Taxing reality for London's prime housing investors

Although there is no such thing as a surefire winner when it comes to investments, owning a house in prime central London has been about as close to it as it gets over the past five years.

According to Knight Frank, property prices rose by an average of 8.5 per cent during the five years to January 2015.

As Ashley Osborne, the managing director and head of UK residential at Colliers, put it: “Central prime London has had its place in the sun over the past four to five years.”

But there are signs of storm clouds gathering. This month, The Financial Times reported that hedge fund investors had started shorting the stocks of Berkeley Group – a property developer focused on the London market. That followed a weight of research showing fewer transactions are completing and the recent surge in house prices was coming to an end.

Knight Frank’s prime central London sales index reported that from a year-on-year increase of 4.8 per cent to January 2015, house price growth slowed to just 1.2 per cent in the year to January 2016, and the number of super-prime transactions (£10 million, or Dh50.9m, and above) fell by a third.

Changes to stamp duty, a UK property tax, have been blamed for this, with the levy imposed on homes worth more than £1.5 million being increased to 12 per cent of the purchase price.

On top of this, in April a further 3 per cent levy will be imposed on buyers of properties that are either second homes or buy-to-let investments.

This deadline has begun to spur activity, with prices rising in January by 0.1 per cent – the first positive monthly growth since July 2015 – and the number of viewings in the final quarter of 2015 increasing by 4 per cent year-on-year.

“The market needed to correct. However, that’s not to say it’s ready for take-off,” says Daniel Daggers, a partner at Knight Frank. “The overriding mood is one of caution, but at the right price demand is strong and mom­entum is returning.”

Indeed, although prices have slowed, few analysts are predicting a major slump in house prices, with demand still strong regardless of the tax situation.

“I know that nobody likes paying tax, but death and taxes are two of life’s certainties,” says Laurence Ronson, a director of Ronson Capital Partners.

“London certainly has been, and continues to be, a safe haven for global wealth. There’s always a flight of capital from regions of uncertainty and I think London will always capitalise on that. I think you will always get people having a little moan about stamp duty or capital gains tax, but those taxes exist everywhere in the world. London is still on a par with many other cities around the world in terms of your cost of purchase.”

The growth in prime London property prices over the past few years has been attributed to overseas buyers – initially from Russia, but latterly from the Middle East and China. And the slowdown both in China and in the Middle East has meant more buyers from each region have been looking at London property as a means of wealth protection.

Knight Frank’s January prime London report stated that “while some institutional capital is returning to or remaining in the Middle East to support local economies, private individuals are more likely to buy pro­perty and other assets outside the region due to longer-term concerns about what the falling oil price may mean”.

GCC investors spent US$8 billion on global real estate purchases in the first nine months of last year, with $6.5bn of this being purchases made by sovereign wealth funds. Of the $1.5bn spent by private individuals, 37 per cent went on purchases in the UK – up from 10 per cent in the previous year. London was the focus for most of this spending.

“Over the past few years, London has been consistently the most attractive location for private GCC investors in the residential sector,” said David Godchaux, the chief executive of Core UAE, an associate of Savills estate agent.

“While some have commented that falling oil prices and instability across the region would translate into less direct investment from the Middle East to London, what we are witnessing is actually the contrary – Middle East residential investors are looking towards London as a safe haven now more than ever, favouring capital preservation over higher yields that can be achieved in secondary European cities,” Mr Godchaux said.

Abu Dhabi Financial Group (ADFG) has been one of the more active investors in London in recent years, snapping up the Metropolitan Police’s headquarters, New Scotland Yard – this is not to be confused with its former headquarters, Great Scotland Yard, which is owned by the UAE’s Lulu Group – and No 1 Palace Street overlooking Buckingham Palace. Both are being converted by Northacre – a London developer in which it has a controlling stake.

Speaking at an event held in Dubai in November, ADFG’s chief executive Jassim Alseddiqi said the city had proved to be a lucrative hunting ground.

“When we first acquired Northacre, it had £150m of developments. Today, it is the largest central London developer with projects of over £2bn.”

He argues that the super-prime market has attracted more interest from US cities.

“Don’t forget, London is a truly global city. The new billionaires coming from Silicon Valley eventually will trickle in.”

Niccolo di San Pietro, the chief executive of Northacre, argued that the slowdown in prices was merely “a pause” and that the long-term fundamentals for London’s property market remained strong, with 700,000 new homes in the UK capital due to be built by 2030 but more than 900,000 new homes were needed as the city’s population is predicted to grow by 1.5 million people to 10 million over the same period.

He pointed to research by the building consultancy Arcadis which stated that £620bn of built assets are due to be constructed by 2030.

“If you thought you had seen [a boom] in London over the last 15 years, you haven’t seen anything yet.”

Faisal Durrani, the head of research at Cluttons, is also bullish on the long-term prospects for London property, predicting a 20 to 25 per cent growth in house prices over the next five years. Its spring 2016 report said the recent decline in the pound had created a “currency advantage” for Ara­bian Gulf buyers, as most regional currencies are pegged to the stronger US dollar.

Mr Durrani said Cluttons growth projections for prime central London are underpinned by the fact that “there is such a shortage of secondary stock”.

He said: “There just isn’t anything on the market. When there is, it transacts really quickly, conversion rates are close to a record high.

“We have 10 central London agencies and we are talking 98 to 100 per cent conversion rates, which we haven’t seen before.”

Mr Osborne agrees. “There’s always sites kicking around that people are talking about conversion to residential, but it’s still very difficult to get planning consent, funding is difficult to obtain for most developers and the reality is the supply situation is not likely to change,” he said.

He added that demand had started to become more price-sensitive as a result of the rapid price growth in recent years, but while supply remains tight a significant decline in prices remains unlikely.

“Until there is an alternative for people to put money into in terms of other markets, I don’t think that demand is going to leave.”

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Michael Fahy

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