19 February 2016, The Times
According to the old adage: “When the United States sneezes, the world economy catches a cold.” Recent events have taught us that it is not only American snuffles that can spread far and wide. The Chinese economy has stalled, its stock market has faltered and there is panicky talk of a global slowdown.
Several large commercial property deals that hinged on Chinese investment have fallen through, and in residential property markets there are rumours of several investors pulling out or rapidly flipping properties in redevelopment areas such as Nine Elms.
Aberdeen Asset Management recently stated: “Correlations between the London property market and flows of Asian investment are remarkably high, suggesting that if China’s economy keeps faltering, London property markets could be in for a tough time.”
Data from the estate agency Strutt and Parker on where the money for residential property investment in London orginates supports this view. Asian buyers of resale properties fell from 6.6 per cent of the agency’s sales at the end of 2014 to 4.9 per cent last year.
However, a closer look shows that all nationalities have backed off, including northern Europeans, who have fallen from 7.7 per cent in 2014 to 1.6 per cent in 2015, with the growth coming from British domestic (64.8 per cent of buyers in 2015) and expat buyers (8.2 per cent).
So it seems the speculation might be right and that Chinese money is flowing out of London. This month the luxury developer Banda said its search team had noticed that “the prime central London property market is undergoing a shift in the dynamic of overseas investors as Russian and Chinese buyers seemingly withdraw and Iranians and Europeans seek to invest”.
Louisa Brodie, the head of search and acquisitions at Banda, says: “Despite general scaremongering, we are seeing little evidence of a waning in London’s popularity among overseas property investors. It is still the No 1 destination globally, and where Russians and Chinese buyers are withdrawing as a result of external forces, other investors are quickly plugging the gap.
“Many wealthy Iranian families have strong connections with London, so it feels familiar to them. There are concerns that the recent lifting of UN sanctions could be reversed, so we are likely to see people looking to move their money out [of Iran] fairly quickly.”
Dominic Grace, the head of London residential development at Savills, says: “The number of actual mainland Chinese who buy in London is very small — they still find it difficult to get their money out of China.”
He adds that Chinese purchasers tend to favour new-build properties. Savills figures show that last year 23 per cent of purchasers of new-build properties were from China or Pacific Asia (compared with 53 per cent from the UK); for resale properties in prime London it was 3 per cent (compared with 68 per cent from the UK).
The majority of Chinese money in London comes via Hong Kong and Singapore — countries that have, as Grace puts it “poured buckets of cold water over any froth in their own property markets”. This cold water is primarily in the form of punitive taxes. A Knight Frank study shows that, on a $1 million property, buyers would pay 22.4 per cent tax in Hong Kong and 19 per cent in Singapore, enticing investors to look elsewhere, including London, where, in 2015, they would pay 9.7 per cent in taxes. However, London isn’t the only strong property market catching their eyes. Closer to Asia is Australia, whose housing market has been showing strong capital growth (9.8 per cent last year, with house prices 48 per cent above its financial-crisis low), particularly in Melbourne and Perth, Grace says.
Camilla Dell, the managing partner at Black Brick, an independent property buying agency, predicted in September: “The falls in China’s stock market appear dramatic but it is worth bearing in mind that the country’s equity market is less closely linked to the underlying economy than is the case in most developed economies. Recent years have seen enormous wealth built up in China’s ‘real’ economy and that wealth will become an increasingly important factor in markets around the world in coming decades — including London’s property market.”
However, last week she admitted that she has yet to see “huge numbers of Chinese buyers come our way”.
Sungwei Huang, an agent with Felicity J Lord in Canary Wharf, says the Chinese haven’t lost their appetite for British property but that the government’s changes to capital gains tax and stamp duty, including the forthcoming 3 per cent levy on buy-to-let and second homes, have made buyers hesitant.
Huang is hopeful that measures to make it easier to get money out of China will help. The Qualified Domestic Individual Investor programme, which is set for trial in six Chinese cities, including Shanghai, will enable people with at least one million yuan in assets to buy shares in New York, London or Paris. This could lead to more Chinese money being invested in British property.
However, a similar scheme by the Bank of China was closed, less than a year after it started, because demand proved too high.
Huang says there are two distinct types of Chinese buyers in London: those who are looking at expensive high-end prime central London properties, and a much more active lower tier who are interested in buying two-bedroom apartments for between £450,000 and £650,000 as buy-to-let investments or to use while their children study here.
However, some commentators are already turning their attention away from China and towards the Middle East, where political unrest means that investors are searching for a safe haven.
Dell says: “There is plenty of appetite in Dubai, Jordan and Saudi Arabia, where there is political and economic uncertainty. It is perhaps too early to tell whether Iranian money will land in London; at the moment there are some issues with the banking system and getting money out is difficult, but Iran is definitely one to watch.”
There are about 4,000 owner-occupied homes in England and Wales held in corporate envelopes, according to data from the tax office. Corporate envelopes are where a property is bought under a company name rather than an individual’s name and are often associated with mansion-buying oligarchs seeking anonymity.
It was hoped that the introduction of the Annual Tax on Enveloped Dwelling in April 2013 would raise substantial amounts for the treasury.
Analysis of the latest data by London Central Portfolio (LCP), a residential fund and asset management company, shows that 3,990 properties (0.02 per cent of the UK’s total housing stock) were held in corporate envelopes nationwide in 2015.
The owners of these properties paid £116 million to the treasury last year. The majority of the tax was paid on properties in London (£103 million), while £11 million came from homes in southeast England and the remaining £2 million from properties elsewhere in the UK. “These statistics show that numbers are less than a fifth of previous estimates. While the official numbers will increase when the tax bands extend to lower-value properties [the tax applies to properties worth from £500,000 from April 2016], this is unlikely to be significant as such properties are not usually bought in corporate wrappers,” according to LCP.
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