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The Enduring Global Appeal of Real Estate in London

15 May, 2018

Guy Gittins, Head of Residential Sales, Chestertons, UK

Craig Leverett, Mortgage Consultant, Springtide Capital, UK

Nick Stone, Property Lawyer and Partner, Child & Child, UK

The safe haven appeal of London’s high-value residential property market has long been underpinned by strong national and international demand, with overseas nationals drawn to a city that is at the forefront of business, trends, and culture. However, former Chancellor George Osborne’s decision to reform Stamp Duty Land Tax in December 2014 — making the property acquisition tax more expensive for anyone acquiring property worth more than around GBP 937,000 — made home values at the higher end of the market particularly vulnerable. This was followed in April 2016 by the government’s decision to introduce further reforms with a 3% stamp duty surcharge on second homes.

The increases to stamp duty and heightened political uncertainty, as well as greater exposure to capital gains tax and inheritance tax (IHT) for overseas buyers, meant that for much of 2017, consumer confidence in the high-value London property market was fragile. However, after a period of price corrections, particularly in central locations where values fell by as much as 10%–15% from their peak three years ago, the final quarter of 2017 saw strong signs of improvement, according to international property specialist and one of London’s largest estate agents, Chestertons.

Guy Gittins, Head of Sales at Chestertons, comments: “In the last quarter of 2017, we recorded our highest transaction levels of the previous two years, and December in particular was a record month as sales over GBP 5 million accelerated once again, giving us an optimistic view of 2018. We believe this is because the market had corrected itself to a level that absorbed pretty much all of the increase in stamp duty and, therefore, started to show relative value again.”

Much of the demand for high-value luxury homes in London is coming from prospective overseas buyers, with many international purchasers attracted to the weakened sterling against the dollar and the euro continuing to view London as a safe bet. In addition to those from the UAE, Jordan, Saudi Arabia, and Egypt, the biggest increase has been in potential buyers from Turkey and China, reports Chestertons’ mortgage partner, Springtide Capital.

“I have been told prices at the top end of the Turkish property market are falling amid the depreciating Turkish lira and deteriorating political and economic conditions, which means many affluent Turkish nationals are rethinking their current property investments and looking to shift their money abroad. The Chinese enquiries seem to be coming from experienced property landlords in China and Hong Kong who are looking to diversify into London,” says Mortgage Consultant Craig Leverett of Springtide Capital.

For any purchaser not familiar with the UK property market and/or based overseas, it is a good idea to instruct an agent to operate as a buying agent or property sourcer, a service offered by a number of high-end agents. This service sees agents representing buyers first establish their requirements, and then source the best options available on the London market, thus helping to reduce the clients’ anxiety about finding the right investment.

Gittins offers some valuable insight: “Obviously, overseas buyers looking to invest in high-value UK domestic property, whether for investment or owner-occupation, need to do their homework to fully understand the buying process in the UK, funding options, and UK tax aspects, such as inheritance tax, stamp duty, and capital gain.”

A few years ago, overseas residents and foreign nationals were catered for by just a couple of specialist lenders and private banks, with many private banks dealing only with those looking to invest a significant amount of money. Now, in marked contrast, many major banks and lending institutions have relaxed the availability of mortgages to foreign nationals and expats, Leverett explains. “Three years ago, I arranged very few overseas loans. In 2017, I would say as many as half of loans arranged have been for foreign clients, many of them still residing overseas. Now, more and more lenders are considering non-UK residents and UK residents who are living/working overseas for a mortgage to purchase property in the UK. The market is certainly growing and is opening up.”

For many investors, it is not necessarily that financing options are required to make a purchase, but with an increasingly competitive lending market and interest rates still low, buyers want to raise capital on their property. “Reputable mortgage brokers can advise on the best lending products available based on investors’ requirements, but depending on the structure of the acquisition, there can also be varying tax benefits, so it is also worth discussing options with a specialist tax advisor,” adds Leverett. The foundation to a successful UK property portfolio is ensuring that a team of trusted professional advisors is in place. Working closely with an agent that has international links and experience in helping overseas buyers is important, but selecting the right mortgage broker and property lawyer is also paramount to the purchase process running efficiently.

Nick Stone, Property Lawyer and Partner at Child & Child, says: “It is a common assumption that all property lawyers provide the same level of service, which is not the case. Ideally the property lawyer should work for a company that offers an all-round legal service to clients, catering for their every need — that way, buyers from overseas can also work with a tax lawyer within the same firm to implement the most tax efficient structure for the property portfolio, especially considering recent changes to UK inheritance tax.”

As of 6 April 2017, UK residential property owned through non-UK structures has been within the charge to UK IHT, regardless of the owner’s residence or domicile status. There can be between one and three IHT charges with at least 40% and up to 120% tax exposure. “This change is catching both property investors and advisors out, which is why it is more important than ever for investors to fully understand tax implications,” says Stone.

Despite tax hikes and post-Brexit uncertainty, London remains one of the world’s largest cities and a global financial center. Conditions in the high-value residential market are ideal for overseas buyers who seek advice on where and what to invest in, the most affordable loans, and how to properly structure their purchase to reduce tax obligations.