The Impact of the Autumn Budget 2024 on Operational Real Estate

The Autumn Budget 2024 has introduced a series of significant changes that are set to reshape the UK’s real estate landscape. While the entire industry is navigating these new measures, the Operational Real Estate (OpRE) sector—which includes properties like student accommodations, built to rent (BTR), senior housing, hotels, healthcare facilities, and self-storage units—is particularly impacted. As a leading service provider in several OpRE subsectors, we at QX have analysed the budget’s implications to help stakeholders understand and adapt to these changes.

In this blog, we will discuss how the Autumn Budget 2024 affects the OpRE sector, delve into recent investment performance, and explore future opportunities and challenges.

Impact of the Autumn Budget 2024 on the Operational Real Estate Sector

The Autumn Budget 2024 introduces several measures that significantly affect the Operational Real Estate (OpRE) sector. These developments influence various critical factors—from acquisition and operational costs to overall investment strategies and growth opportunities. Understanding these changes is vital for stakeholders adapting to the evolving landscape and maintaining a competitive edge.

1) Increased Acquisition Costs

Stamp Duty Land Tax (SDLT) Adjustments

• Higher SDLT Surcharge for Second Homes: The SDLT surcharge for second home purchases increased from 3% to 5%, effective 31 October 2024. This raises the upfront costs for investors acquiring residential OpRE assets, such as student accommodations and senior living facilities.
• Increased Rates for Companies: From 31 October 2024 onwards, companies purchasing residential properties for over £500,000 now face an SDLT rate increase from 15% to 17%, directly impacting corporate investors in the OpRE sector.
• Reduction in Nil-Rate Thresholds: From 1 April 2025, the nil-rate threshold for residential property purchases will decrease from £250,000 to £125,000, and for first-time buyers from £425,000 to £300,000. This means buyers will begin paying SDLT on property values above these lower thresholds, increasing the overall tax burden on property purchases.

Implications:

The recent SDLT adjustments lead to higher acquisition costs for stakeholders in the Operational Real Estate sector. As a result, investors may become more cautious, potentially slowing down transaction volumes and prompting a thorough reassessment of the viability of new and existing projects under the increased tax burden.

2) Operational Cost Implications

Business Rates Reforms

• Lower Multipliers for Key Sectors: The introduction of permanently lower business rate multipliers for retail, hospitality and leisure from the 2026/27 rate year provides financial relief for operators.
• Interim Relief Measures: For the 2025/26 rate year, businesses in these sectors will receive a 40% relief on business rates, capped at £110,000 per business, offering short-term cost savings.
• Higher Multipliers for High-Value Properties: Properties with a rateable value over £500,000 will face higher multipliers, potentially increasing operational costs for large OpRE assets.

Implications:

The recent business rates reforms will have varied financial implications for operators in the OpRE sector. While lower multipliers and interim relief measures may reduce operational costs for some, others—particularly those managing high-value properties—could face increased expenses. As a result, operators will need to carefully manage these changes, potentially reinvesting any savings realised from business rates relief into property improvements that enhance the value proposition for end-users.

3) Changes in Taxation Affecting Investment Returns

Capital Gains Tax (CGT) Reforms

• Rate Increases: The basic CGT rate rises from 10% to 18%, and the higher rate increases from 20% to 24%, affecting the net returns on the disposal of OpRE assets.
• Business Asset Disposal Relief (BADR): While BADR is preserved, the increased rates—from 10% to 14% starting 6 April 2025 and then to 18% from 6 April 2026—reduce the relief’s effectiveness for qualifying business owners.

Carried Interest Taxation Changes

• Immediate Increase: The CGT rate for carried interest increases from 28% to 32% for gains arising on or after 6 April 2025.
• Future Reforms: From April 2026, carried interest will be taxed as trading profits, subject to income tax and National Insurance Contributions. This change introduces uncertainty pending the outcome of consultations defining ‘qualifying’ carried interest.

Implications:

Recent increases in Capital Gains Tax (CGT) rates and reforms to carried interest taxation are likely to significantly influence investment strategies within the OpRE sector. Investors may be discouraged from selling assets due to reduced net returns, leading to more extended holding periods and a greater emphasis on income generation rather than capital appreciation. Real estate funds and private equity investors may also need to reassess their fund structures and compensation arrangements to mitigate higher taxation on carried interest. Consequently, proactive tax planning has become essential to optimise after-tax returns, including exploring strategies to qualify for relief, such as Business Asset Disposal Relief (BADR).

4) Introduction of the Reserved Investor Fund (RIF)

• New Investment Vehicle: The RIF offers a tax-transparent, unauthorised investment vehicle to attract onshore investments, potentially making the UK more competitive than offshore jurisdictions.

Implications:

The introduction of the Reserved Investor Fund (RIF) is anticipated to increase the flow of institutional capital into the OpRE sector, as its tax-transparent structure makes onshore investments more attractive compared to offshore jurisdictions. This new investment vehicle also offers enhanced flexibility in structuring investments, which could be particularly advantageous for complex OpRE assets that require substantial operational expertise. Together, these factors may lead to increased development and expansion projects within the sector.

Conclusion

The Autumn Budget 2024 introduces transformative changes that present challenges and opportunities for the Operational Real Estate (OpRE) sector. These measures significantly impact investment strategies and bottom-line returns from increased acquisition costs due to adjustments in Stamp Duty Land Tax (SDLT) to varying operational expenses influenced by business rate reforms. The alterations in Capital Gains Tax (CGT) rates and carried interest taxation further underscore the need for careful financial planning. At the same time, the introduction of the Reserved Investor Fund (RIF) opens new avenues for attracting capital and offers enhanced flexibility for investors.

Adapting to Evolving Conditions: As the sector adjusts to these reforms, stakeholders must remain agile and responsive. This involves revisiting investment decisions, managing operational expenses, engaging in proactive tax planning, and considering new investment vehicles like the RIF to stay competitive.

Strategic Opportunities: Despite the challenges posed by higher taxes and adjusted relief measures, these changes also create opportunities for innovation and growth. Operators and investors willing to adapt their strategies, restructure their portfolios, and invest in operational efficiencies can find ways to thrive amid these reforms.

Looking Ahead: By understanding the specifics of the Autumn Budget 2024, OpRE stakeholders can better navigate the evolving landscape. The key to success lies in staying informed, being flexible in strategy, optimising financial structures, and leveraging available resources to maintain a competitive edge.

At QX, we are committed to helping our clients through these transitions. Our team offers expert insights and tailored finance and accounting services to optimise outcomes in the OpRE sector, ensuring stakeholders are well-equipped to respond to these changes and continue growing their investments sustainably.

Originally published Nov 15, 2024 04:11:20, updated Nov 15 2024

Topics: Finance and Accounting Transformation, Property Management