June 2012

On May 31 the UK government provided further details on a number of tax issues first raised in the Budget on March 21 relating to the use of companies and off-shore structures to acquire high end residential property. Although the proposals laid out in the document are subject to a twelve week consultation period, we believe it is unlikely that the headline charges will change materially if at all before becoming law.

In short, the new tax framework is seeking to stop the use of such vehicles by wealthy individuals to buy UK property. In addition to the new 15% stamp duty rate on £2m+ properties acquired by “non-natural persons” announced at the time of the Budget, the government is now proposing:

• Effective April 1 2013, the introduction of an annual charge on properties valued above £2m held by “non-natural” persons defined in the context of the annual charge as “companies and other corporate bodies, collective investment vehicles and partnerships”. The proposed charges are a flat rate within defined valuation ranges and will be indexed annually to the:

• Effective April 6 2013, the extension of Capital Gains Tax (CGT) to the disposal of residential property held by “non-resident, non-natural persons” or any interest in such property or the vehicles in which they are held. The definition of “non-natural” in the context of CGT is broader than the annual charge and includes trustees. The capital gain will be calculated over the period of ownership and not the date from which the new tax is effective.

Camilla Dell, Black Brick Managing Partner, says: “We have been waiting for the details of the ‘Mansion Tax’ and the new capital gains regime affecting property since the issues were first raised in the Budget two months ago. We believe that the changes will have the impact that the government desires: namely that “the charge will encourage individuals who have put such high value property into envelopes for reasons including tax mitigation to take them out”. The changes will also determine whether existing offshore structures are still appropriate. In many cases tax is not the main reason for owning valuable UK property through an offshore structure. Privacy and asset protection are often more important. Now it may be necessary to achieve privacy in different ways to avoid walking into penal tax charges. However, there a number of important issues raised by the new proposals that require clarification. By deferring the date by which these new taxes are effective the government has created a clear window for the change of ownership that it wants. However, the update does not clarify whether those seeking to exploit this window to ‘de-envelope’ properties will be subject to Stamp Duty. We will, of course, keep clients informed of any further changes but would recommend strongly that clients remain in close consultation with their tax advisers.”

Development opportunities and safe-haven status drive demand

In the first week of June, Malaysian property developers SP Setia and Sime Darby were announced as preferred bidders for the iconic 39 acre Battersea Power Station site on the south bank of the River Thames for £400m. The Malaysians beat off strong interest for the prestigious site from a number of parties including the billionaire Russian oligarch Roman Abramovich, owner of Chelsea Football Club. The deal is yet more evidence of the continued strength of Asian demand for London property – and follows the successful acquisition of the St John’s Wood Barracks development site in North West London for £250m by another Malaysian conglomerate in November 2011.

Meanwhile, a strong deal pipeline plus a sharp increase in inquiry levels and new client sign-up demonstrate unequivocally that demand for central London property remains resilient in the wake of March’s rise in stamp duty land tax. The main feature of these new clients is their continued geographic diversity. In May, new clients have come from Africa, the Middle East, Asia, Australasia, North America, Europe and the UK. This trend is reflected across the market with another major agency reporting new sales inquiries above £2m+ up 13% in April from March. Such a broad demand base suggests strongly to us that the recent tax hikes have not significantly impacted potential buyers.

We sense however, that the principal driver behind many of these new enquiries is changing. Opportunistic investors aided by currency advantage are not as significant a force as they once were. Instead, wealth protection and relocation engendered by rising economic and geopolitical risk worldwide are now the driving force to demand. Recent elections in France and Greece have only served to accelerate that trend. Capital controls, devaluations, a higher tax burden, austerity measures, political and social volatility, and in some countries the risk of arbitrary seizure are powerful motivating factors for the movement of wealth and relocation. Ironically, where it was once the weakness of the pound that attracted foreign money to London property it is now the pound’s relative stability that is driving capital flows into sterling assets.

The safe-haven argument for PCL property is not difficult to understand in the current climate. For the international elite looking to protect their wealth London property offers many attractive characteristics, not least the protection of English law from arbitrary seizure and a rather obvious size advantage over other assets. Too put it in simple but extreme terms, it’s rather harder to seize a London property from its legal owner than it is to seize cash or gold deposited in a state-controlled emerging market bank. Bricks and mortar make a solid foundation for wealth.

Such demand is what continues to drive the price of PCL properties higher. Knight Frank’s monthly prime London index rose 1.1% in April despite the rise in Stamp Duty. Prices in Prime Central London have now risen 11.4% in sterling terms in the past year. This is an undeniably robust performance – but the breadth of demand relative to constrained supply certainly does not appear to suggest that any meaningful reversal is imminent. At Black Brick we have also seen strong competition in the £5m – £10m price bracket. We secured a highly desirable house in Noting Hill in May for £9.25 million for an international client and although the property was not being openly marketed we faced stiff competition from another buyer and had to exchange contracts within 24 hours in order to secure it for our client.

Once again, the latest data on the health of the broader UK residential property market point to lacklustre conditions. Given the UK has officially slipped back into recession, this is hardly surprising. The headline net price balance provided on a monthly basis by the Royal Institution of Chartered Surveyors slipped from a reading of -11 in March to -19 in April. i.e. 19% more surveyors reported price falls than rises, though the overwhelming majority of these falls were in the 0 to 2% range. Meanwhile, monthly fluctuations in the major house price indexes underline the fragility of market conditions. According to UK mortgage lender Halifax, overall house prices fell 2.4% in April leaving home values down 0.5% from a year earlier. The contrast with conditions in London’s most sought after post codes could hardly be starker.

Meanwhile, the latest statistics on the prime rental market shows rental rates rising 0.1% in April. Despite some market commentators suggesting a slowdown in the prime rental market is imminent our own experience through our property letting service is one of robust demand and minimal void periods. With gross yields on rental properties of around 4.0%, the attraction relative to perceived risk in comparison to other duration assets including government bonds is clear. By way of comparison, the yield on ten year UK gilts is currently 1.51%. Camilla Dell, Black Brick Managing Partner, says: “Given the continued rises in sales prices in prime Central London, demand for one, two and three bed rental properties between £1000 and £1500 a week in the same areas remains very strong.”

Olympic Countdown

With only a few short weeks until the start of the London Olympiad we are often asked about the potential impact of the forthcoming games on the capital’s property market. With such a large global audience the Olympics certainly represent an excellent marketing opportunity for London as a city. Television coverage will no doubt lean heavily on the capital’s iconic architecture. Meanwhile, the games will leave a lasting legacy of new sporting facilities and improved infrastructure. In that sense, the games may well serve to boost London’s profile as an international business centre and help foreign nationals considering relocation of London’s many attractions. We certainly hope so. However, we do not expect any impact whatsoever on central London’s property prices in the short-term. In the rental market there may be a temporary spike in letting rates for the period of the games, but by definition such short-term letting strategies run the risk of multiple void periods. Nevertheless, we are very much looking forward to having our city having the world’s attention for a few weeks.

It’s a wrap!

Black Brick’s Camilla Dell was delighted to be invited recently to participate in a new television series about the world of top end London property. The series, called Selling London, will be aired later this year on top-15 US cable network HGTV. In the words of HGTV, Selling London gives an insight “into the extraordinary and extravagant world of Great Britain’s best properties, complete with all of the high-stakes drama that is part of making deals happen in this world-class, dynamic, one-of-a-kind city.” Viewers will also “get a rare glimpse into a world where a solid reputation at the top of the real estate food chain involves swimming with the sharks, competing with the biggest and best in the biz, and rubbing shoulders with the wealthiest and trendiest of London’s social, political, and artistic elite.” The series is likely to be shown in Europe on the popular UKTV channel. Watch this space!