Since the 2008 financial crisis, the UK property market has overcome many hurdles including three elections each bringing their own business and investment changes and opportunities, Brexit and the latest issue which has affected 2020 and continues into 2021, Covid-19.
Sectors hit hard by Covid
Student accommodationStudent accommodation is a huge sector in the UK, with an estimated 2.38m students delayed returning to, or beginning, university until the 2021/2022 academic year. Cambridge University stated in May 2020 that all learning for the current academic year could be online. Despite this, we are still seeing this alternative sector being of interest to investors and clients specifically accommodation which has personal washing facilities per student/tenant, as the importance of personal hygiene is now evidently prioritised.
RetailDespite many retailers having an online presence, the severe drop in footfall has proved too much for many businesses. This has especially been true for those that rely on shifting a high quantity of low-cost products with their margin coming from on the high street customers.
Following the issues on the high street, several major brands have gone into administration including Laura Ashley, Debenhams and Cath Kidston. Retail had seen a welcomed boost with the run up to the festive season, however with lockdown 3 implemented thereafter and ongoing there have been further casualties. Many retail businesses were struggling pre-Covid, but the pandemic has put the nail in the proverbial coffin.
The sectors survivingThe micro sectors which seemingly have weathered this storm are the supermarkets, warehousing, logistics and retail parks and we would expect to see further opportunities for investors in this area and an increase in assets becoming mixed use.
Mortgage issuesFollowing the government announcement that tenants could not be evicted during the UK lockdown, many tenants stopped paying rent due to economic uncertainty. However, landlords still had liabilities to meet.
Although many lenders were willing to review debt obligations, the results varied on an individual basis. For many, especially those larger institutional investors with deep pockets, debt continued to be serviced despite falling income.
Operating during Covid - InsuranceMost businesses had to switch to a working from home policy, creating more than just operational challenges as they struggled to assess the impact of covid on business strategy.
Linking back to real estate, one problem we faced was trying to obtain insurance quotes in a timely manner. Usually, one of the most reliable cornerstones of the real estate cycle, we are used to obtaining quotes for insurance within a 48-hour window. During the pandemic though, we had seen a delay to obtaining quotes in a timely fashion due to increasing pressure on the insurance market, this has since returned to pre Covid-19 levels in respect of turnaround time. Seeking renewal terms early is key and we have seen value added in being organised in this area.
Government interventionDuring 2020, the UK government was quick to prop up the property market. Changes to the smaller value residential market had been welcomed with open arms. An extension of ‘stamp duty holidays’ for residential transactions has been extended in England and Northern Ireland until July 2021, with the current threshold for residential properties at £500,000 (being tapered between July 2021 and September 2021 to £250,000). There has been an increase in transaction levels in this sector which should continue as the deadline nears. This is positive news for residential developers too, who will likely see an increase in demand for existing units, generating liquidity and freeing up reserves for future developments.
The UK budget was released on the 3 March 2021 and although this was not overly exciting, the key takeaway point was the UK Government are looking to protect jobs and livelihoods and provide continued support and encourage investment. For a more detailed report please read our Budget 2021 highlights for further details.
For the cash rich investorIn 2019 there was a noticeable fall in transactions in the UK with many cash rich investors waiting with bated breath for news on the outcome of Brexit. Many feared that with Covid the level of trade would remain stagnant, however, Savills announced positive news that the commercial investment market finished strongly in Q4 2020, where £12.4bn was transacted with total investments for the year reaching £41.8bn. This was a fall of 22% on 2019, however a strong performance given the market.
For the active international investorThe Office for National Statistics data revealed that in 2019 Hong Kong and mainland Chinese buyers invested £7.69 billion in London property including £750 + million invested in residential property specifically in the City of Westminster and the Royal Borough of Kensington and Chelsea. Despite the drop in transactions throughout 2020, the UK property market is set to remain stable and continues to be an attractive location to Asian investors. According to Hurun Chinese Luxury Consumer Survey 2020, “Chinese high-net-worth individuals (HNWIs) are currently putting 12.5% of their wealth into overseas assets, with London ranked as the most popular investment destination”.
Structuring optionsWhen it comes to acquiring and holding UK Real Estate, Special Purpose Vehicles (SPVs) together with Jersey Property Unit Trusts (JPUTs) have a lot of appeal. We are seeing the popularity of JPUTs grow: they are a familiar approach for investors, lenders and authorities whilst also being easy to establish. Jersey has a proven track record in this area with an experienced workforce that have vast experience in the real estate sector.
As regards to capital gains, JPUTs may be structured to make a transparency or exemption election for UK CGT purposes, under the rules for non-resident collective investment vehicles (CIVs) that came into effect in April 2019. Both elections have the effect of preserving the tax neutrality of JPUTs for gains, shifting taxation of gains to the level of the investor.
Looking ahead – five thoughts
- The property market continues to weather crises well and proves itself a generally sound investment.
- Smart investors, both within and outside of real estate, appreciate that diversification is one of the best protective measures you can have against unsystematic risks.
- There will always be opportunities for astute investors who are cash rich. With interest rates expected to reduce further, return on capital will be a key focus and there will be property investment opportunities if held for the long-term which should yield positive returns.
- Corporate governance will remain a cornerstone of the real estate investment market, and investors, now more than ever, will want to seek comfort that their assets and funds are being housed in a reputable jurisdiction with a respected provider.
- We envisage that JPUT’s will be a structure that will increase in popularity due to the traits of flexibility and simplicity which make them favourable options for holding and acquiring UK real estate.
*Originally featured in BL Global September 2020 https://www.blglobal.co.uk/Features.aspx?id=hawksford-the-real-estate-picture
*Updated in May 2021
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