Foreign investors – and, in particular, those from the Middle and Far East – have played a prominent role in transactions at the high end of London’s property market for decades. Having founded and managed a super-prime property development firm since 2009, we experienced first-hand the impressive amount of capital this buyer-type could deploy. From the Grosvenor House Hotel to the Shard, international purchasers snapped up some of the city’s finest real estate assets.
Many in the property industry assumed the outcome of the EU referendum would dent overseas buyer activity. However, it has actually stepped up a gear. For instance, CBRE estimated Hong Kong investors had accumulated £4.5 billion to target Prime London assets by 2016’s close. Developments we have recently been involved with in Belgravia and Chelsea also continue to attract interest from overseas buyers post-referendum. So why this unshaken confidence?
The benefits of a weakened Sterling
Put simply, nothing has really changed for foreign investors – except, crucially, the pound’s value, which slumped in value after the referendum.
Britain is still an EU member and continues to be so until exit negotiations have completed – not merely begun. Therefore, British property law remains the same, so investors have at least another 12 months of relative security.
Combined with a better than expected economic environment, this equates to a win-win for foreign investors who still enjoy the security of UK property law reinforced by EU legislation, but at a cut-price, owing to weaker pound versus dollar/ euro ratios. As a result, these buyers have capitalised by purchasing now and the signs are that they will continue to, even now that the Prime Minister’s has chosen to formally invoke Article 50.
Whether foreign investor activity in London’s Prime property market can continue at its current pace hinges on the looming Brexit negotiations and subsequent economic policy. Detailed predictions are fairly pointless at this stage but, in general, there are two outcomes which we think are reasonable possibilities.
The first is that the Government attempts to tax and regulate overseas buyer activity more heavily, as a politically easy way of recouping money lost elsewhere. Taxes on vacant homes or on foreign nationals purchasing property (such as operates in Vancouver) would likely cool international demand in the short-term. However, long-term effects would be more muted, as the new levies become factored into financial planning.
The second outcome is one whereby foreign buyer activity is more actively encouraged, as the Government fears losing its status as a world-class investor capital. Stamp Duty at the top end of the market may be cut – as could Corporation Tax.
The eternal investor?
Regardless of what happens next in terms of Brexit, we don’t foresee overseas buyer activity in the capital entering terminal decline in favour of another European city. Great cultural and commercial centres like Paris and Milan cannot offer foreign buyers the returns they have become accustomed to in Prime London. Foreign buyers are here to stay – time to, as the PM remarked, “make a success of it”.