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New tax dims London’s property lure

LONDON’s status as a magnet for foreign property investment was burnished in the years after the financial crisis by an investor-friendly tax regime and the falling value of the pound. That may be changing.

A new capital gains tax on homes sold by people living abroad and a growing British economy that’s lifting the currency may dull the capital city’s appeal to property buyers from abroad.

The government “will put people off by changing the rules constantly and making it less tax-friendly for buyers”, Andrew Sneddon, head of tax law at Trowers & Hamlins, said by phone. “If these wealthy buyers choose to go to Monaco, Paris or New York to spend their summers and their money, what’s that going to cost the UK economy?”

Investors from the Middle East to Asia have been splurging on London homes, buying everything from multi-million-pound mansions to apartments in Battersea and the City of London. That’s driving prices beyond the reach of many British buyers and sparking a development surge that’s increasingly dependent on non-UK investors buying homes before they’re completed.

South Asian buyers account for two-thirds of new London homes sold before completion, according to Land Securities Group plc, the largest UK real estate investment trust. The high-end market is dependent on pre-sales to overseas buyers to help get development finance and deal with rising land costs, Michael Lister, a lecturer at University of Westminster, said in a Nov 22 interview.

International hiccup

The market “only needs a bit of an international hiccup for the buyers to hold back, and then you’re really stuck”, said Lister, former head of UK property lending at Bank of Ireland plc. “You can’t possibly afford to sell to the domestic buyers because they can’t afford to pay those figures.”

Battersea Power Station Holding Co raised a £790 million (RM4.2 billion) syndicated loan to develop and refurbish the first phase of the site after it pre-sold about US$1 billion (RM3.2 billion) of apartments and townhouses in May, the company said in a Nov 21 statement. The record of pre-sales was reflected in the terms of the financing, it said.

Chancellor of the Exchequer George Osborne announced the new capital gains tax in a statement to Parliament on Dec 5. It will apply to “future gains” after the tax goes into effect in April 2015, he said without specifying the size of the levy. Capital gains tax rates for second homes of UK residents currently range from 18% to 28%.

Building luxury

Luxury home developers plan to build more than 20,000 properties in London with a value of about £50 billion in the next decade, Mark Farmer, head of residential property at consulting firm EC Harris LLP, wrote in a Nov 25 report. As well as a strengthening pound, the developers face rising building costs and a risk that investors will grow weary of repeated sales exhibitions, he said.

“You’ll see softening in pricing, at the bottom end of the luxury housing market,” Farmer said. Investors will remain interested though they will “drive a harder deal”. EC Harris defines the lower end of the luxury homes market as £1,250 to £1,700 per sq ft.

In central London, about 28% of home buyers in the two years to June didn’t live in the UK, according to broker Knight Frank LLP. That rises to about 49% for new homes. In Greater London, 10% to 15% of new homes are bought by non-residents, Knight Frank estimated in October.

Moving goalposts

Singapore and Hong Kong, two destinations also favoured by south Asian buyers, have introduced measures to cool property prices and curb speculation. Singapore linked borrowers’ maximum debt levels to their incomes and raised transaction and capital gains taxes. Hong Kong has increased minimum down payments six times in fewer than three years and in February doubled stamp duty taxes for all properties over HK$2 million (RM826,200).

Transactions in Hong Kong will probably drop as much as a third this year compared with 2012, Knight Frank estimated. In Singapore, home price declines accelerated in October from a month earlier to 1.2%.

The frequency of changes to UK property tax law and the possibility of further levies are also seen as a hindrance to home buyers from abroad. Osborne raised a transaction tax known as stamp duty to 7% from 5% for properties priced at more than £2 million in March 2012.

Labour Party leader Ed Miliband and Nick Clegg, head of the Liberal Democrats, which govern in a coalition with Prime Minister David Cameron’s Conservative Party, support an annual levy on houses valued at more than £2 million known as the mansion tax. Cameron opposes the idea.

Missed opportunity

“The government had a chance to review property taxes in 2012 and they fudged it,” Rob Perrins, managing director of UK homebuilder Berkeley Group Holdings plc, said in a telephone interview. “Our real concern is that the government will keep playing around and changing the tax every six months. Property is a long-term acquisition and people deserve to know where they stand.”

About 30% of Berkeley’s customers are foreign, Perrins said.

The capital gains tax will affect prices at the lower end of the prime central London homes market where “speculators” who didn’t intend to live in the properties are more involved said Alex Michelin, a founder of luxury developer Finchatton Ltd. “It’s not going to switch off the tide. The marginal investor will say ‘this no longer makes it as attractive for me and I will stop doing it.’”

Top end

The tax won’t affect the superprime market, he said, as buyers there are more likely to live in their homes. Superprime homes are valued at £5 million or more, according to broker Savills Plc.

“It’s not an unfair tax. It brings London in line with Paris and New York,” he said. “This is just trying to say we want to make it fair for everyone.”

UK economic growth is increasing more rapidly than previously expected, Osborne said last week. That may affect property investors from abroad more than the new tax as it puts pressure on the Bank of England to raise interest rates, boosting a pound that has already been rising.

The pound plummeted against a basket of major currencies after the collapse of Lehman Brothers Holdings Inc, making London homes a relative bargain for wealthy investors and buyers from emerging Asian economies. The Singapore dollar gained 60% against the pound from September 2007 to June this year and the  ringgit climbed by 50%. Since then, the pound has risen 6.8% and 12% respectively against the Asian currencies.

“One of the key drivers around demand in that market, particularly from the Far East, has been the relative weakness of sterling over the last three or four years,” said Farmer of EC Harris. “The improving economy is good for UK plc but it might make residential investment slightly less competitive or good value in the eyes of the international community.” — Bloomberg


This article first appeared in The Edge Financial Daily, on December 11, 2013.

 

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