Repurposing real estate in 2021

Repurposing – modifying the original item to be used for a different, more beneficial purpose –  is what has been happening in the real estate market.  It has been going on for some time, but the pandemic has resulted in more concentration on this aspect of real estate.  Many owners/landlords have been negatively affected by this great upheaval in the world.  Repurposing and adding value to properties which have remained unused/untenanted has opened opportunities for the real estate market.

However, there are many aspects to be considered before launching into repurposing.  Location, local infrastructure, demand and economic viability play key roles.  Real estate agents can offer professional guidance like the estate agents in Buckingham  – especially if specific areas are being looked at.

Some factors to be studied and assessed are:

Rate of SDLT:  While the current tax holiday has offered significant benefit to numerous buyers, it is still worth considering the rate of SDLT payable on an acquisition.

  • If the land is to be bought for conversion, there are varying rates for residential and non-residential land.
  • If the construction exists, then residential rates may apply, but the acquisition of six or more houses can be treated as non-residential land.
  • Special care is required where currently out of use buildings have been previously used for both residential and non-residential purposes.

VAT:  This will need evaluation since these rates also vary.

  • If an existing residential property is sold, the seller cannot charge VAT but cannot recover the VAT on purchases relating to it.
  • If a new domestic property is being constructed, then VAT can be recovered on construction costs. If a third party builder is involved, they will not charge VAT on their construction, and hence the VAT to be recovered will be on other charges like architect and planning fees.
  • If a new domestic property is constructed and rented, no VAT will be recoverable.
  • If a new residential property is constructed for sale and then changed to rent on a short term lease, some of the VAT recovered may have to be refunded.
  • If a non-residential property is being converted, the VAT may be exempt or zero rated or a mixture of the two, depending on what is converted.

For more clarifications, the expertise of a professional real estate agent can be sought.

Capital Gains Scheme:  If VAT has been recovered on commercial property and then the property is repurposed for exempt tax, some recovered VAT may have to be refunded.  This is especially so in the case where it changes to residential.  A difference in the tenant or occupier profile (in case of charities for specific purposes) could also result.

Capital allowances: 

  • Residential properties: Tax relief is not available, but landlords can claim relief on rental income from replacing items of furniture and fixtures solely for use by the tenants.  If rent-a-room relief is claimed, then the capital allowance is not available.
  • Commercial properties: capital spent buying or repurposing properties can be claimed for tax relief.

Investment or Trading:  If repurposing is carried out to sell part or parcel of the property, then investment could change to trading, affecting profits realised on sale following refurbishment under the Transactions in UK Land rules.  This should also be verified carefully.

Sustainability:  Repurposing properties must consider aspects that will ensure sustainability.  Relevant information should be given by clients about the building’s structure, stability, design and previous use. Contractors can carry out surveys and plan the work to be carried out safely.  The time factor for such renovations should also be taken into consideration.

Covid vaccine:  The arrival of the vaccine has a promising outcome.  Although previous normalcy will never return, a close second is predicted.  It will take time, but with more public places coming back into business, repurposing real estate will also take a new turn.  Perhaps demand for the technology sector can be realised by renovating under-used sites.  Retail into rental has been widespread, considering rental values have been higher than industrial.  However, with more offices, industries and educational institutions reopening, this aspect will also have to be considered.

The future:  Long-term benefits will need to be assessed.

  • Repurposing should be carried out to last for many years as carrying it out multiple times will drain finances.
  • The demand for what the repurposing is planned should be considered.
  • Comparisons should be made with other property owners who have renovated their buildings to assess the success, and the pathway followed to achieve it.
  • Single-use or multipurpose should be looked into, to maximise the revenue expected.
  • Thinking creatively, to see the best result repurposing can achieve, can benefit in the long run. For bigger spaces, even hitherto unlikely outcomes such as an art gallery, gym, care home or educational institution could be successful.

Conclusion:  Of course, as in all major decisions, the budget is the key factor.  All the planning and execution of repurposing will depend on how much it will cost.  In the uncertainty of the current environment, it is difficult to anticipate the profit derived.  However, with the real estate market being one of the most resilient, the prediction that repurposing real estate in 2021 will be successful is likely to become a reality!

    Leave a Reply