When UK Chancellor of the Exchequer George Osborne announced in 2014 that a capital gains tax on foreign real estate buyers would be imposed, many who felt it was long overdue cheered him. If enacted in April 2015, this will place the same tax burden on non-UK owners of second homes as is currently placed on British citizens. But will it cool the overheated London real estate market?
Already, threat of the tax seems to be slowing the purchase of high-value residences in London. Some real estate companies predict that current investors – many from China, India, the Middle Eastern countries, and Russia – might sell their holdings before 2015 to avoid the tax. Others suggest that the stability of UK real estate will prove to be a bigger factor than this tax, or that foreign owners might shift their investments from second homes to real asset investing that has more to do with development and building than owning and occupying.
Offering some credence to this ‘the-tax-doesn’t-matter’ school of thought is how foreign investors are increasingly buying homes outside London. The Daily Mail reported in October 2014 that “investors keen to make a profit from the booming UK property market are purchasing homes across the country” in places that include South Wales, Weston-super-Mare, Manchester, Liverpool and Sheffield. These purchases of middle-class and starter homes are up 20 per cent in 2014 over 2013, and most are bought with cash.
What seems to be driving a spectrum of investments in the UK is simply that opportunities have cooled elsewhere. The real estate firm JLL reported in the second quarter 2014 that “major Chinese residential developers look for opportunities overseas to counteract slower economic and price growth at home,” adding that investments in residential development are up 80 per cent this year, concentrated in the UK, Australia and the United States. The office sector may get the bulk of this, but “there is increasing interest in residential development,” says JLL in its online publication The Investor.
• Larger multi-family developments are on the rise in the UK, given the strength of the rental market. Larger investors, institutions in particular, are more interested in scaled-up properties.
• Creative financing such as sale-leaseback deals proves to be attractive to some. These might be available through housing associations.
• Basic demand for housing will remain high for many years to come – all but ensuring the market for sale or rental of properties will be there at the end of the development cycle for new-build developments. Typically, this means the 18 to 60 months it may take for alternative investment funds to acquire raw land, achieve planning authorisations, to develop infrastructure, to construction and to the sale or rental of homes (as is the practice in real asset portfolio investing).
It is impossible to predict the outcome of the proposed new capital gains tax on foreign investors, but the demand for housing is almost a future certainty given the extreme shortage in the UK. But any investor considering real estate for their portfolio needs to discuss it in all its nuances with an independent financial advisor.