As we approach the end of 2020 it is an important time to reflect on the lessons from the last year as we move into 2021, so that businesses and investors in the property sector can build greater resilience for the future.
The pandemic, which has gripped the industry, is not yet over and while vaccines and treatments should be available soon, there is still likely to be some disruption well into the new year.
Add into this the uncertainty of the end of the Brexit transition period and a weakened economy and it is easy to see why those in the property sector may want to make preparations for further challenges ahead.
What state is the property sector currently in?
Before looking at the steps businesses and investors may need to take in the next year, it is probably worth reflecting on the current state of the sector.
While it is clear that, in the main, the industry has been adversely affected by the pandemic, things look better when you compare the performance of the industry against general national trends.
Data from the Office for National Statistics (ONS) Business Impact of COVID-19 Survey (BICS), which covers the period between 19 October to 1 November 2020, shows that 9.5 per cent of businesses in the real estate industry saw their income increase by up to 20 per cent compared to the same period in 2019.
In comparison, across all industries, the national average for businesses reporting a similar increase in income was just 6.3 per cent. This means that generally speaking, property businesses have fared slightly better than others (although some sectors have performed considerably better and other considerably worse).
Of course, there has been a definite negative impact on the industry as well and it is not surprising that 9.2 per cent of businesses in the sector reported income was down by more than 50 per cent year on year. However, once compared to a national average across all industries of 12.1 per cent the property sector is still faring slightly better than others.
Signs of distress
As the data indicates, the income of many property-related businesses has taken a hit during the last seven months, so what impact has this had on companies.
One of the clearest indicators is cash flow. Once again, the ONS BICS provides some useful insights into this area as well.
When it comes to cash flow, 37.9 per cent of firms surveyed in the property sector said they had sufficient cash reserves for six months or more, while 16.4 per cent said they had enough cash for four to six months.
Worryingly though, more than a quarter (26.8 per cent) said that they only had sufficient cash reserves for one to three months of trading.
It would seem then that while much of the sector has remained fairly resilient, a significant proportion of firms are on the cusp of financial distress and need to take immediate action to rebuild and recover.
The challenge of compliance
Alongside the difficulties of COVID-19, those operating in the property sector have had to adjust their businesses to new tax rules.
One of the key changes was to the reporting of Capital Gains Tax. From 6 April 2020, any Capital Gains Tax (CGT) due on UK residential property disposals made by UK residents or businesses must be reported and paid within 30 days of completion.
This rule change, which primarily affects let properties, second or holiday homes and homes with significant grounds and gardens, continues to be overlooked during many transactions, but it is an integral part of disposing of property and could leave sellers exposed to penalties and investigation from HMRC.
Investors and businesses in the property sector have also had to deal with the whittling away of private residence relief and the availability of letting relief.
Both of these tax reliefs previously played an important role in minimising CGT liabilities during the sale or disposal of property, but due to eligibility criteria and periods, they are now somewhat limited in scope.
Steps to building resilience
Cash flow is king when it comes to any business and so where possible businesses should be looking to build reserves.
The pandemic isn’t over and even the financial impacts of lockdown and restrictions is likely to be felt for many months if not years. With household incomes in decline, this may mean a period where rent arrears are more common.
At the moment, during the lockdown in England, actions to evict tenants in arrears is limited, but property businesses and investors need to think about what actions they should take in the coming months to protect their income.
In some cases, eviction may not be the best option and they may find it easier to negotiate with tenants to temporarily reduce rents. Remember, empty properties cost money and generate no income at all.
Now may also be a good time to pivot your business and adapt your portfolio to reflect changes in demand within the property sector.
Before the pandemic, inner-city areas were often most popular with tenants, but a great move towards home working may mean that suburban and rural properties begin to command higher rents and offer greater yields, as recent data from Zoopla, Rightmove and other studies suggest.
This may mean that you should diversify your existing portfolio to tap into the needs of potential tenants, who want more space and no longer feel as connected to the inner-city areas they once favoured.
While it may be tempting to sit and wait to see what happens, this carries its own risks. Businesses must take proactive steps now to build resilience in the months and years ahead if they are to survive and thrive in future.
Considerations for the future
Going into 2021, what should those in the property sector prepare themselves for? This is a question that many may have during these uncertain and confusing times, but there are a few indications already of what the year may hold.
One key change is further reform to the Capital Gains Tax system. The Office of Tax Simplification (OTS) has already released a set of recommendations for the Chancellor to consider and it is clear that the Government is certainly interested in reforming CGT further, alongside other forms of taxation in the next year.
Many of these recommendations point to a new CGT system that mirrors how income tax is charged, which could mean that bills rise substantially on the disposal of property in the years to come.
We will have to await further details of the Government’s plans for taxation in the next Budget, but businesses and investors should be prepared for an increase in taxation, rather than a decrease, as the country attempts to recover the cost of COVID-19.