Overall this was a disappointing Budget for property

Phil Nicklin, Real Estate tax partner at Deloitte, comments on the impact of today’s budget on the Real Estate Industry.

“The extension of the stamp duty exemption will be welcome to first-time buyers, although it’s only for an extra 4 months. However, in an era where lenders want sizeable deposits from buyers, the stamp duty saving of up to £1,750 is important. Every little helps.

“The value of the exemption depends on which part of the country buyers are looking. Land Registry figures show that the average house price is less than £175,000 in all parts of England & Wales - apart from the South East (£190,000) and London itself (£298,000).”

“The proposed REIT rules will make it easier for tenanted pub groups to become REITs, but will make it impossible for the managed pub sector.

“Tenanted pub groups should be fine as their pubs are let on third party leases managed pubs are a different story.”

“Otherwise this has been a disappointing Budget for property.

“The Government had an opportunity to do things for cash strapped REITs that would have cost very little. The REIT rules were conceived in a property boom and are not necessarily appropriate in a crash.

“They’ve also missed a trick for the residential sector. They should have done more to encourage institutional investment in residential property, which would have helped kick-start the house-building industry. They should also have seized the opportunity to improve the REIT rules to facilitate residential REITs.

“The changes to Empty Property Rate Relief were hatched in early 2007 when he had a booming economy. But they took effect last April when the property industry and businesses in general were on their knees. It’s a shame that Government hasn’t been able to do anything more.”

End

Notes
Phil Nicklin leads both the Treasury-appointed technical group on REITs and REIT technical group of the Property Industry Alliance (BPF, IPF, RICS).
Mobile: 07798 651930
Email:  pnicklin@deloitte.co.uk

To speak to any of Deloitte’s tax experts, please call the Deloitte Budget Press Hotline on 020 7007 3333.

Follow our Twitter profile http://twitter.com/ukbudget as Bill Dodwell, Deloitte tax partner, gives up to the minute views on the 2009 Budget.

• Stamp duty exemption. Last September, the Chancellor announced a one-year hike in the stamp duty land tax threshold (to 2 September 2009), so that property up to the value of £175,000 would be exempt from the usual 1% charge. The normal threshold is £125,000. Since then, sales volumes have plummeted. The Chancellor has announced that the £175,000 threshold will remain in place until the end of 2009 (it was due to expire on 3 September 2009).
• Pub REITs. In his 2008 Pre-Budget Report, the Chancellor proposed measures to ensure that the REIT regime was only available as originally intended to legitimate property investment businesses with third party tenants. Groups that operate ‘managed’ pubs do not satisfy this criterion, whereas groups with ‘tenanted’ pubs do.
• Residential property measures. Against the backdrop of difficulties in the housing sector, it was hoped that the Government would announce the following:
  • Proposals to encourage investment in the privately-rented residential sector (PRS). Less than 100,000 new homes a year are being built compared with a government target of 240,000. Against this backdrop, the Homes and Communities Agency (HCA) lead by Sir Bob Kerslake has been considering how to encourage institutional investment in the PRS and kick-start the house-building industry.
  • Stamp Duty Land Tax changes. Mitigation of the stamp duty cost of assembling residential portfolios. Currently the rate of stamp duty is determined by the price paid for the whole portfolio, rather than the price of each individual property (which might enjoy a lower rate of stamp duty), which is an impediment to large-scale investors acquiring residential property portfolios.
  • Consultation on Residential REITs. Against the backdrop of difficulties in the housing industry, it was hoped that the Government would consult on a number of improvements to the REIT regime to facilitate residential REITs.
• Relaxation of the REIT tests in the current economic climate. It was hoped that the Government would take steps to help REITs through the downturn. These would include deferring their 90% distribution requirement and allowing stock dividends to count towards it.
  • Cash conservation: REITs are trying hard to conserve cash, as their LTV covenants are strained and new debt is difficult to come by. However, under the REIT rules, they need to pay 90% of their rental profits as a dividend (PID) within 12 months of the end of their accounting period.  Industry asked Government to:
    • allow REITs to defer payment of their PID, e.g. for 24 months instead of 12 months;
    • allow stock dividends paid by a REIT (shares issued in lieu of the cash dividend) to count to towards their PID requirement;
  • Interest cover test: REITs pay a tax penalty if the ratio of their Profits (before tax and interest costs) over Financing Costs falls below 1.25:1.  A number of REITs have had to renegotiate their LTV covenants with their banks and this has resulted in them having to pay significantly higher rates of interest.  This combined with falling rentals means the 1.25:1 ratio may be impossible to meet in the current climate. The property industry asked Government to relax this ratio
• Empty Property Rate Relief. The changes to empty property rates relief that came into effect on 1 April 2008 were intended to prevent property standing empty and to stabilize rent. They were conceived in early 2007, pre-credit crunch, at a time when the economy was booming and were expected to raise £1 billion per year.  However, the costs are proving to be prohibitive for many property groups and businesses, in the current economic climate. There was a welcome, but minor, relaxation announced in the 2008 Pre-Budget Report, but the proposals did not go far enough.

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