Short-term jitters in London real estate after tax changes

The changes in London’s property taxes – both the recent stamp duty reforms and a new capital gains tax for foreigners – may give investors from Singapore pause for thought before buying in the property safe haven.

But some believe that growing jitters leading up to the UK general elections next May could be the best opportunity for Asian buyers to drive a harder bargain, taking advantage of the slower market and a general feeling of caution.

The real estate market is already experiencing disruption and uncertainty, but this is likely a short-term transition period and, ultimately, will have a “very, very small impact” on buying, as the fundamental attractiveness of London real estate remains, analysts say.

The main downside is that the taxation of UK-held property has become more complex, so “international investors unfamiliar with UK tax rules will inevitably incur greater costs associated with compliance, or they risk failing to comply with rules through ignorance,” says Mark Pollack, director of property agency Aston Chase.

Camilla Dell, managing partner of Black Brick Property, a buying agency, however, says: “We love nervous markets as it gives us the ability to negotiate more strongly on our clients’ behalf.”

Our view is that the next five months present perfect buying conditions for buyers that are willing to take the plunge,” she said. “They could be rewarded handsomely, as the longer-term forecasts over the next five years are for 20-25 per cent growth across central London.”

The market has had about a year now to adjust to a capital gains tax that will be levied on non-UK residents when they sell a UK property that they are not staying in, starting April 2015.

Many see it as a long overdue closure to a “tax loophole”, given that UK residents have always had to pay capital gains tax on their second homes, but foreigners were exempted from any. “Most of our overseas clients have always thought it a bit odd . . . Most investors expect to pay some tax when they make a gain in another country,” says Ms Dell.

There is no doubt many international property investors have been attracted to the absence of such a tax and exploited that. But even with the tax in place next year, it remains cheaper than other hot-favourite jurisdictions for property investors.

At 28 per cent of capital gains, it remains lower than equivalent taxes in New York, Paris and Australiawhich can approach 35-50 per cent, depending on various factors.

Adam Challis, JLL head of residential research in London, says what is perhaps more damaging is the uncertainty surrounding valuations. The tax will only be levied on gains made from April 2015 and not on any previous gains, but he asks how all of these properties are going to be valued at the same time.

“What we don’t know is how they will be valued and measured, who will be responsible for the cost of managing a current valuation, and some of the impact on specific types of ownership,” he said.

“Details for investors are very important for transparency. And there are a number of details that we believe the government still needs to work out and have not done. The lack of clarity around some of these issues is why we are having short-term uncertainty,” Mr Challis added.

For now, values in most parts of central London remain strong and are expected to grow 5-6 per cent over the medium term, but he has seen the jitters quell property transaction volumes, especially at the top end of the market.

That uncertainty is also partly driven by the ambiguous and widely criticised mansion tax which the Labour Party had proposed to be imposed annually on homes valued at more than £2 million (S$4.1 million) – provided, of course, that it wins the general elections next May.

But the Conservative Party, led by Prime Minister David Cameron, had in early December announced and effected its own version of the mansion tax – in the chancellor’s words: ” . . . in stark contrast to the shambles of the anti-aspirational, unworkable homes tax that the Labour party wants to impose.”

Basically, the old “slab system” where stamp duties are charged at a single rate on the whole purchase price of a home has been abolished and given way to a fairer, graduated system where each rate will only apply to the part of a property price which falls in that band, like income tax.

For purchases of £937,000 and below, buyers will enjoy savings in stamp duty under the reformed system. This is good news for Asian buyers, most of whom don’t buy above £1 million, analysts say.

“Buyers from Asia tend to go for properties in the range of £500,000-900,000, for which there will be a modest lowering of transaction costs. As a result, the expectation is a modest boost for mainstream activity,” JLL’s Mr Challis says.

Asians make up between a third to 40 per cent of property investors in the UK by various estimates. But that percentage dwindles as one approaches the higher end of the market, which is crowded with buyers from Europe, the Middle East and Russia.

The reformed stamp duty rises incrementally to as much as 12 per cent for the portion above £1.5 million, which means a £2 million property will incur £154,000 stamp duty, compared with £100,000 before. Analysts thus expect the prime market to be badly hit, although Black Brick’s Ms Dell points out “that buyer profile group is quite frankly able to absorb the slightly higher taxes”.

In comparison, Hong Kong’s stamp duty reaches 8.5 per cent at the top end of the market, while Singapore’s hits 15 per cent for foreigners, and 7 per cent and 10 per cent respectively for citizens and permanent residents buying a second home.

Analysts think the prime central London residential market will stall until these luxury homes are re-priced to take into account the higher stamp duty. Mr Pollack says: “It’s inevitable that this will cause many deals to fall through and for aggressive and desperate re-negotiations to happen.”

Meanwhile, there is no guarantee that the Labour Party will drop the idea of a mansion tax over and above the stamp duty changes if it wins, even though an add-on tax now seems senseless and unnecessary.

If it does, Aston Chase’s Mr Pollack says, it would result in “a huge backlash from both the domestic and investor markets” and would shave 30 per cent off existing capital values.

It is amid this uncertainty that the high-end market now functions, but therein lies the opportunity for Asian buyers who have been mulling and hesitating about accessing the London property market.

“If buyers sit and wait until after May 2015, they may be disappointed. If you look back historically everytime we have had a general election in the UK, once the election has happened, the market bounces back. So if the Conservatives win, we believe the market will very quickly return to normal, with no threat of a mansion tax, and the opportunity will have been lost,” Ms Dell says.


Residential curb spells boon for alternative assets

By Uma Shankari

INVESTMENTS into strata-titled office, retail and industrial units in Singapore, as well as overseas homes, are set to pick up as investors search for alternative assets to buy following fresh government measures to cool the residential market here.

Analysts expect to see a sharp drop in demand from foreigners and corporations for private homes in Singapore, which will lead to a moderate drop in overall demand. Liquidity could instead flow into other asset classes, the analysts said.

The government on Wednesday announced fresh measures to curb demand for private homes, including an additional buyer’s stamp duty of 10 per cent for foreigners and corporations on top of the existing buyer’s stamp duty of up to 3 per cent.

‘The latest measure could divert activity to other segments, such as strata-titled commercial and industrial sectors, since these are not affected by the additional stamp duty,’ said DBS Group Research.
Nicholas Mak, head of research at SLP International, likewise noted that interest in small strata-titled industrial and office units could pick up.

Interest in such properties began to slow down in August, when negative news from the eurozone started to adversely affect local investment sentiment. Prices of small industrial units have also climbed by about 30 per cent year-on-year, making them less attractive to investors. But now, interest could pick up again as cash-rich investors look for assets to soak up liquidity.
‘There could be a small percentage of buyers who may shift from buying a home in the core central region (CCR) to buying industrial properties,’ said Mr Mak, noting that ‘most property investors are still unfamiliar with the industrial property market’.

Small retail shops (sometimes as small as 150 square feet) have also started to appear on the market of late, market watchers said. They could find more takers going forward.

Interest in overseas properties could also heat up. In addition to foreigners who will now look elsewhere, Singaporeans – who now have to pay an additional buyer’s stamp duty of 3 per cent when they buy their third and subsequent residential properties – might also look abroad.

‘As the latest measures by Singapore government would turn away funds for property investment from foreigners, some of these funds could find their way to other overseas markets, such as those in countries with transparent rules and large Asian migrant communities,’ said Mr Mak. ‘These countries include Australia, Canada, UK, New Zealand and the US coastal cities.’

Camilla Dell, a managing partner at UK-based property consultancy Black Brick Property Solutions, said that her firm is already starting to see an increase in the level of enquiries from Asian and other overseas investors who were previously considering investing in the Singapore property market, but have now changed their mind because of the tax hikes.

In addition to the additional buyer’s stamp duty, investors in Singapore have to pay a seller’s stamp duty of between 4 and 12 per cent if they re-sell their units within four years of purchase, she pointed out.
‘All of this makes Singapore far less attractive for property investors, and London is bound to benefit as a result, where the tax system is far more favourable, particularly for overseas investors who pay no sellers tax or capital gains tax if they are a UK non-resident,’ Ms Dell said.

‘Stamp duty can also be significantly reduced in the UK as if the property is owned in a company name, buyers pay very little or no tax on the acquisition.’
Analysts also noted that most of the demand for strata-titled commercial and industrial units and overseas properties will mostly shift from the prime CCR area, which includes the prime districts 9, 10 and 11, Marina Bay and Sentosa Cove.
According to data compiled by SLP International, foreigners and corporations bought 36 per cent of all homes sold in the CCR from January to November 2011.

‘A foreign buyer of a private home here in Singapore will have to take a very bold move in investing amidst the global crisis and a grim economic outlook in 2012,’ said PropNex Realty chief executive Mohamed Ismail.
In contrast, in the outside central region or OCR (which is a proxy for suburban mass market locations), foreigners and corporations accounted for just 16 per cent of all sales in the first 11 months of this year, according to SLP’s analysis of caveat data from URA Realis.

Singaporeans bought 71 per cent of all home sold in the OCR, and demand from this buyer segment is expected to hold somewhat.

New UK properties find strong Asian support

Singaporeans make up 10% of buyers in projects where construction hasn’t begun

By UMA SHANKARI (Singapore)

SINGAPOREAN buyers now account for around 10 per cent of all purchasers at ‘new-build’ properties in Central London, industry players say.

According to estimates from sales agents at major property firms, buyers from Asia make up about 40 per cent of all investors for new-build projects (that is, projects where construction hasn’t begun) in Central London. And Singaporean buyers figure prominently, accounting for about a quarter of transactions by Asian buyers, they said.

Many UK-based developers now launch properties in Asian cities such as Singapore, Hong Kong, Jakarta and Kuala Lumpur ahead of their UK release dates to capitalise on buying interest from this part of the world. In Singapore, this has translated to some two to three new projects from London and the rest of the United Kingdom being marketed here every weekend, industry players said.

James Talbot, Savills head of international sales, told BT recently that UK developers hope to sell enough units in Asia to fund the start of construction. This is because Asian buyers are more willing to buy properties off the plan, while buyers in the UK prefer to pick up units in only completed properties, he said. ‘Asian buyers accounted for about 40 per cent of new developments that were sold in 2010, and the buying trend has continued into the first three quarters of this year,’ Mr Talbot said.

He said that Singapore buyers could account for about half of these Asian buyers at some launches. Other agents put the figure at closer to 25 per cent.

UK-based property consultancy Black Brick Property Solutions has also noticed the keen Asian interest in ‘safe haven’ London.’Asian clients represent over 22 per cent of our client base as they have a huge appetite for London property,’ said Camilla Dell, managing partner at Black Brick. ‘It is viewed as a safe haven, many children are educated in the UK, and the weakness in sterling is a key driver.’ Black Brick noted that Singapore clients are benefiting from a 35 per cent discount on London property prices compared to 2007 as a result of currency movements. Similarly, Hong Kong buyers now benefit from a 25 per cent discount, while Malaysian buyers are seeing a 28 per cent discount.

Central London estate agency Kay&Co also noted that bigger homes are still in vogue. Some 41 per cent of the firm’s overseas applicants – 25 per cent of whom are Asian – purchase properties in excess of £2 million apiece, Kay&Co said.

But buyers here are not indiscriminate, agents said. Asian buyers are looking for attractive ‘buy-to-let’ investments in London. Mark Collins, head of residential at CB Richard Ellis (CBRE), said: ‘They are ideally looking for properties in areas of strong rental demand and from developers with established and trusted brands.’

Added Knight Frank Singapore’s head of international project marketing, Linda Chern: ‘Right now, week in week out, there are a lot of property launches (in Singapore), so clients are spoilt for choice. So unless you have a good location and attractive prices, the take-up is not going to be good.’

But there is no doubt that sales are taking place every weekend. Buyers are usually a mix of investors and those buying for their children who are studying in universities in London.

Knight Frank, for example, marketed Baltimore Wharf (in London’s Canary Wharf) several weeks ago, and sold around 15 units in the 473-unit project in Singapore. Ms Chern attributes the take-up to the project’s good location.

Boutique London developer Vision Homes also recently brought The Metropolis to Singapore. The small 15-unit development in the Elephant & Castle area sold well and Singaporeans bought around 30 per cent of the units sold, the developer said.

Savills is marketing Caro Point, which is next to the Thames Embankment (among other projects), while CBRE launched Langham Square in Putney, London. Knight Frank recently previewed One Tower Bridge, a luxury development on the banks of the River Thames.

Singaporeans make up 10% of buyers in projects where construction hasn’t begun