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UK: BAD FOR BUSINESS.1
Property Week
28 Jan 2000
In the fourth week of Property Week's campaign against further rises in Stamp Duty, leading players in UK plc hit out against Labour's claims to be the 'friend of business'. Rainbow Blue Nelson reports.
With almost �25bn of property outsourcing deals hanging in the balance this year, the business community is watching with interest to see what the chancellor does with Stamp Duty in the March Budget.
Business leaders may have firmly embraced the government-sponsored PFI model, but they are beginning to feel that they are in danger of being betrayed. A government that declares itself to be the best friend of commerce is now prepared to increase a major impediment to commercial efficiency.
Increases in Stamp Duty may be aimed at calming a booming housing market in the south-east, but it is in the business sector - with deals like the �300m sale and leaseback of 180 Shell petrol stations in December (news, 7 Jan, p2), where another rise will really be felt.
In the pioneering Shell deal - which provided the oil giant with total operational flexibility - the buyers, London & Regional and Rotch Property Group, were hit by transaction costs in the region of �50m, a figure capable of making any chief executive baulk at doing the deal. With the threat of another increase, a range of even larger property deals, such as the �640m-plus outsourcing of Lloyds TSB's property portfolio, could fall by the wayside.
The principles behind the corporate outsourcing of property are simple.
Property companies are better placed to run and manage property portfolios because it is their core business. Plus, the capital invested in property by oil companies, banks and retailers would be better invested in the areas of their own core business. In Shell's case, the returns on capital demanded by its investors are 15%. The billion-pound property portfolio managed by Shell provides returns of half that figure. In business terms, the sums don't add up.
Driving forces
Neil Jeffares, head of structured finance at Shell Capital, says: 'We all know that the great driver of efficiency in business is liquidity and, if you keep increasing Stamp Duty, you're driving down that efficiency.' The simple economic advantages of the process are only restrained by the cost of transferring the assets from one company to another. These costs, said one source involved in the Shell deal, are becoming 'absurd'. Stamp Duty now accounts for more than three-quarters of total transaction costs.
Microsoft, JP Morgan, Lloyds TSB, Electrolux and Chase Manhattan are just some of the companies looking at outsourcing their property holdings to improve efficiency. In the prevailing economic environment, the greatest fear among companies is that just as they prepare to exit from property, the Labour government plans to reduce their chances of success by wiping billions off the value of their property in one fell swoop.
A joint report commissioned by the RICS, the British Property Federation, the Investment Property Forum and Corporation of London claims that three consecutive Stamp Duty increases have already wiped �40bn off an estimated UK total of �500bn. The research, undertaken by Arthur Andersen, predicts that another 1% increase in Stamp Duty will knock a further �43bn off property values.
In a bid to remain competitive, GlaxoWellcome resurrected its merger talks with rival SmithKline Beecham two weeks ago. The company is just one of the more high-profile names concerned by the increase in inefficiency being introduced by the back door. Peter Redhead, head of estates at GlaxoWellcome, says: 'Stamp Duty is bound to be a discouragement to buying property because it pushes the transaction cost up. If there is a finite amount of funds available and Stamp Duty goes up, the price will have to come down and that might not make the sale viable for the vendor.'
Any threat to the process is of direct concern to banking giant Lloyds TSB. The bank recently held talks with four key PFI players about outsourcing its entire 3,000-property portfolio: Goldman Sachs-backed Trillium; Nomura-backed Servus; Citex, backed by Donaldson Lufkin & Jenrette; and Mapeley, supported by funds from George Soros's Quantum Realty Fund.
Delivering shareholder value in the banking sector has become the primary concern of Lloyds TSB's property support chief Hugh Stebbing who says the case against any increases in Stamp Duty is simple: 'We don't like illiquidity any more than anyone else. Business is all about flexibility these days, and anything that affects that flexibility is bad news for business.'
Post Office tense
Gill Robinson, head of estates management at Post Office Property Holdings, is also anxious about the chances of success for private sector PFI deals and the impact such deals can have on the success of the Post Office's business.
'Stamp Duty has an effect on the disposability of our properties, particularly our high-value properties. It reduces the constituency of people looking to buy them,' she says. Robinson is concerned that the Stamp Duty rate doesn't have to get much higher before it begins to bite into the performance of businesses. 'It wouldn't have to get much higher; at 5% we would certainly feel it. Every pound that we spend on Stamp Duty is a pound that we can't spend on our business,' she says.
Gary Wilder, managing partner of Credit Suisse First Boston's Real Estate Products, says UK plc's fears are well-founded. 'With every 1% increase in Stamp Duty - for every billion you're taking out another �10m in costs. It's just detrimental to market forces. Any additional cost has to come out of the equity. It's not transferable, so you can't leverage; you just reduce the return on these deals. The internal rate of return will be depressed and, as a result, the pricing will be reduced.'
Well-placed sources involved with the Shell deal admitted that last year's Stamp Duty increase had already forced the oil giant to pull out of similar portfolio sales. Additional increases are likely to be felt, particularly at the margins. David Turner, president of NACORE, says the tax's impact on occupiers is becoming clearer.
Loosing loopholes
Whereas Stamp Duty has always been looked on as a complicated and eventually avoidable tax, closure of loopholes - as well as increases - have changed that for occupiers. 'It's become a disincentive. One could perhaps argue that it's not dissimilar to other frustrating financial and employment issues that we somehow shoot ourselves in the foot with,' says Turner.
In an economic world where the message coming from 11 Downing Street is to modernise and deliver 'best value' in everything we do, it's no wonder that the business community remains confused. Convergence with Europe may be Gordon Brown's objective for Stamp Duty, but it's UK plc that ultimately pays the price for the chancellor's dividend.
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