A Question of Property - Ep 4 - Paul Mahoney, Stefano Lucatello & John Howard - Nova

A Question of Property – Ep 4 – Paul Mahoney, Stefano Lucatello & John Howard

Lucia France:

Hello and welcome to A Question of Property. I’m Lucia France and joining me in the panel today to answer all of your property questions, we have Paul Mahoney, head of Nova Financial Group. We have John Howard, our property expert of more than 40 years and author of over three books on the subject. Because I believe you’re working on a fourth, aren’t you, at the moment, John?

John Howard:

I certainly am, Lucia. Thank you for that.

Lucia France:

And Stefano Lucatello, Senior Partner at Kobalt Law International Property Lawyers. So hello to all of you.

Stefano Lucatello:

Hello, Lucia.

Lucia France:

Right. Let’s get started then with Paul. And your first question today is from one of our viewers. Do you think that a buy to let investment would still be a good thing to do over the next two to three years? Or, is there another form of investment I should be looking at?

Paul Mahoney:

Okay. I suppose a fairly common question at the moment, given the uncertainty caused by COVID-19. I suppose, first off, the timeframe they’re talking about, if they’re talking more passive buy to let, I’d be looking at that as more of a seven to 10 plus year investment. Property investment is a slow burn, and unless you’re being more proactive or property developing, you’re flipping properties, you really want to be in the market and take full advantage of the market. So they mention in the next two or three years. I don’t necessarily think there’s ever really a bad time to be buying good properties in good locations. That’s evidenced by the fact that if you bought the day before the crash, last financial crisis, you still will have done quite well by now if it’s a good property in a good area.

Paul Mahoney:

So although you might have bought at arguably the worst possible time, and you had a downturn for two or three years after that, you will have recovered that, plus some, to now. And you will have been receiving rental income as well, so you have positive income even throughout the downtown. So I think if you’re applying all the right fundamentals, focusing on properties where there is strong demand for them and an abundance of demand, strong demand due to things like employment, facilities, amenities, the reasons that people live in certain locations. If you’re ticking all of those boxes and you have confidence your property is going to rent and that there are positive factors that are going to change that location in the right direction. For example, things like major infrastructure projects can really change the face of a location. We tend to focus mostly on areas that are very close to central desirable locations but aren’t quite there yet. If that makes sense.

Paul Mahoney:

Areas with improvement to be had. They don’t quite have the cafes and the gastro pubs, but you can see them 500 meters down the road. And in our view they are the areas that tend to do best, on the fringes of really desirable locations. Because you get them at a better price, and as that location grows and more people move there for all those reasons, that’s where you tend to see your uplift. A quote that I’m sure I stole off someone but I use all the time is that property investment is more about time in the market rather than timing the market. So no one knows the direction of the market. They may have released some negative economic figures yesterday, but they could be completely wrong. And maybe the property market takes off after all this ends because there is pent up demand and the economy is strong and all those sorts of things.

Paul Mahoney:

We don’t really know.

Lucia France:

In previous episodes as well, about that pent up demand, again, we don’t know which way that is going to go. But it could actually be a positive for investment as well.

Paul Mahoney:

Potentially, it could be. Yeah. Everything is on pause at the moment. People are still wanting to buy. There are still reasons to buy. We have no idea which direction the market is going. So my view is, buy good properties in good locations, but have all the reasons to do well. And regardless of the short term economic blips, you’ll tend to do well over the mid to long term.

Stefano Lucatello:

Isn’t one of the good things to do to visit the chambers of commerce and talk to local chambers of commerce? Because they are the people who deal with the ingress, shall we say, of new businesses. Like for example, in Hull, three years ago, we had Siemens that came to Hull and they redeveloped at one at the Albert Dock in Hull, created 2000 jobs for these great big wind turbines that they put on the North Sea. And they’ve created 2000 jobs, which meant that the east of Hull, where the dock is based, has now created 2000 more homes in that area, in the region of Hedon Road, which is highly industrial there. It’s the chemical area along the estuary in Humberside. So that’s the sort of thing you ought to be doing is all to be asking chambers of commerce where are big companies coming and then follow them.

Stefano Lucatello:

We do that in the international side of things. We follow where Ryanair and EasyJet are going. The new areas. Then you put the new links-

John Howard:

They won’t be going there for long.

Stefano Lucatello:

In the past, John, that’s how we used to tell clients to look at and see where EasyJet is going to fly to.

John Howard:

I know. I can understand that. My view on all this is that buy to let is pretty boring really. It’s little bit like vanilla sex. It’s fine for most of the time, but you do need a bit more excitement now and again.

Lucia France:

[inaudible 00:05:38] John.

John Howard:

Sorry.

Lucia France:

It’s only midday. They’re the only people watching this, though. So-

John Howard:

Exactly. So, I take the buy to let market as a bit like the stock market. If it does go down, Paul is absolutely right, it might go down a little bit, but it’ll come back stronger probably. And if you’re looking over 10 15 years, seven, to 10 to 15 years, I’m sure, even if you went on right, moved today and bought one without even looking at it, in 10 or 15 years time, it will be worth more. Paul is absolutely right on angles. You need some sort of angle still if you can. And investing in an area where something is about to happen is a great angle.

Lucia France:

Okay, great. Thank you very much, guys, for all your inputs on that one. We’ll move to John now for your first question for this episode. So this is from somebody who has been watching the last few episodes, although-

John Howard:

Good.

Lucia France:

Yeah. Good. Thank you. “Although I have received my rent from my four tenants this month, I am concerned what will happen, once life gets back to normal as three of my tenants have been furloughed. What can I do to make sure I get my rent?”

John Howard:

Well, I can understand this problem and this worry because I feel the same way. I mean we had 90 odd percent of our residential tenants paid in the last month. Are they going to do so again going forward? I think it will start to slide once people get back to work because some people won’t be going back to work, although they’re furloughed at the moment. So if you’ve got a good relationship, and this is where it’s important, if you’re a small landlord, if you’ve got a good relationship with your tenants, this is where it really counts, because you need to talk to them and make them appreciate that they’ve got to make a superhuman effort to pay the rent because the rent is the first thing they should be paying before they buy food. Simple as that. Because if you haven’t got a roof over your head, there’s no point buying food, is there, really?

Lucia France:

Will they buy food?

John Howard:

No. The rent is more important than the food, especially if you’re the landlord. So it’s very inviting but-

Paul Mahoney:

John, but you can eat food outside.

Stefano Lucatello:

You can eat food in a bus shelter, Paul is saying.

John Howard:

You can’t eat the food if you haven’t got a table and chairs to sit on. [crosstalk 00:08:04] But you can’t go to a restaurant at the moment. So, what I’m saying is, to the landlord it’s more important. And to the tenants, it ought to be taken very seriously as well or well they could be out on their backsides.

Stefano Lucatello:

John, you can’t throw anyone out until September now. So-

John Howard:

Three months. It’s only three months.

Stefano Lucatello:

Yeah, but it will get pushed again another three months.

John Howard:

But it will be disappointing if it does because otherwise people will take advantage. At the moment, they haven’t done, to be fair, but I think unfortunately that some will take advantage going forward. So talk to them. Have a good relationship with your tenants and explain how important it is to you and to them that they pay you.

Paul Mahoney:

And just a note there, something to keep in mind is that most lenders are giving mortgage holidays as well or time to pay on your mortgages. So if you are thinking that you might end up in a tight cashflow position, that’s something worth talking to your lender about because if you’re not having to pay your mortgage, due to not receiving your rent, then hopefully you can balance out that loss.

Stefano Lucatello:

But my one main point to say is that they don’t discount it. It will be tacked onto the end of your mortgage. So your mortgage will last for another three months.

Paul Mahoney:

Exactly right. But you would be doing the same with your tenants as well.

John Howard:

But Paul, that’s assuming you’re looking at it slightly differently than I would be. First of all, they may not have a mortgage on it, but they may be using that income to live off themselves and buy food and keep a roof over their heads.

John Howard:

So, not everyone has got a mortgage, but it doesn’t mean they won’t be in difficulty.

Paul Mahoney:

Yes, that’s true.

John Howard:

And that’s people maybe relying on it, as literally their only income.

Paul Mahoney:

I think it is key, though, to be communicating with your tenants in these times.

John Howard:

Yes, I agree.

Paul Mahoney:

Your tenants are probably seeing on the telly that they’re talking about rent holidays, that they can’t be evicted. And they’ll probably make a choice one way or the other, to keep paying rent or to not. But if you’re communicating, letting them know that this isn’t a time where you can just stop paying rent.

John Howard:

No exactly.

Paul Mahoney:

And that if you need some sort of arrangement, that it will need to be repaid at some point in the future and make them aware of that, they’re probably far less likely to stop paying.

John Howard:

No. I agree. Even if they pay half or three-quarters. Yeah.

Stefano Lucatello:

Sorry to interrupt you, Lucia. Some people are going for allowances and reliefs and government state aid. What’s the main one that they’re going for that takes five weeks to come out and people are saying-

John Howard:

We’re not going for any of that. We just want our tenants to pay.

Stefano Lucatello:

No, you don’t. You’re not going to but the tenants are going for it in many cases.

Lucia France:

Universal credit.

Stefano Lucatello:

Universal credit. That’s right. It takes five weeks to come out and in the meantime they haven’t paid maybe five weeks rent because they’ve been furloughed and they haven’t got enough money to buy food and to pay the rent.

John Howard:

They have got to make the right choice in my opinion.

Lucia France:

But in that case then, John, would it not be prudent to offer some sort of discount for instance?

John Howard:

Of course. I’m being a little bit flippant, aren’t I? At the end of the day, absolutely, if they can pay half or three-quarters, that’s better than not getting it.

Paul Mahoney:

Although, Lucia, I wouldn’t be using the terminology discount.

Lucia France:

Sorry. No. Just for a certain period of time.

Paul Mahoney:

Deferment.

John Howard:

Deferred is the word.

Paul Mahoney:

You’re paying half for the next three months. Those three lots of 50% are going to need to be repaid at some point in the future.

Lucia France:

Yeah, exactly. But at least it would take the pressure off for that time. I think we’ve just got John frozen there. Oh no, you’re back again. Okay. So we’ll move over to Stefano now for your first question here today. Somebody has written in to say they’ve lived in France for 20 years. “My wife and I have decided to move back to the UK now as my health is starting to fail.”

John Howard:

Hurray. Good.

Lucia France:

We’re not hurraying that your health is starting to fail, just so we’re clear.

John Howard:

No. They’re coming back to Britain. That’s what we like to hear.

Lucia France:

“We want to move back as soon as possible and this may be before we have sold our French residence. What are the capital gains tax implications of this, both in the UK and in France?”

Stefano Lucatello:

Well, the guy has been in France for a lot of years. He’s quite clearly French tax resident and not UK tax resident. So the starting point for capita gains, whether it’s the United Kingdom or France, is your residency. So for the moment he would be French tax resident and any gain that is taxable would be payable in France. Now, on the French tax law, there is no capital gains tax to pay on your main or only or principal residence. Whereas in England, if you had it for 10 years, but you only had it for eight years, out of the 10 years as your main or only principal residence, then there’s an apportionment to be carried out. Whereas France says whether you’ve owned it for six minutes or whether you’ve owned it for 60 years, because it was your main principal residence, you get a full tax nil rate payable on capital gains. So you don’t pay any capital gains tax in France for the sale of property in France.

Stefano Lucatello:

The problem lies where many people are actually wanting to sell their premises in France but move back to the United Kingdom before they’ve sold it and they fall between these two stools where they are still French tax residents and whether they pay anything over there or not or whether they now become tax residents in the United Kingdom, whether the United Kingdom chancellery will now ask for a capital gains tax because they’ve since become tax residents in the United Kingdom. Let’s go back a few steps, capital gains tax is payable in two bits. There’s the usual capital gain as we understand it. You buy it for a hundred you sell it for 500 you’ve made a capital gain theoretically of 400 subject to any expenditure which you can claim back and reduce it and subject to main residence final period relief and, if you let it out, lettings relief, which is only for nine months in the extension.

Stefano Lucatello:

But subject to that, the same things apply in France. However, capital gains tax in France is payable in two tranches. It’s 19% on the capital gain and there’s also anything between up to 17.5% payable on something called social charges. And social charges are taxes over and above income tax that you pay in France and this guy will have paid that social charge while he was in there. So it’s payable in two tranches. The capital gains side of things is reduced the more you occupy premises and certainly over 21 years it’s reduced to zero. And if you are due to pay capital gains or social charges, then that’s reduced to zero if you’ve owned the property for over 30 years. But as I say, because this guy was selling his property as his main property, there is no tax to pay.

Stefano Lucatello:

So the charges that I’ve just mentioned, which could total up to 42% in the case of a non-principal residence, don’t apply. There is also another French tax which covers this person being between two stools, which is that if you sell your main or only principal French residence and you move to another country, another European country or another country which has a double taxation treaty and a treaty with France for the reduction of fraud and anti money laundering, that sort of thing and provisions, then you can actually dismiss up to 150,000 euros of capital gains tax, which would otherwise have arisen because you’ve moved out of France and you were subject to being a resident somewhere else. And as such, if you sold the French property, and you’re not resident in France, you have to pay a capital gains tax. So you can claim up to 150,000 euros in this other exemption.

Stefano Lucatello:

So you can do that actually up to 10 years. So this guy could move back to the United Kingdom. He may have a very bad French property market, not be able to sell the property for 10 years and he could still get a reduction.

Lucia France:

Okay.

John Howard:

Exactly. As I was about to say, to be honest with you, good luck selling in France over the next few years. It’s got the worst economic outlook to any large European country.

Stefano Lucatello:

Even worse than Italy?

John Howard:

Worse than Italy. Really has, yeah.

Lucia France:

Stefano, do you think that anything in regards to the advice that you’ve just given, is that anything to do with Brexit and the end of that coming on the 31st of December?

Stefano Lucatello:

No. Nothing will change. One thing to say is that this guy will become tax resident once he’s been in the United Kingdom for 183 calendar days. He will become tax resident. And if he hasn’t sold the property in France, he will have to declare the sale because if he becomes a tax resident of the United Kingdom, he’ll have to declare the sale of his French property to the United Kingdom authorities. And because there is something called the double taxation treaty between the United Kingdom and 157 other countries in the world, that says that if you have to pay tax in one jurisdiction because you own a property in it, but you’re paying it in another jurisdiction, you won’t get taxed twice. The only incidence to tax in two jurisdictions is, for example, that you pay capital gains tax in France of 19%, but in England it’s 28. And therefore you would have to pay the difference between 19% and 28%. You would never have to pay 19% plus the 28%, double taxation treaty.

Stefano Lucatello:

But it’s a very complicated area and certain people fall between these two stools because they sell, but they sell only when they become tax residents in another jurisdiction.

Lucia France:

Right. Okay. Thank you very much, Stefano. Okay, back to Paul now for your last question for today. Someone who has written in has said, “I’m seriously looking at purchasing a buy to let property in the next month or two, but do you think that if I wait, I’ll be able to borrow more money from a building society in six months time or so, than I can do now?”

Paul Mahoney:

Okay. So they’re looking at buying a property now and they’re asking whether they might be able to borrow more money in six months time?

Lucia France:

Yeah, purchasing a buy to let property.

Paul Mahoney:

Okay. Well I think at this point in time it would depend on what type of property that is as to whether it’s even possible to buy it right now. And it will also depend on whether they’ve got a mortgage arranged, because the mortgage market is pretty much on hold at the moment, aside from very low loan to value mortgages. So most lenders have stopped progressing mortgage applications regardless of the stage. For example, I was personally applying for a buy to let mortgage and was at evaluation stage. Obviously evaluations aren’t able to happen at the moment. So it’s just paused at that stage. If this person hasn’t even started that process, that they might find it quite difficult to start that right now until COVID-19 is over. But, as John mentioned, hopefully it will be over in three or four weeks time and things will return back to normality.

Paul Mahoney:

As I mentioned previously, I don’t think it’s a bad time to be buying in the right circumstance. It’s a good time to buying. But whether they’ll be able to borrow more in six months time, I’m not quite sure the reason for that question. But-

John Howard:

But, Paul, can I just say, I reckon, what they’re saying is, at the moment, let’s say you can only borrow 50 or 60% now on a buy to let in the last few weeks, they’re probably saying, well, will the market return? So that in six months time it might be 70 or 75% again.

Paul Mahoney:

No, I understand.

John Howard:

I’m guessing.

Paul Mahoney:

No, I understand. That makes sense. Okay. Right. Again, listening to the media, there have been some sensationalized media articles around lenders pulling high loan to value mortgages. That’s not really the case. They’ve paused them because they can’t do evaluations.

Paul Mahoney:

How can you be giving a mortgage at 75, 80% without actually knowing the value of the property? That doesn’t make much sense. So that’s why they’ve pulled them. But it’s not that they’re not going to come back. The only reason that the lower loan to value mortgages are still progressing is because they can pretty accurately… Or at least have a bit of confidence in the value of a property, if they’re lending less against it, it doesn’t matter so much if the value is a little bit wrong. Whereas when you’re going to a higher loan to value, it matters more. So I suppose the answer to that question is, yes, absolutely. Once all this is over, I’d be very, very surprised if everything doesn’t return to normal with regards to being able to get the higher loan to values again.

Lucia France:

Okay. And guys, any thoughts on that one there?

John Howard:

Well, I think what Paul said is absolutely right. At the moment everything is on hold. Everyone is panicking a bit. But if we just settle down, calm down, leave it a month or two, just see how it all pans out. But I think that the lenders in this country are in a pretty good position financially. They’ve got money to lend. It’s not like 2008 when they had no money. So I think it will settle down.

Lucia France:

Great. Okay. So we’ll just go back to Stefano then for our final question. Stefano, again, referring to France for this one, “I’ve got a small property in France that I let. The tenant is now saying that they cannot pay the rent due to COVID- 19. I rely on the rent to help me live. How do I go about claiming my arrears from the tenants?” And that’s a property in France that they let out there.

Stefano Lucatello:

Lucia, did he say that he had a mortgage?

Lucia France:

It doesn’t say.

Stefano Lucatello:

Right. So French law is very, very draconian as regards landlords. Once you’ve got a tenant in, you can’t get them out very easily. And I’ve got experience with this at the moment with clients of mine who’ve got a flat in Paris, and the guy who is in there hasn’t paid the rent. He has paid the rent on and off, but he hasn’t paid the rent for some months now. And it has taken four years now to try and get him out and we’ll hopefully get him out subject to COVID-19. We’ll get him out in the next six months. But once you are in there and once you’ve negotiated a contract, which is for more than four years, then you have great difficulty as a landlord to get someone out. As regards to the arrears, the only thing you can do is to write the equivalent of a letter before action and to send that to him, serve it on the proper terms and the proper notice, and then there will be a hearing at some time in the future.

Stefano Lucatello:

It is not necessarily the case that the tenant, just because he hasn’t paid the rent, will be thrown out. Judges are very, very lenient towards tenants, even in the extreme cases. And it may take a long time to get them out. So, as I say, the only way of getting them out is to take proceedings. If you are reliant upon that rental income to pay your mortgage or to live or to subsist, then I think that’s very foolish, because I think that nowadays you should never be buying a property subject to a mortgage or on the basis that you can afford to buy it, but then you’re reliant on the rental income to subsist. I think that that is not a good… I’m sure the other two guys will agree… It’s not a good way of doing business and it’s not a good reason for buying property.

Stefano Lucatello:

You should never buy property on the basis that someone said to you, you can afford if you get someone in there to pay the mortgage off. And we all know on the international scene that people will always sell properties on the basis that it’s a great investment. You’ll be able to rent it out. The rental income will pay the mortgage and you’ll still have something left, Mr. Lucatello, to put in the bank. It’s proved to be 98% [crosstalk 00:24:16] wrong.

John Howard:

But, Stefano, plenty of people do do that.

Stefano Lucatello:

Yes. But I thing it’s Russian roulette. I think, as a lawyer, it’s Russian roulette. I don’t think it makes practical sense. You should never do that.

John Howard:

I don’t agree with you, to be fair.

Paul Mahoney:

I don’t agree either, Stefano.

Stefano Lucatello:

I think it’s very foolish. In my view, you should never buy a property on the basis that you are reliant on the rental income to either pay the mortgage that you bought it with or to subsist. I think it’s foolish. It’s practical.

Paul Mahoney:

In the UK, the UK laws, although not in favor of landlords, you can get a tenant out quite quickly if they stop paying rent.

Stefano Lucatello:

They’re in France. This is totally different. France, Spain, Italy Portugal are different.

Paul Mahoney:

We need to stipulate there, cause in the UK, buying property and using the rent to pay for the mortgage is a tried and tested approach to property investment.

John Howard:

Exactly. It’s what we all do.

Paul Mahoney:

Many people have built large portfolios doing that. Maybe France isn’t a great place to invest in property by the sounds of it.

Stefano Lucatello:

[Crosstalk 00:25:18] The landlord and tenant laws abroad are totally different, as I said to you, from the landlord and tenant laws in England. You don’t have section 21 of the 1988 act and in France, Spain, Italy or Portugal. The tenant has rights which are so entrenched and it takes years and years and years, and I’ve known a few clients over the years that I’ve been an international property lawyer, go into bankruptcy or liquidation because they were reliant on that rental income and it took such a long time-

John Howard:

Are you going to carry on [inaudible 00:25:47].

Stefano Lucatello:

Let me finish, John. By the time they’ve actually got the property back, it was no longer for them to have the property. It went to the liquidator or it was a company [inaudible 00:25:57].

John Howard:

That’s incredibly sad. I think what we ascertained from this then is the UK property market is the best market to invest in as a residential investment. But if you want to have a lovely home abroad and relax and enjoy your home abroad, then do so. Would that be fair?

Stefano Lucatello:

But the point is that the rules abroad are totally different to the rules here. You can never equate UK property law to foreign property law.

John Howard:

Thank god we’re not socialists. And we haven’t got those laws and we don’t speak French.

Lucia France:

Let’s wrap it up, guys.

Stefano Lucatello:

The final point to make, is this. That when you buy property abroad, you cannot, just because you’re an experienced property buyer like Paul and John, and use the same rules and laws and due diligence that you would use abroad.

John Howard:

That’s a very fair comment. Yeah.

Lucia France:

Okay. Well, thank you very much to all of you. Thanks Paul, thanks Stefano and thanks John.

Paul Mahoney:

Thank you.

John Howard:

Pleasure.

Lucia France:

Thank you all for your input today, especially John.

John Howard:

See you next week.

Lucia France:

And apologies for my dog. If you heard him bark in the background just there. If you do have any questions for the next episodes, just email us ask@aquestionofproperty.co.uk. And we’ll see you next time. Thank you.

 

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