Announcements by Chancellor George Osborne of changes to stamp duty land tax (“SDLT”) rates, and the manner in which they are levied on commercial properties, may have some potential to stimulate lower value investment in corporate real estate outside of the South East and major cities, whilst also encouraging owner occupiers towards the bottom end of the market. However, an increase in SDLT for higher value commercial real estate is likely to result in a more selective appetite from investors focussed on higher value transactions – a consequence that has been heavily criticised by many industry commentators.
In what has been described as a budget designed to appeal to families and small businesses, as opposed to the corporate investment and business community, the Chancellor indicated that 90% of commercial property investors will see their SDLT bills cut or remain the same, to be paid for by increased SDLT costs for higher value transactions. The zero rate starting band, and revisions to the tiered charging system, immediately reduces SDLT on lower value commercial acquisitions.
In terms of a regional impact, the benefits are most likely to be enjoyed by investors outside of the South East and major cities, and are likely to be attractive to prospective and existing investors with local knowledge of lower value markets. Additionally it provides an incentive for those looking to acquire premises for occupation rather than rewarding those solely seeking a suitable yield.
To a limited degree, existing investors (for instance those within the CRE backed distressed-debt market) may see some enhanced sell side pricing opportunities for their sub-prime collateral as reduced SDLT releases buy side capital to fund acquisitions – in other words an opportunity to squeeze a little more out of prospective purchasers, thus bringing the vendor closer to their target IRR. That said, the marginal SDLT benefit is unlikely to bridge the price expectation gap between buyers and sellers and it is highly unlikely that it was the intended consequence the Chancellor was seeking.
The higher value CRE investment community has reacted angrily to the scale of the SDLT increases and the lack of a transitional period. Indeed, we are already aware of one significant deal on the cusp of exchange that has been stopped in its tracks at the eleventh hour due to a seven figure increase in the developer’s prospective liability to SDLT. Whilst the deal will no doubt be re-engineered – and notwithstanding the additional SDLT liability – the time and expense of bringing all stakeholders back to the table (vendor, purchaser and a consortium of debt providers) is significant and, in some cases, could be the difference between success and failure.
So in economic terms, whilst the Chancellor’s SDLT initiatives may result in the return of smaller value regional assets into local private and business ownership, they will do little to enhance the appetite of the larger institutional investor community at a time when investment in corporate real estate is fundamental to the regeneration of so many parts of the UK. This point is further supported, anecdotally, by the divergence in the reactions from the small investor and institutional investor communities.
For corporate real estate insolvency and restructuring professionals, the effect of these changes is unlikely to be especially dramatic. It is possible some higher value deals may founder, potentially requiring the intervention using an insolvency process. On the other hand, they may assist in revitalising some geographic markets and improve realisations when marketing assets subject to existing enforcement processes such as receivership.