In the Masterclass, I have focused on the apartment market rather than houses. However, at the end I will cover houses separately, the new build market for houses will be easier to put into context with an understanding of the apartment market.
Throughout this book, I have referenced the following fictional example, based on real life, to give you a true sense of how the market operates.
Metropolis is a real town, but for obvious reasons I have changed some of the details. I have referred to Metropolis throughout the book to put different scenarios into context.
After many years of being seen as a bad part of London, Metropolis is currently undergoing urban renewal. The catalyst for this was the economic growth experienced by many of its neighbouring suburbs. Metropolis has not experienced as much regeneration as its neighbours because it had a run-down housing estate (Metropolis Estate), which has always been considered rough. Recently, a prominent developer has purchased the Metropolis Estate with a plan to redevelop it.
Metropolis is five miles northwest of Oxford Street. It has a busy local high street as well as a London Underground Station. Adjacent to the Metropolis Estate is a parcel of land available for a new residential property, Kingsley Tower. I have used Kingsley Tower as an example throughout the book.
I have used two developers to highlight how different developers view different scenarios.
Ashley's Homes
Ashley's Homes is a private developer run by two brothers, Kingsley and Alfred. Ashley's Homes are local in Metropolis and typically build complex buildings of up to 250 units. They have a small management team and some key staff. They always act as developer, and outsource most of their work - including planning, construction, and sales.
Alfred and Kingsley use their own capital to purchase land and then use construction finance to fund the development. When they do not have enough money to buy land, they can call upon a group of investment partners to invest in their development projects.
Osborne Corporation
Osborne Corporation is a prominent, listed developer; it employs 20,000 staff across the United Kingdom. Osborne Corporation comprises 30 business units, each with its own independent management team led by a managing director. Osborne Corporation is listed on the London Stock Exchange, and it develops 20,000 homes a year across the UK. Osborne Corporation has its own construction staff; in some scenarios it self-builds with these in-house staff, while in others it appoints a main contractor to build the development.
Osborne Corporation uses its shareholder funds and debt to fund its business and developments. Capital for development is allocated to managing directors on a project-specific basis. When a managing director wants to undertake a project, they submit a standard pro forma document to the Board of directors. The CEO and CFO decide which development projects they would like to proceed with, and allocate the required level of capital to the managing director.
I have presented a potential purchase in Kingsley Tower from the perspective of two buyers: one investing onshore, and one offshore:
I have explained what the cash flow and tax implications are from owning an investment property.
I have also set out how that investment would change if Kingsley Tower were in Australia or New Zealand. I have adjusted the currencies to make similar comparisons, so the investment can be compared across different tax brackets.
I have used Australia, New Zealand, and the United Kingdom in my comparison, for multiple reasons:
Table I.1: Effective income tax rates
Table I.2: Residential real estate markets
Table I.3: Real estate taxes
Whether a country has low or high real estate taxes for a specific market function is not necessarily an issue in itself. However, it is crucial to understand what real estate taxes are in order to design your investment strategy with them in mind.