A year ago, the U.K. government changed the Stamp Duty Land Tax rate, and added an additional 3% tax bill surcharge to properties purchased by buy-to-let investors and second-home owners, bringing the maximum tax rate up to 15% for luxury properties.
Soon after, Brits voted to withdraw from the European Union, causing—along with other factors—the value of sterling to drop more than 10% in 12 months. Together, these factors have made it increasingly attractive for high-net-worth-individuals to rent, rather than buy, in prime central London.
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"Due to all these changes, we’ve seen a lower transaction market, because investors know it will take them longer to recover their costs," said Lucian Cook, head of U.K. residential research at Savills, noting that renting rather than purchasing a property now makes the most sense for people who only expect to live in London for five to 10 years.
Now, another measure that will significantly reduce some buy-to-let homeowners’ ability to get mortgage tax relief, which goes into effect next week, combined with Prime Minister Theresa May’s move to trigger Article 50 by sending a letter to the president of the European Council earlier this week, formally notifying him of the U.K.’s intention to leave the E.U. after a two year negotiation, have made it even more likely that high-net-worth individuals will favor renting over buying for the near future.
But even with strong rental demand, experts say there’s still significant oversupply in the prime market, where properties rent for £1,000 to £5,000 (US$1,252 to US$6,261) per week. This glut comes from three places: Accidental landlords who intended to sell, but are renting out their property as they wait out the downturn; new inventory from the influx of investments made right before the April 2016 stamp tax increase; and finished stock from the new construction market, mostly located in the outskirts of central prime London, in neighborhoods like Canary Wharf and City Fringe, which are largely commercial.
When this oversupply is combined with a decrease in corporate relocation and constrained budgets, it’s meant that prime market rentals are down 5% in the last year and 1% in the last quarter, according to Mr. Cook.
But something quite different is happening in the super prime rental market, in which properties are rented for more than £5,000 (US$6,256) per week, said Tom Smith, head of the super prime lettings team at Knight Frank.
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Here, there isn’t that same oversupply problem, Mr. Smith said, because only trophy properties—typically furnished, turnkey and the best in class—with features like high-end gyms, spas and a 24-hour concierge, will do. That’s meant that instead of dipping, prices have held firm or gone up a bit, Mr. Smith said, noting that there were 16% more leases signed for super prime properties in 2016 vs. 2015, and 25% fewer super prime sales in that same time period.
In January and February alone, Mr. Smith said that he rented out three properties that were all more than £15,000 (US$18,783) per week: a 10,000-square foot house at £25,000 (US$31,305) per week; and two apartments at about £18,000 (US$22,540) per week. He’s currently listed a nine bedroom, nine-bathroom house in Belgravia for £29,000 per week, which translates to almost US$36,000, or $1.86 million per year.
"These ultra-high-net-worth individuals like that they can rent the very best, and in three years’ time, hand it back and upgrade to get a home decked out with the newest technology and decorated in the latest style," Mr. Smith said, noting that Knight Frank’s super prime market consists of about 65% single-family homes and 35% ultra-luxury apartments. "It’s a fairly hassle-free approach, and that freedom is attractive."
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Sensing that the market isn’t going to change or become more certain for at least three years because of Brexit uncertainty and other market factors, many high-end renters are signing leases for 24 months or longer, with the option to extend, and paying a bulk of the total cost upfront, Mr. Smith said.
Ed Woolgar, the lettings director at Harrods Estates, agreed, noting that last year, he was working with the perfect applicant, who wanted to buy, but ended up signing a six-year contract for a Knightsbridge penthouse at £5,500 (US$6,887) per week because he was unsure where the property market was going and it made more financial sense.
This has made for a lucrative business model for some owners, like an investment fund that was set up to acquire, add value and then sell properties, but instead, changed their business model to acquire, refurbish, furnish and then rent out properties for three to five years. They’re currently getting a 4% to 4.5% return, Mr. Smith said, which is well above the typical 2.5% yield.
In terms of the effect that these changes will have on the overall prime central London real estate market, Jeffrey Matsu, a senior economist with the Royal Institution of Chartered Surveyors, said it’s still too early to say, although he did note that a cyclical downturn started in London before the Brexit vote, and is continuing today.
In the general and prime markets, this downturn in sales and rental prices is likely to help core, volume renters who were having difficulty affording a place to live. But Mr. Matsu said he expects rents to start picking back up by the end of the year for a 2% increase, and increase 4% every year after for the next five years.
Mr. Matsu also noted that while the stamp duty tax increase and surcharge has certainly impacted sales volume, when you look at the treasury data, it shows that the surcharge alone has brought in about £1 billion in tax revenue—double what they the government anticipated, according to Mr. Woolgar—showing that these buyers are not by any means going away.
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Savills data, which shows that there were still 59,000 purchases of residential investment properties and second homes in the third quarter of 2016 alone—only 19,000 of them requiring a mortgage—backs this up.
"At the end of the day, if yields on other assets are relatively low, property will still look quite attractive, even with these extra fees," Mr. Matsu said.
For dollar-backed investors, there is still real value in purchasing in London now, experts say. Yes, the extra taxes are there. But they also have a currency incentive, as the pound is currently down about 12% over last year. "That’s not to say that anyone is going on a shopping spree," Mr. Matsu said, "but just that investors who are a bit more opportunistic can take advantage of that automatic 10%-plus discount."
Here is a look at other news from around the world compiled by Mansion Global:
In Spite Of Efforts To Curb Them, Oslo Housing Prices Have Surged By 24%
Limited supply, increased demand, and record low rates have all combined to create a double-digit increase in Oslo’s housing market, where home prices have increased by more than 24% over the past year. At the end of 2016, the Norwegian government tightened lending standards nationally and added additional restrictions on Oslo, a move that’s drawing criticism from economists. "I don’t think it’s a good idea generically to social engineer where people live," said Massachusetts Institute of Technology professor Albert Saiz at a recent Oslo conference. Mr. Saiz also noted that the government would be better served by manipulating the market through credit policies rather than regional restrictions, and in regards to worries of a bubble in Oslo’s market, he said, "All housing markets are cyclical, you can’t be on the high part of the cycle forever." (The Business Times)
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Failing To Find Buyers, Owners Of London Luxury Homes Turn To Airbnb
Faced with a slowing high-end sales market in the city, owners of luxury properties in London are increasingly opting to turn their homes into short-term rentals through brokers and via sites like Airbnb. "Demand in the long-let market has not been very strong after the Brexit vote, but property owners need to maintain their profit," explained Gao Xiang of JC International Property, which specializes in working with foreign investors. The number of Airbnb listings in London nearly doubled over the course of 2016, reaching a total of 50,000, according to data compiled by broker Jones Lang LaSalle, Inc. And tellingly, the number of listings available for short-term rentals in London’s most tony neighborhoods rose 20% in the past six months as of February, per numbers from Knight Frank LLP. As London’s government warns that an excess of short-term rentals could eat up housing stock for full-time residents, local councils are also looking to enforce the city’s 90-day limit on short-term rentals, and encouraging listing sites to do the same. (Bloomberg)
Chinese Billionaire Sells Sydney Mansion For Bad Feng Shui
A sharp rock formation across the water from Mosman, Sydney has triggered a Chinese billionaire into selling his A$22.5 million (US$ 17,215,400) estate. The owner, Ying Li, purchased the 5150-square-meter property at A$20 million (US$ 15,302,600) in 2012, and has been living overseas, leaving the home largely vacant and untouched for the past five years. Mr. Li originally planned to demolish the five-bedroom mansion to rebuild a new spec home, but decided to list it for sale because of its "negative feng shui"– specifically a sharp promontory just across the harbor, pointing in the direction of the home like an "arrowhead." (Domain)
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A Wave Of Construction Signals A Looming Luxury Apartment Boom For Chicago
If its proliferation of construction cranes is any indication, Chicago is due for a serious boom in luxury residential housing. The city beat out Seattle and Denver as the U.S. city with the most construction cranes as of November, according to the biannual crane index, with a total of 56 cranes at work that month. The uptick in apartment buildings is thought to be driven by millennial demand for rental housing, as well as Chicago’s growing tech sector. "There’s been a big increase, predominantly in the residential market," said RLB executive vice president Paul Brussow. All told, 6,500 new units are expected to open up in Chicago in 2017, more than twice the number that opened in 2016 and 2015 combined. (Biz Journals)
New Court Ruling Signals A Costly Crackdown On Canada’s Foreign Buyers
A recent British Columbia Supreme Court ruling is expected to send shockwaves through the rest of Canada’s real estate industry, targeting lax restrictions that allow foreign investors to claim that they are "residents of Canada for tax purposes," and thus skirt heavy capital gains taxes on property sales. The ruling requires a notary public to pay $600,000 to a former client who was hit retroactively with that amount to pay for a 25% capital gains tax that had been shirked by the former owner of their home, who had not been a legal tax resident of Canada. "It’s precedent," said Vancouver-based immigration lawyer Richard Kurland. "Real estate agents can now get a knock on the door from the taxman, asking for the (capital gains) taxes that should have been collected by Ottawa, because the agent failed to make adequate inquiries." While the ruling puts pressure on buyers and agents to do their due diligence on the seller during a deal, the attorneys for the case say they hope this will also spur the federal government to "target high-risk international tax and abusive tax-avoidance cases," which they say lead to hundreds of millions of dollars in lost tax revenue each year. (Times Colonist)
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Hong Kong’s Wealthy, Single Young Investors Are Snapping Up One-Bedrooms
Pivoting away from a focus on tiny "shoebox" flats, Hong Kong developers are turning their attention toward more luxe one-bedrooms to court the growing market of young, single investors in search of a higher-end lifestyle—and higher rental returns. Families are also interested in these units when purchasing for their adult children, and Centaline Property Agency director Louis Ho said, "Such units are sought after by upper-middle class families and high-income earners who are single." The city is seeing a rush of these units onto the market, many of them larger than in previous years.," said Sammy Po of Midland Realty. "Investors who have excess cash would prefer buying one-bedroom flats as they are easier to rent out than studio units," said Sammy Po of Midland Realty. Currently, he said, investors account for 40% of recent sales of new apartments, and mainland buyers made up 5 to 10%. (South China Morning Post)
Chinese Investors Rush To Get U.S. Visas Ahead Of Possible Changes To EB-5 Program
While U.S. Congress contemplates raising the minimum investment required by the EB-5 investor visa program—which grants U.S. visas in exchange for a minimum amount of investment, as well as the creation of jobs—wealthy Chinese investors are scrambling to acquire visas before the current program expires or is updated. "Some clients are demanding that we make sure their applications are submitted before April 28, the date that the current program is extended until. We’re working overtime to do that," said Judy Gao, the director of a Beijing-based agency that facilitates the visas. Chinese buyers have comprised as much as 85% of total EB-5 investors, and the program has been used to help developers fund major projects such as Hudson Yards, creating as many as 200,000 total jobs, and drawing in an estimated $14 billion from China alone. Congress may raise the current investment minimum from $500,000 to $1.35 million, which would put added strain on Chinese investors already struggling to work around China’s new $50,000 annual limit on outbound investment.(Bloomberg)