The continual incremental increases in the Additional Dwelling Supplement (ADS) in Scotland, otherwise known as the Second Home Surcharge, proves the unwritten law that once a tax is introduced, its direction of travel is only ever upwards.
ADS began its uphill journey in 2019, when it was increased from 3% to 4% of the purchase price of a property.
Then, in December 2022, it went up to 6% and, in December last year, it was hiked again to 8% – a figure greeted with dismay by smaller landlords.
However, paradoxically, it has created something of a surge in interest in residential properties in Scotland among professional investors who scent attractive opportunities to expand their presence in the property portfolio market.
Driving this quickening of investors’ pulses is the caveat buried in the LBTT (Land and Buildings Transaction Tax) Act that, where six or more buildings are the subject of a single transaction, those dwellings are treated as not being residential property and are therefore eligible for a 100% ADS exemption.
This has the effect that a buyer of more than six properties – say, a block of flats or an estate with worker’s cottages – is not only immediately 8% better off than if they were purchased individually, but he or she also benefits from lower commercial LBTT rates.
The health of the property portfolio market is also creating a welcome life raft for smaller operators – let’s call them the accidental landlords – who are being driven off the playing field by the increasing regulatory burden on rents, notice periods and tenants’ rights.
They are becoming aware that, if they can bundle their properties in a way which meets the provisions of the Act, they are much more likely to be able to hook a willing buyer, and exit the market without the stigma of a distressed sale.
At the moment, it is a virtuous circle, and our firm is experiencing a marked upsurge not only in sellers seeking advice on creating a portfolio for sale, but also from professional buyers, at home and abroad, who are sniffing around for ready-made, fully-tenanted and fully compliant investments.
The buoyant state of the portfolio side of things is perhaps a natural consequence of the current regime surrounding residential rentals in Scotland, which is becoming so cumbersome and so onerous that it is best dealt with by professionals who can devote the entirety of their energies to it.
The current environment is hard work – and there is little sign that it will ease any time soon – but there are opportunities and potential rewards out there for those who are prepared to stick with it.
Scotland is also still seen as a beacon of reasonable economic stability in a daily more-troubled world, and its main cities, with large student populations and mobile young professionals, can provide a steady demand for rental properties.
Even in Aberdeen, where the residential sales market has taken such a hammering, rental demand is still strong, largely because of the ongoing shortage of reasonable quality stock to let.
In the wider UK, research shows that interest is coming from a more diverse range of investors, and emerging economies, such as in Africa and Eastern Europe, are joining the queue of buyers for UK properties which previously was the preserve of high net-worth players from the UAE, the Far East and the US.
In Scotland, a lot of the interest is coming from London-based actors for whom the differences in yield between Scotland and their own turf have been a real eye-opener in recent years.
For instance, rentals in the outer circle of central London might hover around 3% to 4% on a good day while, in areas of Scotland such as Lanarkshire and the Borders, yields can float up to a very attractive 15%. And there are far fewer pitfalls around leaseholds and service charges.
So, all in all, despite all the obstacles which governments, pandemics and economic fluctuations have thrown in the path of investors, the property portfolio market looks increasingly like a haven where landlords can diversify their investments, build a strong income stream and expect a degree of capital growth.
There are not many investment classes these days which can say the same.
Duncan Ure is director of The Portfolio Brokers, specialists in off-market property investment
