London realty market faces ‘major shock’ after tax rises

Bloomberg

London’s housing market is facing a “major shock” as private landlords offload properties because tax increases will reduce returns on their investments to near zero, according to analysts at Deutsche Bank AG.
New lending rules will also severely restrict the ability of investors, who have accounted for about 40 percent of purchases in recent years, to fund property purchases with debt, Deutsche Bank analysts Oliver Reiff and Markus Scheufler wrote in a report. Landlords selling homes may create an excess of properties on the market, damping prices.
“This has the potential to create a major shock to the market,” the analysts wrote, recommending investors sell shares in Capital & Counties Properties Plc, which is developing homes in the Earls Court neighbourhood. “A material number of owners will face pain and squeezes on returns.”
CapCo fell as much as 4.5 percent, the most since May 3, and was the biggest decliner in the 27-member Stoxx 600 Real Estate index. The shares were trading at 316 pence at 2:25 p.m. in London
Buy-to-let lending for home purchases fell 86 percent by value in April from the previous month, according to data compiled by The Council of Mortgage Lenders. Berkeley Group Holdings Plc, London’s biggest homebuilder, said sales reservations fell 20 percent in the five months through May, in part because of the increased taxes against rental investors. The referendum on EU membership has also impacted sales, the firm said.

Return on Equity
“New tax rules will reduce BTL returns on equity towards zero and result in low or negative cash flow, particularly for new landlords,” according to the Deutsche Bank report.
Developers are delaying new luxury-home projects in London after successive increases in sales taxes made building less profitable, consulting firm Arcadis NV said last week. The moves come after a 3 percentage-point increase in the stamp-duty sales tax for landlords and second home owners in April which followed an increase in charges for all luxury-home purchasers in December 2014.
There were 116,000 home transactions in the London market last year, about three percent or four percent of the total stock, according to Deutsche Bank. The German lender expects demand from all buyers to fall by about 20 percent because investment property is “considerably less attractive,” while demand for rental properties may fall by 50 percent.