win the bid in areas earmarked for growth so consequently will need to have more equity at their disposal to take full advantage of sites in these areas.

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