by Danielle John, Associate at Charles Russell LLP

• The London prime real estate market

Property prices in London have been increasing rapidly and although a full recovery from the 2007 crash is yet to be achieved, the capital continues to be considered a safe haven for investors both domestic and foreign.

The most desirable, or “prime”, areas of London have seen a staggering 118% price increase in residential property prices over the past 8 years and we are now seeing some interesting movements within these prime areas. Movements which suggest that investors might need to change tactics in order to see good returns.

Danielle John

Prime Central London, for example, has seen a slightly more modest 8.9% increase year on year for Q1 2014 and London’s “ultra prime” (i.e. properties worth over £10million) has seen an extremely modest 1.9% increase year on year[1] whereas the annual rate of increase in the London Borough of Waltham Forest was a whopping 23.5%[2]. The rates of increase within prime areas seem to be more rapid where owners don’t hold on to their properties for as long a period of time such as prime South West (14.7% increase) and prime North (15.8% increase) or where there are properties which can be up-cycled such as in Prime East London where properties have seen an exciting increase of 17.2% year on year [3].

There are murmurs that the soaring increase in property prices will lead to another housing bubble but some, including Savills, believe the slower rate of growth in the ultra prime and prime Central areas might just help consolidate the rapid recovery seen in recent years and avoid the risk of a bubble. Can it really be a simple case of onwards an upwards?

•  Foreign investment and the need for affordable housing

In 2013, 75% of new homes built in inner London and 50% of central London properties sold for over £1m were bought by “foreign” purchasers.[4] There are concerns that foreign investors are buying up London’s best properties, increasing the property prices and leaving homes empty, but when we look at residence as opposed to nationality of property owners a different light can be shed on the matter. London is a global city and so it isn’t surprising that a large number of the city’s population are “foreign” and looking to live in the capital. Knight Frank’s analysis of prime Central London sales split by nationality and residence (12 months to June 2013) showed 49% of sales were to Non-UK nationals but only 28% were to Non-UK residents.[5]

London needs more homes and foreign investors are not only adding to the limited stock but are more willing to take on projects domestic developers don’t have the capacity to take on, such as off plan sales. Developers, whether foreign or not, are often required to provide affordable housing or make CIL payments which although can in some cases be prohibitively high for investors, they are good for Londoners since the money is filtered into the local area.

•  A taxing question: Is the “Safe Haven” still safe?

The UK is undoubtedly a top European destination for foreign direct investment with a 22% increase in FDIs in 2012/2013 compared to an 18% fall globally during the same period[6] but there are fears that talks of a bubble, the strengthening pound, increased tax burdens and a looming general election might put off the less risk averse investor.

Unlike their domestic counterparts, non-UK resident investors are currently exempt from paying capital gains tax when reselling UK property but the government’s plan is for the balance to be redressed. From April 2015, non-UK resident owners will be required to pay CGT on disposals of UK property and so some investors will need to consider taking on new structures of property ownership or looking at new assets in which to invest altogether. Even if CGT doesn’t put off investors, it is likely that we will see a lull in investments whilst the inevitable teething problems surrounding the complex new tax rules are overcome or at least better understood.

• Current considerations for investors

Investors want to see a good return on their investment and the statistics show that London, for the time-being at least, ticks that box. The diversity of the capital provides a wide ranging menu of investment opportunities to satisfy differing risk appetites. We have seen that the rate of increase in traditional prime areas is slowing down and that the prime areas are expanding and so it isn’t surprising that some investors are looking to invest in areas which have more room for growth.

The rate of property price increase versus the rate of salary increase has seen many people living in London priced out of home ownership and having to live in rental properties. The demand for more rental properties has driven investors towards the buy-to-let market but consideration has to be given to the practicality and cost of carrying out landlord’s duties if investing from overseas.

 Tips for Foreign Investors

• It is a highly competitive market out there and knowledge is golden. Investors need to know the market, know how to find the right property and know the right people for the job. Having a team of advisors lined up and ready to go when the right property surfaces will hopefully mean beating the competition. Have accountants ready for tax planning, lawyers who are experienced in working in the chosen investment area and agents who can negotiate the right deal.
• Part of knowing the market means staying on top of political and economic developments so that these can be factored into decision making. The government are well aware of Londonners’ feelings towards the lack of affordable housing available and so it wouldn’t be surprising to see more incentives and schemes introduced to address this.
• Don’t be left behind! Keep an eye out for emerging submarkets with character and good infrastructure; these are already seeing higher percentage growth than prime areas.

[1]  Savills, Market in Minutes, Prime London Residential Markets, April 2014

[2] Land Registry, House Price Index, March 2014, Release date 30 April 2014

[3]  Savills, Market in Minutes, Prime London Residential Markets, April 2014

[4] Land Registry, House Price Index, December 2013, Release date 29 January 2014

[5] Knight Frank, International Buyers in London, October 2013

[6] United Nations Conference on Trade and Development, World Investment Report 2013