A budget of missed opportunities

The ailing property arena, largely cynical in its expectation of the Chancellor to offer help, fostered some hope that Mr Darling would come to the rescue in these hard times. Alas, he proved himself not a knight in shining armour, but a highwayman on what should have been a road to recovery. The British Property Federation (BPF) said that this Budget was a ‘confused web of missed opportunities and potential easy wins that the Chancellor has chosen to ignore’. It is not so much a question of what Darling has done, but what he hasn’t done.

REIT petite
When REITs were introduced in 2007, property was at its peak and spirits were high. This new piece of legislation was a welcome break for commercial property. Pan to April 2009: the Chancellor has the opportunity to make REITs an even better deal, adapting to drastically different circumstances. But no, he fails to make real changes. With REITs, he has apparently made existing legislation ‘clearer and more consistent’, if this is at all possible.

Perhaps one of the most significant amendments is the enabling of REITs to issue convertible preference shares, which is welcomed by the industry. On the ‘balance of business asset’ test, there will now be an accounting-based definition of REITs (previously, definitions differed for grouped and single-company REITs). And another measure clarifies how cash from property disposals can be apportioned.

The BPF is bitterly disappointed that the Chancellor didn’t listen to industry pleas to make REITs more flexible, particularly regarding the mandatory distribution requirement. Greater flexibility would certainly have made sense: how can REITs conserve cash while obliged to distribute 90 percent of their profits to shareholders? Offering the choice to issue stock dividends – if only in the short term – could have eased this conundrum.

Another idea being bandied about is to defer the entry charge of two percent, which is restricting new entrants to the REIT regime. Evidence from the US and Australia proves that REITs grow in response to increased flexibility; that they can play an important role in aiding recovery in the property sector after a crash; and that increased REIT flexibility can be a solution to the banking sector’s over-exposure to real estate.

With REITs, Darling initially provided all the right armoury to help the property sector to flourish. Now, it’s as though he has declined to update the weaponry with which to fight a change on the battleground.

Making allowances
Capital allowances will double to 40 percent for claims made in this tax year, for businesses spending more than £50,000 on plant or machinery. The Treasury estimates that this will cost around £1.6bn, and should support investment of around £50bn.

Neil Farquhar, head of capital allowances at Savills, says that these changes are a welcome boost to businesses planning to invest in UK commercial property over the next year. However, he points out that the net benefit will be limited, because it applies to just a few assets typically found in modern commercial buildings. New legislation, introduced last year, redefined many plant and machinery assets into a new category of ‘Integral Features’, available at ten percent. Assets within this category – which is what most businesses claim for – will not be affected by the change. Also, capital allowances are only of immediate benefit to businesses with current taxable profits; the new measures will not help those with trading losses. That would be quite a few, then. In any case, the Forum of Private Business estimates that only 15,000 of the UK’s 4.7 million companies will stand to benefit.

The list of technologies that qualify for Enhanced Capital Allowances (ECAs) has been amended, as has come to be expected of each Budget since their inception in 2001. ECAs allow businesses investing in certain green technologies to write off 100 percent of their cost against taxable profits within the period during which the investment was made. The amended list includes one new technology (uninterruptible power supplies) and two new sub-technologies (air-to-water heat pumps and close-control air-conditioning systems). Three existing, but little-used sub-technologies have been removed (air, ground and water-source heat pumps).

Stamp duty
The Chancellor’s measures on stamp duty are about as effective as a drop of rain in a drought. The stamp duty ‘holiday’, which extended the residential property threshold to £175,000 until September, will now be extended to December 31st. After that, the threshold reverts to £125,000. A couple of other minor amendments have also been made: the stamp duty ‘holiday’ is also extended to purchases under shared ownership schemes and by registered social landlords, plus the restrictions have been removed for SDLT relief regarding leasehold enfranchisement.

This amounts to no more than a little tinkering at the lower end of the market. Granted, it will help some first-time buyers save a few crucial pounds. But it fails to address property’s problems wholesale. Developers and investors were hoping for Stamp Duty Land Tax (SDLT) relief on bulk transfers or purchases, which would have helped get things moving. There has long been a campaign to raise the stamp duty threshold to reflect higher property prices. Even in a slump, this remains a valid point. The threshold should be raised – and kept there – to reflect at least average property prices, thus helping the beleaguered householder and investor alike. The remaining billions raised through SDLT should, if only temporarily, be pumped back into a property recovery programme.

Opposing forces
Darling announced that the government is willing to explore the possibilities of tax increment financing (TIF), a public financing method of funding redevelopment and community improvement. It seems we could learn a trick or two from across the pond – this is a proven method that began in the US more than 50 years ago. TIF could certainly help stimulate regeneration and its acknowledgement is regarded as a victory for the BPF, which has worked to persuade the government of its viability. Also, the Community Infrastructure Levy has been delayed
until 2010 – another welcome move.

Meanwhile, one of the Chancellor’s most blatant ‘missed opportunities’ was his failure to scrap the highly unjust Empty Rates Tax (ERT), which has left the industry aghast. According to the BPF, millions of square metres of property have been knocked down since its introduction last year. Liz Peace, the BPF’s chief executive, said that “regeneration could be the fundamental driver to recovery”, but the tax “undermines the viability of new development and investment”. In other words, this is a damaging tax that hinders growth. Demolished buildings and empty plots do nothing for local values or esteem. The government – and industry – would do well to explore more creative solutions to the use of empty buildings, in order to encourage new enterprise.

The Budget report’s title, ‘Building Britain’s Future’, is misleading, as it would imply a Budget with reforms more carefully targeted at rescuing our bricks and mortar. Forget the knight in shining armour, forget what the government can do for you. The solution lies in maximising opportunities presented by this recession. Until the next election, that is.