Sunday Supplement – 10/01/2021

by Jan 10, 2021

Lots of amusing memes this week about cancelling subscriptions to 2021, 7 and 10 day cooling off periods etc. – no doubt that the nation is fed up with lockdowns. However, polls show 80%ish in support which is no surprise – the speed of spread is far faster than before given the amount that is now known about Covid versus what wasn’t known back in March 2020.

We’ve got to stay positive and glass-half-full – lots of sensible stuff being said and done by people around and about, and lots of businesses not drastically affected. Still feel for those who have slipped through the cracks – on a personal level I definitely fit in that category, but given that my tenants have been largely well looked after by the government I have no gripe. The more exotic your strategies, and financing arrangements, the harder the whole thing is from a property perspective.

Tenant demand continues at record levels for any voids and it is not easy finding rentals, or stock to turn into rentals/rentals to fix up. Stock levels are low. It will be interesting to see how auctions go in late Jan/early Feb.

There are a couple of sizeable pieces of news this week however that I wanted to concentrate on. The first is the leasehold reforms.

The headlines tell us that millions are set to benefit. These are of course “tenants” in the eyes of the law and as per usual, there are more tenants than landlords here. Let’s deal with the high level statements that have been made by the housing minister:

1) Ground rents will be zeroed on extension. Thus, passing income from freeholds will be destroyed. The only financial benefit will be reversions/lease extensions, and that will only be once for the next 990 years.
2) There will be a “fair, simple, new formula and will be lower than those currently charged.” This sounds like good news for the leasehold owners.
3) Ground rents for new homes will be abolished this year.
4) (unsaid but implied) – the rest of the legislation will take several years.

Sitting outside of it somewhat – although as a leaseholder of a handful of leasehold properties – it seems that the greed of the last 30 years by some developers is being punished as things have gone too far. I do not know, however, where this leaves leasehold properties in the north of England, where often, material/residual value in the freehold made the sites stack up – the gap will need to be plugged by either grants, cheaper land (good luck with that!), lower build costs (things are going the other way at the moment), or higher end prices for FTBs (which trickle upwards every year anyway of course) – grants could include different incentives for buying new build stock, and potentially linked to EPCs I suppose if zero carbon is high enough on the agenda.

Landlords overall should remember though – if celebrating this victory because you have a number of leasehold properties, it is worth bearing in mind that similar policies for tenants of rentals may well be coming if this is a roaring success, and it is somewhat hypocritical to champion one and decry the other!

It effectively winds up some companies with leasehold interests over the next 100 years or so, it is quite clever from a “value destruction” perspective on the face of it because I am presuming the “fair, simple, new formula” will take into account current ground rent passing and the moving of that to zero, alongside some consideration for the current value of the flat. Of course, if that assumption is correct – it is difficult to see how it will be cheaper to do this – it feels like it will be more expensive…….but I do not know what percentage of people are currently extending by private negotiation rather than following the legal process through to conclusion. I’m sure overall the information is generally asymmetric and lies in the freeholders court at this time. The talk is about saving “tens of thousands” but I doubt this can possibly be across the board or even an average. The freeholders will be putting up one almighty fight. They have of course seen very large gains before this all kicked off some years ago, because of the very low interest rates (which have got even lower) so this looks like it will offset some of that.

The other issue which has been widely discussed this week is the stamp duty holiday and any extension. Rishi seems to have been keen to continue ruling this out but saying little more than that. He is less keen to rule out a furlough extension at this point it seems from his choice of language.

I am going to be contrarian here and suggest that there will be an opportunity for a “grand reopening” at some point in March. Taking everything out of the obvious doom and gloom that is around us, I rely on the mathematics – and the math’s show right now everything that we knew would happen. Christmas and gettogethers, legal or illegal, sensible or not, have about a 3 week hangover. The “real first lockdown” started on 23rd March but arguably was very close and behavior was changing from around 16th March. The previous peak (we can only really look at deaths, because case measurement has changed massively since March/April 2020) was April 12th. This suggests a 3-4 week period from the height of “mixing” events.

That sees a peak at somewhere between 14th January (3 weeks after Xmas) and 28th January (4 weeks after New years’ eve). The expectation by the end of next week is 1.5m vaccinations a week, and, staying with the figures, one thing that is not disputed is that age is the very greatest predictor of severity of Covid. Once we get to around 12-13m vaccinated I believe that sees the over 65s vaccinated, and that should be around 21st Feb or so (half-term, for those with school aged children!).

The government were before keen to “eat out to help out” and whilst this looks well-intentioned but misguided, this is where they will want to focus. That time is VERY close to the budget and some very large decisions will have to be made. They will want independence for businesses and people and to yank the morphine drip out of the arm. Furlough without a doubt continues until 30th April and I’m going glass-half-full, reopening’s will be earlier than that date.

In the middle of that melee lives the stamp duty holiday. Quoting from the MD of Fine and Country:

“House price forecasts for 2021 range from mildly positive to greatly negative, reflecting uncertainties facing the economy and the housing market. The Dataloft consensus house price forecast, based on the average from five leading commentators, expects 0.9% growth in 2021. The Office for Budget Responsibility (OBR) forecast 1,111,000 residential transactions to complete in the year to March 2021, rising to 1,279,000 in the year to March 2022”

Forecasts look understandable. The specter of unemployment, which is likely felt in q3 2021 (Subject to further kicking of cans down the road), is more likely to weigh on prices in 2022. The specter of repossessions and debt pressure is another matter – also currently scheduled for q3, but constant extensions are meaning there is no certainty here either.

A sideways market to me makes sense (with volatility as I have said a number of times). There will be times when it looks dire, but expect there still to be buyers. One thing stands out to me as looking wrong above. Bearing in mind we would typically see around 1.15-1.25m transactions in a “normal” year, and stamp duty holiday will definitely have brought forward some activity into the YE March 2021 rather than YE March 2022, is it really likely that we see 160k+ more transactions in the next tax year? The SDLT holiday has created a mini-bubble and a series of transactions that don’t make a lot of sense, in the face of everything else going on, and a massive amount of demand – even in the face of an extension, the low-hanging fruit has been picked and in the more likely scenario of either a reform, partial reintroduction or a cliff edge, surely April and May look fairly grim in transaction numbers and sales agreed at the very least! Who am I to argue with the OBR? We will find out.

One further note on crypto. I made a post on my personal timeline about it this week. I am sticking with the dinosaurs here – I think digital currency is unavoidable, I think the blockchain is a brilliant idea that has so many practical uses – but bitcoin itself, I fear, has too many negatives and too little in terms of fundamental value behind it to interest me. I’m pretty robust on only gambling when I have an edge – and I see no edge here, I see castles in the sky “someone will pay more tomorrow than I am paying today”. It IS gambling and don’t gamble more than you can afford to lose – and as they say these days – “when the fun stops, stop”.

Well done if you’ve got to the end – you may have noticed our 3-times-weekly Facebook lives have disappeared from public view, we are instead running mastermind sessions in the private members-only group that we run, and have shaken up some of our content for the new year (and the new lockdown of course).