It has been another stellar year for London property, which continues to attract foreign investment at record levels, in both its residential market and its commercial developments.
The latest figures from the Office for National Statistics showed house prices in Britain’s capital rose by 12 per cent over the year to October, with the average house price in the capital now £437,000 (Dh2.62 million), compared with £257,000 across England.
The rise of the London housing market is being underpinned by a flood of money from across Europe, the Middle East and Asia.
The cash has flowed to the capital as rich individuals have feared for the safety of their wealth elsewhere in the world.
But with public finances in the United Kingdom remaining extremely stretched, there is pressure on ministers to make sure that overseas investors are paying their fair share.
There have also been concerns that a house price bubble in London is being exacerbated by an influx of foreign money.
So this month the chancellor of the exchequer, the government’s finance minister, announced a heavily trailed move to make overseas investors pay capital gains tax (CGT) on the sale of their UK property from 2015.
It has been dubbed the “oligarch tax” and is predicted, by the treasury, to raise £125m over the next five years.
Previously, foreign resident owners had to pay no CGT, compared with 18 to 28 per cent for UK residents selling a property that is not their main home.
Will McKintosh, who is the head of the property consultancy Jones Lang LaSalle’s Middle East and North Africa residential business and based in Abu Dhabi, is confident that the move will not deter serious Emirati investors from buying London property.
“Many of our buyers in this region are buying for long-term investments. At some point they may sell, but equally they may not. Many will buy property in London and keep it vacant all year – so they are not really bothered about the return they can get,” Mr McKintosh, who has been working in the region for almost a decade, says.
“There remains amazing enthusiasm for London from our Emirati clients. Bricks and mortar is close to the overall culture here and people aspire to own property in London.” One client owned 15 properties in one project and that was not unusual.
The average purchase price for McKintosh’s clients who buy London properties is between £1m and £1.5m and at this level of the market, there has been little concern shown over the proposed changes.
Indeed, of all the things that could turn investor sentiment off London – the recession, shortage of property, inadequate transport, fears over the weakness of the City or fears of departure from the European Union – it is rare for these to be mentioned.
Mr McKintosh says: “Out of 100 buyers, perhaps five might raise something about the European Union or the City, but it will not stop them from buying anyway.”
His colleague, Adam Challis in London, agrees that the market is unlikely to react with any significant sell-off. “International buyers chose to own London property for a wide range of reasons that extend well beyond the current treatment of CGT.”
However, Mr Challis argues that a greater problem is the uncertainty introduced by the government’s period of consultation and the impact the tax changes may yet have on new development, which is already in short supply in the capital.
“The continued focus on increasing the tax burden on high-value property and the wealthy is unhelpful to the UK’s long-held openness to international investors. The UK taxation system is already very progressive and there will come a point, as occurred with the high rate of income tax, where increased burdens are counter-productive.”
Mr Challis argues that overseas investment in new residential supply is vital. “In a post-credit crunch world, to trigger development finance a certain proportion of sales (usually about 30 per cent) must take place first. Now it’s not owner-occupiers who buy off-plan, so without investors many developments would be unviable. Put simply, no investors, no supply – or certainly a lot less,” he says.
Jones Lang LaSalle estimates that about half of all new build in London last year was bought by overseas investors, representing somewhere between £4 billion and £5bn in investment, or 5,000 to 6,000 homes. To be clear, new build represents 13 per cent of all transactions in London (16 per cent by value) so it’s still just a fraction of the total market – but it’s still a pretty big deal.
London now competes in a global market for investment into property and if the increased CGT liability becomes a discincentive for buyers, there are plenty of other cities that will relish the opportunity to win a sale away from London.
Ultimately, Mr Challis says, slapping 28 per cent tax on non-voting foreign owners may not result in an increased tax take, but in lower investment across the board.
Rob Perrins, the managing director of Berkeley Homes, one of London’s most successful housebuilders, recently called for government to step back from a piecemeal approach to property taxation. He made a similar point: “Don’t think in terms of increasing the tax burden on a small cake. Attract investment and make the whole cake bigger.”
Niccolò Barattieri di San Pietro, chief executive of Northacre, the developer behind some of London’s most expensive residential developments including the Bromptons in Chelsea, says: “Overseas purchasers keep the development industry in business, creating employment and investment in the construction sector. Many developments built over the last five years would not have happened at all without international money funding this construction.”
Kim Vernau, the chief executive of BLP Insurance, is similarly concerned that the measure could dissuade foreign investors from coming. “The government intends to conduct a thorough investigation of this measure early in the new year and we hope they consider the dangerous signal this move would send to foreign investors,” he says.
But Liam Bailey, head of global residential research at Knight Frank, the property consultancy, is less concerned.
“It is important to note that this brings the UK into line and levels the playing field with other markets like Paris and New York, where equivalent taxes can reach 35 to 50 per cent, depending on the owners’ residency status.
“Tax is not the primary driver for people buying in London – although it will now have to be factored in. For most investors their main reason for buying in London is their belief that it is a safe bet in terms of economy.
“It’s fair to say that five years ago London was very benignly taxed for foreign residents, now it is much closer to other global cities.”
Meanwhile, one property website has predicted that UK house sellers could increase asking prices by 8 per cent in 2014. Next year’s growth is expected to outpace 2013, according to Rightmove, which measures the price sellers advertise their properties for, rather than the achieved sale price.
House prices in most parts of the UK remain below their 2007 peak, but are rising fast. According to Halifax, the nation’s largest mortgage lender, prices are up by an annual average of 7.7 per cent this year, the biggest annual increase in six years.
The gap between house prices in London and the rest of the UK is now at the highest level recorded and records look set to be broken again next year.