Friday 26 December 2014

Property deal frenzy expected as CGT deadline nears

Donal Buckley

Published 28/08/2014 | 02:30

Mortgage calculator. House, noney and document.
Mortgage calculator. House, noney and document.

The next four months look set to be a hectic period for both property investors and owner occupiers as the window of opportunity for availing of the Capital Gains Tax waiver will close on 31 December 2014.

Already the count down appears to have been one of the factors which has contributed to the rise in values for both prime commercial as well as residential property. The incentive can also spells good news for those asset rich but cash poor businesses which needs funds in order to expand.

At a time when deposit rates are offering little or no returns and with some properties achieving double digit annual price rises, it's not surprising that property investment is looking attractive.

Irish commercial property outperformed the Irish stock market in the second quarter of the year with total returns of 8.5pc during the three months to the end of June according to the IPD/SCSI survey. This was at a time when equities suffered an 8.4pc decline.

When rental and other income is omitted, the values of Irish commercial property grew by 6.5pc for Q2 2014 which was the highest rate of quarterly price increase seen since 2006 and these values have been accelerating over each of the last four quarters.

While Irish equities, helped by dividends, achieved a stronger 28.6pc return over the longer 12 months to the end of June, however property, with the help of annual rental income, came close with an also strong 26.6pc return.

So the CGT incentive looks set to add sugar to the cake for investors as properties which are acquired before the end of this year and held for seven years will not incur the 33pc capital gains tax (CGT) on any increase in the value of the property during those seven years.

For example, say John acquires a property and sells it after ten years at a profit of €100,000.

If €70,000 of that profit was reflected in rising prices in the first seven years, then 7/10 of the gain or €70,000 is not subject to CGT thus effectively generating a net tax saving of €23,100.

But this CGT incentive may also generate a spin-off benefit for some businesses.

It could prove especially helpful for instance for traders which own their own premises and need to raise cash in order to invest in expansion but are finding it difficult to borrow from their banks.

Unlike ultra cautious banks, some investors may be more willing to provide the funds in return for the property.

Investors will pay higher values for those properties which are let to businesses which are generating healthy trading profits and thus offer a good prospect of sustaining the rental terms.

So investors may well buy such premises from the owner occupier and rent it back to them.

Not alone would this allow the business operator to continue operating from the property, but it may also present other opportunities.

For instance, those with ambitions to expand but find that their banks are reluctant to lend for such expansion, could find that sale and lease back is one way to generate the funds to acquire another business or perhaps open a new branch or outlet to expand an existing business.

Such owner occupiers will need a business plan which compares possible future increases in the value of the property with the possible returns from an expansion of either the existing business or a diversification into another business.

Such a business plan could make even more sense for those traders who find that their existing loan repayments are proving too much of a drain on their business.

If they can convince the investors to accept a current market rent below their mortgage repayments then a sale and lease back deal would also be of help.

Rents have also fallen so these may be more affordable than the mortgage repayments. There may also be opportunities to negotiate on the basis of a turnover related rent with the investor taking a low rent to start provided that they are offered a reasonable prospect of sharing in a promising business in the medium term.

Alternatively business owners might use the proceeds from the property sale in order to undertake a debt restructuring deal with their banks.

Perhaps offer a substantial early lump sum repayment to the bank in return for a reduction in amount of the mortgage outstanding.

This would make sense for the bank if it can be shown that the bank is likely to get more money back in both the short and longer-term from a sustainable business.

After all, unsustainable mortgage repayments may force a closure and the bank may then have no choice but to accept the debt write-down.

However, as anybody will tell you, sale and leaseback may not be for everyone.

In some cases it can be argued that the current phase of the market is not really the best time to sell because property prices have not fully recovered and in many cases may have a long way to go.

On the other hand the window of opportunity for sale and leasebacks may close in December investors may not be as enthusiastic about property after the incentive ends for the CGT waiver.

Either way, as most investment advisers will say, tax incentives should not be the sole driver of any deal and both investors and vendor/tenants need to decide their terms based on realistic views of the fundamental of their business.

If you base your decision on anything else that will only lead to misplaced arguments and ultimately the wrong decision.

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