By Citi Private Bank,
April 11, 2016
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London residential real estate has attracted many ultra-high net worth buyers in recent years. But with prices high and an often-shifting tax regime, we ask a leading expert for his view on the outlook.
“When a man is tired of London, he is tired of life; for there is in London all that life can afford.”
It is almost two-and-half centuries since the great writer Dr Samuel Johnson gave his famous verdict on the capital of the United Kingdom. In recent years, many Ultra High Net Worth Individuals from around the world have echoed his sentiment, buying up super-prime homes in the city and helping to drive prices to new record-highs.
Just lately, however, the world’s wealthy may have grown slightly wearier of London, if prices and transactions for its finest properties are anything to go by. Sales of super-prime homes – those worth £10m or more – fell by one-third in 2015. High prices, tax changes and political uncertainty have all been mentioned as possible culprits.
So, are wealthy buyers really tiring of London property or will their enthusiasm get a new lease of life? To find out the latest trends among Ultra High Net Worth buyers in the capital’s best neighbourhoods, Tracy Jackson-Kitt, Citi Private Bank’s Regional Head of Investment Finance for Residential Real Estate, sat down with Liam Bailey on 29 March 2016, Head of Residential Research at Knight Frank, a leading independent global real estate consultancy.
Tracy Jackson-Kitt: London residential prices have had a strong run since the end of the financial crisis in 2009. How do you see the market right now?
Liam Bailey: There’s no doubt we’ve been through a weaker period. Last year was difficult. The lead-up to the general election in May created uncertainty, while the market was also still digesting changes in stamp duty (a purchase tax on British property). Overall, annual growth to November 2015 was only 1%.
TJ-K: And has the top end of the market done worse than the market overall?
LB: Prices in prime central London have slipped back. Taking the area around Hyde Park – where many super-prime properties are located – achieved prices are probably down 5% year-on-year at the moment, whereas asking prices are down closer to 10%. This partly reflects how asking-prices became inflated in 2013-2014, when the market was very strong.
TJ-K: Are there any signs of a turnaround?
LB: We’ve certainly seen more registrations of potential buyers over the last couple of months and more viewings. So there’s a definite sign that more realistic pricing is starting to benefit the market. Also, some buyers may be motivated to get deals done before 1 April 2016, when the stamp-duty regime is going to change again.
TJ-K: This is the additional 3% of the purchase price that buyers who already own a property will have to pay to the government, taking the top rate of stamp duty to 15%, right?
LB: Yes. And it’s important to note that this will not simply affect people who already own a UK property. As it stands, anyone who owns a property anywhere in the world would be liable to the additional rate of stamp duty.
TJ-K: A couple of leading financial institutions have put out papers in recent months saying that London house prices are in ‘bubble territory.’ What do you make of that?
LB: I think ‘bubble territory’ would be the wrong phrase here. ‘Fully priced’ is probably a fairer term. It seems very unlikely that we’re going to see significant price-growth over the next five years in London, so the situation is very different to what it was five or ten years ago. I would expect we’re going to get used to relatively low if not flat growth over the next few years.
TJ-K: So the forecasts of a significant correction are overblown?
LB: London has been fully priced on various measures on some time and there have been calls for a correction for the last two or three years. And of course, we saw in 2008 that London is not immune to downturns. But for a correction, you need a trigger. And it’s not clear what that trigger would be for now. The biggest threat would be from rising interest rates. But that seems unlikely in the short term. The same goes for a sharp rise in sterling. Likewise, the London economy looks fairly healthy for the moment.
TJ-K: What about supply? There’s been a lot of new development at the top end of the market. Couldn’t that affect pricing?
LB: Super-prime properties – the very top end of the market – tends to be clustered in places such as Mayfair, Marylebone and Belgravia, Chelsea, St John’s Wood, Hampstead. As a rough rule of thumb, you can say locations around Regent’s Park and Hyde Park. There’s more development going on in places like Mayfair than there was a decade ago, but they’re still relatively few overall.
The big supply growth is, as you say, really around the fringe of central London. But even there, sales are still happening and are relatively strong.
TJ-K: The Mortgage Credit Directive – the new European legislation to create a single market for mortgages and protect consumers – has just come into effect in the UK. Is this having any effect on lending?
It’s a bit early to tell, really. And with so many other factors potentially affecting the market right now, it’s hard to know which is the dominant one. From past experience, it’s possible that this could have a temporary negative impact on lending and housing market activity. But once lenders have fully acclimatised themselves to the new regime, one would expect to see a rebound in activity.
TJ-K: We’ve already talked about stamp duty’s impact on high-end London property, but what about the other tax changes, like the annual levy on properties owned through trusts and companies, the imposition of capital gains tax, and increases in the charges paid by non-domiciled residents?
LB: I don’t think the imposition of capital gains tax on foreign investors in UK property is an issue. It was a quirk that they didn’t have to pay before. Stamp duty remains the most impactful change. Funnily enough, the biggest problem is not so much that there have been all these changes that you mention, but that they’ve happened so quickly. That’s created uncertainty. Can anyone really say that the government has finished with its changes to property taxation? It seems as if there are fresh changes every six months. This makes things especially difficult for developers, who have little idea what the tax situation will be in three or four years’ time.
TJ-K: How does the tax payable on London property compare to that payable in other global cities favoured by Ultra High Net Worth buyers?
LB: We did an analysis with Ernst & Young looking at taxes relating to $1m and $10m properties in some twenty different cities around the world – combining the costs and taxes arising on purchase, ownership and sale. For $1m properties, London was relatively low placed, in the lower half of the locations. In the $10m properties, it’s in the more expensive end of the range.
TJ-K: Overall, does London property still retain its appeal for overseas buyers?
LB: I think it does. The biggest draw is everything that London has to offer. Prime property is a big market here because London is one of the most important business and financial hubs of all. The high-value added jobs and wealth attached to that are the primary drivers of the market. Quality education, the lifestyle on offer, the rule of law, English language, and stability of property title also combine to make a very compelling proposition. Legal and governmental stability bolsters the economic backdrop, supporting demand for living and owning property here.
TJ-K: Has the volatility and uncertainty in many emerging economies had any impact on the make-up of super-prime buyers?
LB: The make-up seems relatively stable, actually. Native buyers still make up 35% to 40% of the super-prime market. Beyond that, Russian, Indian, Middle Eastern and European buyers are a big part of the market. The biggest change in recent years has been the arrival of mainland Chinese buyers, who weren’t even present four years ago but who now account for 5-10% of the super-prime marketplace. Russians have held steady at 10-15%. Of course, the marketplace is fairly thin, with perhaps 400 deals a year above £10m, so just a few transactions can affect the “trend”.
TJ-K: Is the build-up to Britain’s expected vote on membership of the European Union a concern for super-prime buyers? What would a vote to withdraw mean to them?
LB: For most buyers and those relocating to London, it doesn’t seem to be much of an issue for now. There’s a recognition that whatever happens, London should retain most of its attractions even if Britain does vote to leave.
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