A new U.K. stamp duty could add a significant tax burden to long-term leases that will, in the long run, mar the cost-effectiveness of sale/lease-back transactions, said analysts at Standard & Poor's. "It's a tax that will certainly make things more expensive, as the economics will change for sale and leaseback transactions," said one analyst. "It's particularly significant for longer leases that could face net present value calculations that end up at 3.5%."

According to S&P, under the new stamp duty, the land tax regime for commercial leases is expected to increase the tax payable on the signing of new leases by switching to an upfront payment of 1% of the lease at NPV. "For leases with a life of more that 10 years, the proposed change may mean increased stamp duty payments of up to 10X," explained the analyst. "The higher lease pricing that results from the new taxation rules will affect both lessees and landlords of assets such as leased pub estates."

However, under the new law, leases with a current value less than GBP150,000 (US$252,000) are exempted from the new tax. This exempts a large portion of leases rated by the agency, such as the leases that make up pub estates. Further, pub operators tend to sign up new lessees for initial shorter periods that range between three and five years, said the analyst, adding that in the case of Enterprise Inns, for example, at least one-third of its leases were of less than a 10-year duration.

"The biggest impact will be felt five years from now, because we still need this to feed through," said the analyst. "The basic assumption is that property companies have a fair amount of power especially considering the scarcity of prime retail spaces in the U.K., for example."

In essence, property owners will have the option to pass on extra costs to retailers.

It's likely that the U.K. will begin to see a surge in shorter-termed leases, but this might not be an option on prime spaces, said analysts. "The new proposals are likely to reduce market liquidity for hotel-based sale and lease-back transactions," explained the analyst. "Increased stamp duty should undermine the pricing advantage that fueled a range of long-term sale and lease-back deals based on U.K. lodging properties over

the past few years."

According to S&P, pricing on new hotel leasing deals has already begun to move upward since talk of an increase in stamp duty began circulating earlier this year.


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