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Mortgages

Real Estate Investment Trusts

Friday, 18 October 2013 09:00

One winner from the March Budget was the Real Estate Investment Trust (REIT) sector. The chancellor promised to implement new rules allowing these property companies to invest in each other, as they hoped he would, including a consultation on whether they should be given institutional investor status, another long-held aspiration of the property industry.

The Budget announcements provided UK-listed REITs with a bonus: the British Property Federation announced the changes would result in an inflow of funds into REITs, as well as greater deal activity and an increase in joint ventures.

Property companies have made significant gains in recent times , the average REIT was up 26 per cent during 2012 and has continued to post positive returns during 2013.

REITs, which invest almost entirely in commercial property, have continued to be liked by analysts. The sector is prized for its income-generating attributes, with many REITs regularly yielding well above 5 per cent. REITs’ investments range from warehouses to office blocks to shopping centres, which are traditionally seen as a good hedge against rising prices.

REITs did not escape the recession and it wasn’t until the second half of 2011 that the sector began to show signs of sustainable recovery. The vehicles’ exemption from corporation tax, as long as they pay out 90 per cent of their income in dividends to shareholders, means investors do not face double taxation on these property vehicles. Analysts have always expected the development of REITs in the UK to follow the pattern established elsewhere, with more agile property companies able to raise finance from equity markets quickly in order to fund transactions.

The question everyone wants answered is what drove last year’s spectacular performance. One factor was without doubt the strong overseas interest in UK property, with international investors committing more than £20 billion to UK commercial real estate over the course of 2012, according to figures from the accountancy firm Deloitte.

Deloitte’s analysis has shown that key pricing points have now been reached in several areas of the commercial property sector. Prime property such as London real estate has now become too expensive for many investors,  which should broaden demand across the rest of the market. It also thinks falling prices in the secondary market have now largely run their course.

Deloitte’s analysts conclude that it is likely 2013 will be the year that the downward trend in commercial capital values stops and rising prices should return. The largest UK and northern European REITs are now looking beyond equity and taking advantage of the high-demand bond markets to issue bonds with, from the borrower’s perspective, highly attractive long-term fixed finance costs.

With the cost of capital so low, the hurdle rates that REITs must achieve in order to deliver to their investors are lower than in the past. This is why the REIT sector is well positioned to drive market-leading returns to investors in the coming years.

For investors who feel uncomfortable with single-stock investments in REITs, one alternative is an investment trust specialising in property. These trusts also hold diversified portfolios of property, as well as  property company shares in certain cases, which are softer, less aggressively run, strategies than REITs.

This softer approach protected investors during the banking crisis, with property funds avoiding the extreme volatility seen in the REIT sector and, largely, maintaining their dividends throughout. However, this sector’s long-term performance record is not spectacular.

For advice contact me on 01896 757734 or email This email address is being protected from spambots. You need JavaScript enabled to view it. Fraser Brydon – MoneyMatters

Help with a deposit  A stumbling block or first time buyers is the initial deposit.  Parents or grandparents nearing retirement with a pension fund of at least £40,000 could use their tax-free lump sum, of 25 per cent of the fund to provide additional security for the mortgage.  This would give first time buyers access to cheaper mortgages.

Begin saving early Parents could start saving early to help their children with a deposit later.  Junior ISAs allow tax-free savings of up to £3,600 a year for under-18s in any combination of cash or shares.  A Junior ISA automatically becomes an adult ISA when the child turns 18 and can be cashed in by them.

Maximise deposits The best mortgage rates are found where a 25 per cent deposit is put down.  If the child put down a 5 per cent deposit and parents put savings equal to 20 per cent of the property, then a cheaper rate could be secured.

Cut the cost of repayments Family offset mortgages allow parents and relatives to put savings into a deposit account linked to the mortgage, the deposits reduce the cost of the loan because interest is charged only on the balance.

Stand as guarantor Some mortgage lenders offer guarantor rates, these require parents to cover mortgage payments in the event that their children default.  The lender may request the borrower is a young professional whose salary is likely to increase in the next few years.  The guarantor must be over 25 years old and a blood relative.  Being a guarantor has total loan responsibilities, which means they are liable for the whole of the debt if the borrower defaults.

Second charge security Many banks now offer a 100 per cent loanto-value (LTV) Family Guarantee mortgage, in place of a deposit.  The loan is secured against up to 25 per cent of the value of the parents’ property.  Buyers with only a 5 per cent deposit may be able to use equity in the parents’ home as additional security.  The lender will take a second charge on the parental home if the borrower has a deposit of less than 25 per cent.

Taking a joint mortgage The income of the parents will be calculated into the loan when it is applied for.  Here, parents are joint applicants for the loan but are not on the deeds, so there should be no capital gains tax liability when the property is sold.  If the parent has a mortgage of their own already then the cost of this will be taken into account by the lender, which could reduce the loan size.

Lend your own money Parents can help with a cash injection, even if they cannot lend the whole deposit, as a small contribution can greatly reduce the rate charged by lenders.  Mortgage lenders often charge a lower rate  for every 5 per cent of additional deposit a buyer has, in most cases just raising a little more money will potentially save thousands in interest payments.

Provide funds as a gift Grandparents or parents could “gift” some money towards the deposit.  However, the benefactor needs to live for seven years afterwards for the gift to be exempt from inheritance tax.  Parents or grandparents need to provide a letter confirming this is a gift and not a loan and state that they have no legal interest in the property.

It is said that first-time buyers hold the key to unlocking the housing slump, and parents are increasingly helping their children get on the property ladder.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR A LOAN SECURED ON IT.  Your financial adviser may charge a fee for mortgage advice. The precise amount will depend upon your circumstances you should ask for an individual quotation before seeking advice. 

For advice contact me on 01896 757734 or This email address is being protected from spambots. You need JavaScript enabled to view it. Fraser Bryon - Money Matters

Interest rate rise - not if, but when...

Monday, 14 March 2011 17:37

The Bank of England held interest rates at 0.5% on the 10th March and kept its quantitative easing programme at £200bn – despite growing calls for a rate hike amid spiralling inflation.

The decision - almost two years to the day since the Bank first cut rates to their historic low in March 2009 - comes as the Bank's Monetary Policy Committee  (MPC) remains divided on policy.

Last month, Spencer Dale joined fellow MPC members Andrew Sentance and Martin Weale in voting for a rate hike. With Sentance pushing for a bigger hike than his fellow hawks, the committee was divided in a four-way split.

The growing division comes as the committee struggles to balance mounting inflation concerns - with the CPI (Consumer Prices Index) hitting 4% in January - with a sluggish economy. Fears the recovery has lost steam were recently heightened with shock figures showing GDP (Gross Domestic Product –what UK PlC earns) contracted 0.6% during the final quarter of 2010.

In addition, disappointing figures from the manufacturing, construction and services industry all point to a slowing down of the economy.

Last week, Bank of England deputy governor Charlie Bean seemed to dampen expectations of an imminent rate hike when he warned the economy could be on the verge of a "durable slowing".  Should this be believed?

Speaking at a conference in London, he said the 0.6% GDP contraction in Q4 pointed to a possible slowing of the economy which could exert downward pressure on inflation.

But Bean conceded CPI inflation will increase beyond the current level of 4% - twice the MPC target - in the short term due to soaring commodity prices. He also warned of an oil price spike amid ongoing political turmoil in the Middle East and North Africa.  That is already evident in prices and will have an immediate impact on inflation.

The last time the Bank raised the borrowing rate was as far back as July 2007 when it hiked the base rate by a quarter point to 5.75%,how long before we see the first rate rise of what is expected to be several?

For mortgage advice or to discuss your finances in more detail, contact me on 01896 757734 or email This email address is being protected from spambots. You need JavaScript enabled to view it.

Fraser Brydon - Money Matters