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The recent Deloitte real estate seminar focused on a number of hot topics and industry trends that service providers and their clients need to be aware of as 2015 gets underway in the real estate sector. Deloitte is the pre-eminent service provider to the UK real estate sector and a number of UK experts joined with the local team to provide these market insights.
Will Matthews, a senior manager in Deloitte’s London real estate group, reported that risk appetite for UK CFOs was at a seven-year high, although the European outlook remains less favourable, with CFOs reporting improved prospects in the UK, USA and Japan.
Overall real estate capital values are up 12.5% in the past 12 months with central London real estate leading capital growth followed by office and industrial space in the South East of England. Regional retail space lags behind, whilst secondary office space is now exceeding prime in terms of total return performance. Real estate investment is being driven primarily by overseas interests and institutions.
Looking at Europe, it was reported that whilst the faltering economic backdrop prevails there is positive sentiment across some European countries’ real estate markets including those in the Netherlands, Spain and France.
Back in the UK, the most recent Deloitte Crane survey reported on a 17% fall in construction over the last six months in London and limited developments in the pipeline.
Mr Matthews concluded with his thoughts on outlook: ‘Scope for further yield compression has shifted towards secondary stock and rental growth will begin to play a stronger role in performance, whilst overall political risk is moving up the agenda and we expect that 2015 will see capital growth slow.’
For Guernsey structures, investment in real estate appears likely to continue to offer positive yield advantages in a low interest environment; the island’s strength in this sector appears well supported by a return cycle that still has further to run although the pace of growth may be beginning to slow, particularly in terms of prime capital growth.
Alex Adam, Director of Advisory in Guernsey and Will Newton, Director of Corporate Finance from Deloitte’s London office, reported on life after the comprehensive Banking Union assessment.
Last year, banks across Europe underwent a review of their loan books using standardised criteria, with a focus on lending to real estate. As a result, banks were required to record a significant increase in non-performing or bad loans.
Furthermore, the European Banking Authority is implementing rules which mean that banks can no longer be extend or amend the terms of lending without being forced to classify the loans as non-performing.
Together with increased capital requirements, these measures increase transparency and focus on banks’ lending books.
The expectation is that the sales of real estate loans which had occurred in the UK and Ireland will now pick up to a much greater degree across Europe.
For Guernsey, on the one hand investment structures with excessively large loans against real estate might expect banks to be less accommodating, whilst on the other hand there are likely to be opportunities for investors to put money to work purchasing loans from banks that are deleveraging. Overall an increase in transactional activity in the real estate financing space is expected. A number of alternative funding providers to real estate had been launched in Guernsey and these developments were seen as positive for them.
Alison Vine, a director at Deloitte in Guernsey, picked up on a number of UK tax changes including some included in the Autumn Statement.
In particular she noted the new SDLT charging provisions for residential properties which are beneficial where purchases are of properties for less than £937,500. Also HMRC has recently confirmed that non-UK owners of a UK residential property will potentially be subject to UK capital gains tax on the sale of that property after 5 April 2015. Only gains accruing after that date will be caught; therefore any increase in value to date is locked in and is outside the charge. Owners will need to obtain a value at 6 April 2015 on which to base future charges but may elect for original price, or time apportionment if beneficial.
The rate of charge will depend on the nature of the owning entity, with companies probably paying 20%, trustees 28% and individuals 18% or 28%. Reliefs and exemptions may apply, including an extension of the right to the annual exemption for individuals and Principal Residence Relief for non-residents, in certain circumstances.
David Becker, lead partner for real estate at Deloitte in Guernsey, said: "Our real estate seminars provide valuable insight and expertise to participants to enable them to stay ahead of key changes in a fast-paced real estate industry. From a Guernsey perspective, I believe the expected increased transactional activity in the European real estate markets will benefit the island as more structures are set up to take advantage of the significant investment opportunities."
