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5 Reasons Multiple Apartment Purchases are on the Increase

Blocks for Sale

We have seen an increase in High Net Worth investors and Family Offices purchasing multiple units or whole blocks of apartments.

In this blog we look at why investors are drawn to residential property and what are the benefits of buying multiple apartments.

1. Demand and Supply Imbalance

UK Housebuilding: Completions by Sector (1949 – 2018)

Source: ONS, 2019.

Demand: Population Growth

The residential market in the UK has experienced strong demand in the past few decades. Population growth between 2000-2017 grew at a rate of 0.7% pa, reaching 66m in 2017 (Office for National Statistics).

Demand: Decline in household size

Partly as a result of an ageing population, there has been a decline in the average household size from 2.8 people in 1971 to 2.4 people in 2017 (ONS).

Demand: Private renting has also increased

Now accounting for 19% of households in England (English Housing Survey, 2017-18), up from 10% in the 1980s and 1990s. There is huge scope for this to increase. In New York 65% of residents rent and in Los Angeles 60% rent (governing.com).

Supply: Decreasing Supply of New homes across the UK

Supply of New Homes being completed fell from c.425,000 in 1968 to c. 200,000 in 2018. While the private sector’s contribution has remained a stable 150,000 completed properties a year since 1949. Local Authority building has decreased dramatically from a peak of 253,000 in 1953 (77% of supply) to 4,000 in 2018 (2% of supply) (ONS).

The residential market in the UK has experienced strong demand in the past few decades. Population growth between 2000-2017 grew at a rate of 0.7% pa, reaching 66m in 2017 (Office for National Statistics).

Demand: Decline in household size

Partly as a result of an ageing population, there has been a decline in the average household size from 2.8 people in 1971 to 2.4 people in 2017 (ONS).

Demand: Private renting has also increased

Now accounting for 19% of households in England (English Housing Survey, 2017-18), up from 10% in the 1980s and 1990s. There is huge scope for this to increase. In New York 65% of residents rent and in Los Angeles 60% rent (governing.com).

Supply: Decreasing Supply of New homes across the UK

Supply of New Homes being completed fell from c.425,000 in 1968 to c. 200,000 in 2018. While the private sector’s contribution has remained a stable 150,000 completed properties a year since 1949. Local Authority building has decreased dramatically from a peak of 253,000 in 1953 (77% of supply) to 4,000 in 2018 (2% of supply) (ONS).

2. Tax Saving

You can save £365,000 in tax!

Example of Chambers Street, Edinburgh (9 apartment block sale).

Any purchase of six or more dwellings in a single transaction can be treated as a non-residential transaction for the purpose of Land and Building Transaction Tax (LBTT).

There is a large tax saving to be made on purchases of six or more properties in a single apartment block, reducing the % tax paid from c.14% to 1%.

For more detail, law firm Morton Fraser have produced an excellent blog which outlines the process in calculating Multiple Dwelling Relief (MDR) on property purchases.

In practice, if purchasing 6 or more properties, your funds go further.

 For example, Chambers Street, Edinburgh is a block of 9 apartments currently for sale for offers over £2.65m. If a sale is agreed at £2.75m, you would pay £396,250 in tax compared to £31,500.

You could save £365,000 by applying multiple dwelling relief!

3. Inflation Beating Long Term Income

Residential rents have inflation beating characteristics, with rents having increased by 3.9% per annum compared to Consumer Price Index (CPI) growth of 2.6% between 1988 – 2019 (ONS)

Residential property is a defensive asset as despite economic conditions, people need to rent a home. In fact, in worsening economic conditions, rental demand relative to owner occupation demand is likely to strengthen as a result of high interest rates, reduced mortgage availability or general economic uncertainty (Seven Dials Financial, 2019).

During the Global Financial Crisis, residential rents increased by 7% (English Housing Survey, 2017 – 2018), while both dividends and commercial property rents fell. 

4. Attractive Returns

Seven Dials Financial (2019) also note that Residential property has performed better than most other asset classes in recent decades, with strong house price growth in real terms, estimated at 2.6% between 1975 and 2019 .

Over the medium and long term residential property has delivered attractive returns. MSCI data records residential as the strongest performing sector since 2000, with returns exceeding those in other sectors by 2% pa.

Over the long term residential has delivered returns similar to equities but with lower risk (7% pa for global equities versus 6.7% for global residential from 1870 – 2015) (Eicholtz, et al 2019).

While previous historical performance is no guarantee of future trends, Seven dials financial (2019) expect returns of c.6-7% pa (c.4% yield plus 2-3% income growth over the long term.

5. Leverage

As an investor it is possible to borrow up to 75% of the value of the property, meaning you only have to put down 25% of the value as equity. This magnifies returns on cash invested to 14% – 16% + pa, making residential property a particularly attractive investment.

We do not offer advice on how much borrowing to take out on a purchase. Many investors buy with 50% LTV or 100% cash. The decision is entirely up to you and your personal situation.

Macgregor are able to introduce mortgage brokers or private banks who are able to help borrowing for international investors (including from mainland China) to make the process as simple as possible.

While previous historical performance is no guarantee of future trends, Seven dials financial (2019) expect returns of c.6-7% pa (c.4% yield plus 2-3% income growth over the long term.

Get in touch

Michael Hodgson

07813 082 468

0131 283 2833

michael@macgregorproperty.co.uk

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