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Reducing buy to let taxes through these property sectors

Posted by AlexanderE on March 12th, 2020

With it becoming more difficult for landlords to make money through buy to let, what other property sectors are open to investors?

Landlords are finding it increasingly difficult to make a profit through buy to let property due to additional taxes levied and the scrapping of mortgage interest tax relief. The government has made buy to let a less attractive option and due to the difficulties, between 24% – 38% of landlords will consider selling up. This is despite the lowest amount of rental reductions ever according to ARLA and a lack of supply across a significant number of the 390 local authorities across the UK.

Where opportunities exist

The student property sector has been a favourite amongst investors for several years. In 2019, £8 billion of transactions were conducted in the sector, indicating that the appetite for student property is not subsiding. The two-year work visa after international students graduate will have a positive effect and was introduced to address the fall in international student applications. Over the next decade the government wants to increase the number of international students studying in the UK to 600,000.

Sir Dominic Asquith, British High Commissioner to India, said:

This is fantastic news for Indian students, who will now be able to spend more time in the UK after completing their degree, allowing them to gain further skills and experience.

The UK is home to some of the best higher education institutions in the world and continues to welcome international students. I’m delighted that numbers of Indian students coming to study in the UK are constantly increasing, having doubled over the last three years. Last year alone we saw a massive 42% increase.

Investing in Student Property through shares

There are various investors platforms like AJ Bell where UK investors can purchase shares in student accommodation a REIT like LSE:DIGS which has recorded 37% increase value since March 2019 and pays a yield of 3.04% OR LSE:ESP with 9% growth since 27th March 19 and pays a 5% dividend yield.

Unite Group the largest listed student accommodation provider in the UK recently acquired the Liberty Living portfolio PLC for £1.4 billion in Q4 2019. The confidence that Unite has placed in the student accommodation sector to make the purchase is certainly an indication of the future profitability of the student property sector, with Knight Frank estimating that the industry is worth £53bn. Further confidence is indicated as in February 2020 Blackstone has agreed to purchase IQ Student Accommodation from Goldman Sachs and Wellcome Trust.

Unite also announced that the value of both its associated funds rose during the third quarter of 2019. Its property portfolio was independently valued at £2.45bn, an increase of 0.6%. To June last year, London-focussed student accommodation real estate investment fund GCP Student Living bucked the broader commercial real estate market and reported a 14.8% total shareholder return. With large companies and trusts making such profits, it is no wonder the sector is becoming appealing to individual investors.

Investing directly into student property

Some investors prefer to own property directly rather than take out shares in a company. The good news is that they can purchase student property investment without having to pay stamp duty as it is commercial property under the £150,000 threshold. Property investment companies like One Touch Investment source properties within the best student towns and cities.

One student property investment example is The Mill in Lancaster. Lancaster University is consistently rated in the top ten across all the league tables and attracts a large proportion of international students due to its prestigious reputation. Units in The Mill start from £85,000 and an 8% yield is guaranteed for five years.

Another popular student city is Sheffield because of its vibrant nightlife, excellent universities and affordability. Trippet Court is a student property development in Sheffield’s city centre. It is located just a ten-minute walk away from Sheffield University and a thirteen-minute walk away from Sheffield Hallam University. Trippet Court also offers an 8% net rental yield for five years but has a slightly lower entry point at £64,950.

Investors would typically purchase student property off-plan with stage payments over the development period of twelve months. This makes the cash investment amount more manageable for the average investor.

For those that prefer to invest in property that is already complete and generating income, we have completed student property units in Liverpool. The units are priced at an affordable £54,500 and generate a 7% rental yield per annum.

Investing in care homes

The UK has an ageing population and does not have the facilities to accommodate it. The UK also does not have the resources to build new care facilities and is becoming increasing reliant on private companies to bridge the gap. Demand is expected to rise by 9,000 care beds per year whereas the current build rate is 5000- 6000 care home beds per year. These statistics alone prove that there is a sustainable need for care beds from private companies.

The problem with the lack of care home beds is only compounded by Britain’s ageing population. The number of over 85s is set to double within the next 25 years, new data from the Office for National Statistics has shown.

Investing in care home REITs

Target Healthcare REIT only invests in modern, purpose-built care homes which it leases to experienced operators across the UK thereby providing a diversified tenant and geographical spread and income mix. The current yield is 5% less performance fees and some projected capital uplift.

Octopus healthcare is a closed fund which invests in elderly care homes and specialist healthcare such as GP surgeries. The fund has shown steady earnings growth and continues to attract capital.

Purchasing a care home room

Investors can purchase a room in a care home facility. A developer would usually buy the property and allow investors to purchase rooms for a set cost. Then the developer would put a management company in place who would undertake the day-to-day running of the facility. The investor would usually receive a set yield for a certain number of years. After that time a buy back option is offered where the management company can either buy back the unit from the investor at 125% of the purchase price or a new contract is negotiated between the investor and the management company.

Benefits of investing in the care home sector

The benefit of care home investment is that it is hands-off. A management company is put in place which undertakes the day-to-day running of the care home. Investors do not have to worry about finding someone to occupy the room or the maintenance of it. It is also classed as a commercial investment and stamp duty is not applicable on commercial investments up to £150,000.

As we have previously highlighted, there is significant demand for care home beds in the UK and as the government is not keeping up with that demand, they are looking to private companies to bridge the gap. Here at One Touch Property, we source care home investment opportunities in areas with the highest demand, allowing for good occupancy levels and rental yields for investors.

We think it is important to source care home investment opportunities with reputable developers who have a record of operating care homes successfully. One opportunity we have is Clement House in the Acklam area of Middlesbrough. Clement House is as 5* rated care home that has been operational for 20 years.  Units are priced at £69,500 and investors receive a 10% net income guaranteed for 25 years. If investors wish to sell their unit before then, there is a buy back option in year 5 for 110% of the purchase price, and in year 10 for 125% of the purchase price.

Duchess Gardens is another care home investment opportunity in Bingley, West Yorkshire. It comprises 85 rooms and offers an 8% rental income for 22 years. Duchess Gardens is also complete and operational, and investors can start to receive income immediately. It is also below the threshold in which buyers would need to pay stamp duty, as units are priced at £77,400. Located close to the major towns and cities of Harrogate, Skipton and Leeds, the care home is well-placed to host the elderly and allow for their families to visit them easily. It lies next to some of England’s finest countryside and enjoys a prestigious horticultural heritage. Duchess Gardens accommodates people who need 24-hour personal support and would find it difficult to cope in their own home without assistance. On site features include a hairdresser’s, day centre, cinema room and religious service.

Yorkshire has been identified as a county with a pressing need for new care home facilities. Local councils in Yorkshire have recently closed or are planning to close numerous care homes, due to many being ‘outdated’ and unsuitable for the purpose which they are intended. This will allow existing care homes such as Duchess Gardens to achieve good occupancy levels and rental yields.

Conclusion

It is becoming increasingly difficult for buy to let landlords to make a profit on their property due to stamp duty charges and tax relief on mortgage interest being phased out.

Commercial investments in the care and student sector are usually below the stamp duty threshold and the demand is underpinned by the country’s age demographic and the global standing of its universities. Returns are often underwritten in contracts and can be between 8% – 10%. As these are hands off investments investors will not have to deal with the hassle of finding new tenants or day to day maintenance as they may have to do with a buy to let, freeing up more time for them to pursue interests elsewhere.

Also See: Student Property, Care Home, Care Homes, Student Accommodation, Years, Uk, Student

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