COMMENT: Property is cyclical. I’ve lost count of the number of times that investors – both part-time and institutional – have encouraged me to acknowledge that a downturn is coming in London real estate and that discounted value is just out there, on the horizon. Yet for all of this talk of downward pressure, the market keeps on reinventing itself, often supported by urban regeneration and consumer appetite – but most frequently supported, tweaked and manipulated by government legislation and taxation.
Property is a much more agile beast than we give it credit for. And buyers nourish their hunger for property assets every few years. During the last boom in London real estate, which started to fade towards the end of 2014, we saw the meteoric rise of the buy-to-let investor. Those weren’t just investors with spare capital who might hold a few flats as part of their pension diversification. They were institutions too, looking for large-scale assets that enabled them to scale up with their PRS schemes and hold vast swathes of property, supported by banks and a yield model that became the envy of many a pension fund manager. This government has indirectly supported the scaled-up appetite for PRS by winding down Help to Buy, leaving many individuals with the view that they may never be able to purchase their own home.
This is further compounded by the withdrawal of tax relief on mortgage interest, restricting the ability of investors to offset their mortgage expenses from their rental income. Combine this with restrictions on buy-to-let mortgages and the additional stamp duty surcharge on second homes, and it looks as though government has rather smoothly shifted this asset class into the hands of institutional investors.
Out in force
What is to become of the private investor? Having rejected traditional buy-to-let models, they are out in force targeting mixed or multi-use buildings to add to their portfolios. The benefit of such investments far exceeds that of investing in private homes, with lower entry costs due to competitive stamp duty levels, increased tax efficiencies during ownership, plus a lower level of capital gains tax when looking to sell the property. There are inheritance tax benefits as well.
Much is being made of this shift. Pressure is being placed on the government to introduce a reduction in business rates and this will only serve to stabilise town centre locations and potentially drive commercial rents higher. The cost of renting in the UK has also risen rapidly since Covid, and both of these aspects reward the landlord-investor participating in mixed-use to a greater degree.
There are profound advantages to the mixed/multi-use model, too. On a larger scale, developing the right mix of retail and restaurant facilities within a development can boost residential values. Furthermore, the wants and desires of millennials are more geared towards collaboration and interaction so they want to see offices or flexible working spaces with good WiFi, communal spaces and interesting amenities available on their doorsteps.
Need to survive
Recent notable examples across London include the spectacular redevelopment of Battersea Power Station, and landmark retail destinations such as John Lewis on Oxford Street and House of Fraser in White City have secured planning permissions for the introduction of multiple office floors. It may just be a matter of time until these sites incorporate further residential apartments to complete the picture.
When you look at town centres and their intrinsic need to survive and serve the community, it is logical that increasing the number of residential homes in city centres takes precedence for town planners and strategists. Certainly, the Mayor of London is supporting this, making the creation of mixed-use and build-to-rent schemes a priority with numerous, substantial former retail blocks, ear-marked for mixed-use development with cinemas, restaurants, office space and homes all under one roof.
Breathing life back into the high street is serving the community, reigniting retail and, perhaps, rewarding the savvy investor too.
Adam Stackhouse is head of developments and commercial investments at Winkworth
