UK: Property Survey 2006

Last Updated: 12 October 2006
Article by John Voyez

As part of our continued commitment to the property industry, Smith & Williamson has carried out its fourth annual Property Survey to identify key trends and issues affecting the sector.

The survey included questions on finance, tax, investment and accounting issues and the majority of responses came from property investors, developers and their professional advisers from across the UK. Although clear trends are always difficult to identify, the results do highlight certain issues that are currently concerning the industry.

Planning

Planning problems continue to be of particular concern to the survey respondents. As one would expect, the results show that UK economic performance is the key to the property industry as a whole, but the survey results also point to planning regulations as a critical factor.

When asked what major influences may affect developers’ and investors’ decisions over the next five years, about a quarter of the respondents cited planning issues and almost three quarters of responses point to Planning Gain Supplement (PGS) as a potential disincentive for property developers, an increase of about 10% from last year (Figure 1).

Figure 1: Are the proposals for a planning gain supplement a real disincentive for property developers?

The strong interest in planning regulations may reflect the current debate regarding the PGS. The PGS (note the Government’s attempt to avoid describing this as a tax), will tax the increase in value that occurs when planning permission is granted for a particular development. This clearly gives cause for concern.

However, there is currently some confusion arising from a series of conflicting reports in the property press which indicate that the Government’s proposals for the PGS may be abandoned. One article claimed that the Government now favours a ‘roof tax’ levy on completed developments following the successful pilot of such a scheme in Milton Keynes. It was then reported that the PGS proposals would be dropped following extensive criticism that a tax reliant on a valuer’s opinion would be unworkable. However, Government sources are said to have denied plans to shelve its proposals.

Business Confidence

As in previous years, confidence in the business outlook for the UK commercial property sector over the next 12 months remains high (Figure 2). Over 90% of respondents feel reasonably confident or very confident on this front, with a small incremental increase year on year over the period that this survey has been carried out.

Figure 2: Confidence in the business outlook for the commercial property industry in the next 12 months.

However, a recent article in The Times suggests that investors in the London commercial property market may be overly optimistic. Some developers are paying high prices for office (and residential) development sites based on highly optimistic financial models. They may also be in danger of building too much speculative office space and relying on very narrow margins with only a small comfort zone. Only time will tell whether or not this optimism is well founded, but the cyclical nature of the property market should make investors wary.

Confidence in the outlook for the residential property industry also remains high. This probably reflects the continuing need for housing, particularly in the south, where the supply of affordable housing is not meeting demand.

Perhaps predictably, the ability to achieve real growth clearly remains a key business issue facing organisations, especially where success is generally measured by the ability to meet internal rates of return targets.

When asked what other major influences may affect developers’ and investors’ decisions over the next five years, almost half of the respondents answered ‘interest rates’. For some years the UK yield curve has been inverted, which means that longterm rates on Government securities have been below short-term rates. This reflects both strong demand from pension funds for long-term stable income to match their liabilities and a relative lack of supply of new paper from the Government and corporate borrowers. This has made borrowing against property attractive, where there has been strong profit growth over the past two years, and enabled companies to rebuild their balance sheets repaying existing debt rather than adding to their borrowings.

There are signs of a global slowdown over the next 12 months, which may increase the UK budget deficit while putting pressure on profits, both of which tend to increase borrowings. Even so, we would not expect long-term interest rates to rise significantly given that demand for long-term debt should still outstrip supply. Short-term UK interest rates have risen to contain inflation, but inflation is expected to peak in both the US and UK over the next three to six months and prime lending rates should follow suit.

Financial And Tax Issues

Only a third of respondents said that they would be looking to raise finance in the next 12 months, which is a decrease from last year. Perhaps of more significance is that 85% of those who are looking to raise finance stated that their preferred route is through clearing banks. This compares to last year’s 65%. Does this mean that banks are more willing to lend, and if less cautious than alternative funders, does this mean that the banks may not have learnt their lesson from the late 1980s/early 1990s?

Sources of inward investment into the UK property market remain varied. The Middle East and Far East/Asia are seen as the most likely investors into the UK market, with UK property yields remaining attractive for many (Figure 3).

Figure 3: Where inward investment in UK property is expected to come from.

The survey delivered slightly surprising results in relation to the Government’s proposals for Real Estate Investment Trusts (REITs) and whether these vehicles will enhance opportunities for investment in property (Figure 4).

Figure 4: Will the government’s proposals for REITs enhance the opportunities for investment in property?

Although over half the respondents believe that REITs will enhance opportunities, this percentage is lower than one might expect in view of the considerable press coverage we have seen. Possibly these figures reflect the size of the companies surveyed, as REITs appear to be the preserve of larger corporates. However, there are possibilities for the ‘smaller’ property companies to play a role in certain structures.

Stamp Duty Land Tax (SDLT) does not appear to have had a massive impact on the workload or results of businesses, as almost half of the respondents seemed to have little idea about the administration of SDLT. Presumably, many of our respondents are happy to leave this headache to their solicitors. We are however aware that there is a reasonably high level of SDLT planning aimed at mitigating the impact of this tax with the benefit of the savings generally shared between the vendor and purchaser.

Tax is a growing factor when making an investment decision of whether or not to sell. 91% of survey respondents confirmed this view, up from 88% in 2005 and 82% in 2004. It is possible that the buoyancy of the property market has hardened investors’ views on this, as tax on a substantial profit is likely to be a big cost in absolute cash terms, leaving less to invest in the future.

When extrapolated to the wider market, it gives cause for concern that tax is influencing investment behaviour in this way, with an impact on liquidity being the likely consequence. Perhaps the introduction of REITs is a counter to this potential brake on liquidity, as tax on disposal of properties held in these vehicles is not a factor in investment decisions.

The derivatives market is in its infancy and this is evidenced by our respondents’ views on whether it will assist in risk management. Whilst 31% felt it would assist, 67% were unsure, with the remaining 2% saying it would not. Once there is greater understanding of the potential role these products can play in managing risk in property transactions, it may help investors appreciate the benefits they can bring.

This year sees a slight increase in the numbers that appear to be adopting a more conservative approach to tax planning, following a significant increase last year (Figure 5).

Figure 5: How far those surveyed would go in planning terms to avoid a tax charge

This may be a result of the continued high publicity attack by HMRC on what many in the sector see as legitimate tax mitigation, and reflects the generally conservative attitude of many of Smith & Williamson’s clients.

Summary

John Voyez, chair of the Smith & Williamson Property Group, said responses generally confirm a reasonably healthy level of confidence in both residential and commercial property sectors. However, trends are extremely difficult to identify, and in a cyclical industry such as property, only time will tell whether such confidence is misplaced.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.