The Bulk-Purchase Investment Case
Updated: Aug 18, 2022
"Smart investing doesn't consist of buying good assets but of buying assets well."
Howard Marks
Over the last 4 years the new-build Prime London residential property market has witnessed a significant set-back. Prices have fallen approximately 18% and current sentiment remains depressed as end users as well as investors take fright over a disorderly Brexit outcome. Despite this many of our most astute Investor clients are seeing this as an excellent entry point especially when one considers the London residential property market has historically provided only a few good buying opportunities over time.
The key drivers of a pullback in the market at large have been:
A significant increase in Stamp Duty (SDLT) tax on properties purchased above £1m (introduced in 2014).
A new Second Home Stamp Duty tax rate of 3% introduced in 2016 and applicable to individuals (not corporates).
The non-deductibility of interest expense for individual property investors (introduced in 2016). Corporates still enjoy tax deductible interest.
Negative sentiment surrounding Brexit and the future trading relationship with The European Union.
Over-supply as a consequence of the above factors, in turn resulting in a number of distressed sales by Developers.
The Opportunity
Corporate and Institutional investors have recently taken advantage of this opportunity by Bulk-Buying multiple residential units from Developers at a significant discount. Research by The Financial Times shows these investors are typically achieving wholesale discounts of 10-15% and discounts up to 30% have been achieved. Overseas investors have been particularly active, spurred on by the depreciation of Sterling. USD Buyers for example can benefit from a -24% depreciation of Sterling since June 2014. When the c20% price reductions since 2014 are added to the bulk purchase discount of c10-15% and the currency depreciation (-24% for a USD buyer), one can appreciate the scale of the opportunity on offer to Institutional and Corporate investors.
Looking forward these Investors are optimistic. They cite the following reasons:
The negative news has been ‘priced-in’, leaving limited scope for further downside.
The downturn is mature, being 4 years from the peak.
There are genuine signs of the market bottoming with distressed sales by Developers typically a sign of capitulation near a market bottom.
There are few distressed opportunities in a world of low interest rates/QE.
A reversal in sentiment. Many expect sentiment (and price) to reverse over the next 12 months. They take the view that Brexit negotiation will ultimately result in a reasonable outcome for the UK as economic disruption to the EU economy is something that won’t be tolerated by National European Leaders.
A possible amelioration in tax policy: The UK has some of the highest property taxes in the world and London transactional volumes have fallen c25% since the 2014 tax changes, damaging the fluidity of the housing market as well as the tax take. Many Government MPs including Boris Johnson and Jacob Rees-Mogg (favourites to be next Leader of the Conservative Party/Prime Minister) are vocal supporters of a cut in SDLT. Johnson has recently called on the Government to slash the “absurdly high” levels of stamp duty and Rees-Mogg has urged a reduction in SDLT “as a matter of urgency”. It is not inconceivable therefore that the current SDLT rates may be revised downward and a more amicable tax environment may prevail.
The Competitive Advantage
Corporate Investors also benefit from a fundamental competitive advantage versus Individual Investors. These are:
100% Tax Deductibility of Interest Expense.
Stamp Duty Relief on the purchase of Multiple Units (Multiple Dwelling Relief). As an example, the purchase of a single £10m investment property by an Individual attracts SDLT of £1.413m. Under MDR the purchase of 10 Properties for £10m would attract a Stamp Duty bill of £737,500 representing a £675,500 or 48% saving.
Wear & Tear Expenses are tax deductible.
Corporation tax on rental profit (falling to 17% by 2020). Under the new tax regime Individuals are taxed on rental REVENUE at their marginal tax rate (for many 40%+).
How Ludgrove Can Help
Through our network of contacts Ludgrove has access to the bulk purchase market. On the your behalf we can source, negotiate, acquire & help manage these units. You will benefit from:
A significant discount to Market Value achieved via Bulk Purchase.
Access to a depressed segment of the market with the potential for significant future capital gains as well as an annual rental income.
Significantly lower Stamp Duty under Mortgage Dwelling Relief (please see the example above)
Hassle Free Management: Ludgrove can assist you with the rental management.
Limited Capital Expenditure: New build units require minimal investment over the course of the first 5-10 years of ownership.
Lower Mortgage rate: We would expect to achieve a market-leading mortgage rate given the size of the transaction.
Wear & Tear Expenses are tax deductible.
Profits taxed at Corporation tax (17% by 2020) compared to a tax on REVENUE at Individuals marginal tax rate (40%+ for many).
If you'd like to find out more about the bulk purchase opportunity and how Ludgrove can help, feel free to get in touch.
Fraser Slater
Ludgrove Property
43 Berkeley Square
Mayfair
London W1J 5AP
Tel: +44 (0)207 889 2860/ +44 (0)7713401999
Email: info@ludgroveproperty.com
Twitter: @LudgroveP
Facebook: @ludgroveproperty