Why the world’s wealthy are still buying homes in London
Why the world’s wealthy are still buying homes in London
London’s prime property market appears to be shrugging off headwinds caused by Brexit and Covid. It was ranked the top city in Knight Frank’s 2021 Global City Wealth Index, joint with New York. The index, which analyses wealth, investment and lifestyle offerings, found that London has the highest number of high-net-worth individuals, with 874,354 millionaires.
London’s super-prime residential market has recorded more sales in the first nine months of 2021 than in any full year since 2015, according to Savills, despite a slight summer slowdown.
More broadly, UK house prices rose 1.7% in September which was the highest monthly rate of growth since 2007, Halifax reported. This brings annual growth to 7.4%.
Caroline Roberjot – a lawyer specialising in UK property for high-net-worth clients – says since Covid hit in 2020, the market has been “the busiest I’ve ever seen in my 23-year career. I’ve never worked so hard or seen a market like it.” But what is motivating international buyers’ hunger for British property? And how easy is it for expats to buy in the UK?
Prime London house prices rose across 2021
Annual price change (%)
Source: Knight Frank
Why stamp duty has not dampened international demand
A surge in activity from mass-market domestic buyers was partly motivated by a temporary pause on stamp duty – the up-front tax that is payable on any property transfer in the UK priced at £125,000 or more. Meanwhile, the same tax was raised by 2% (on top of the existing 3%) on residential homes in England and Northern Ireland for overseas buyers in April.
This has not stopped them from snapping up UK property though. Despite international travel bans, London saw the highest levels of cross-border capital from the widest range of countries that was invested in real estate over the 12 months to September 2020, according to the Global City Wealth Index.
Stamp duty is a bigger consideration for UK buyers than overseas buyers
“Stamp duty is a bigger consideration for UK buyers than overseas buyers,” says Marcus Bradbury-Ross, Executive Director, Head of Private Office at CBRE. “You have to pay tax in almost every country. In New York State and California, buyers pay a high state tax on properties,” he adds.
Caroline, Partner and Head of London Residential Property at Adams and Remers, agrees: “My clients are usually already fully aware when I mention it. Whether they are buying for currency discounts, political stability and education purposes, property in the UK is an attractive prospect.”
It is common for wealthy international buyers to tee-up properties in anticipation of their children studying in the UK. “They can buy a property at 2021 prices and rent it out for five years until they are ready to move in,” Marcus explains. This means they don't pay stamp duty twice, on an investment property and then another home for their children’s school years.
The trend to rent out family homes before living in them has been growing for at least the last three years, according to Marcus. It is particularly common among buyers from Hong Kong. He also reports high demand from dollar buyers, including Singapore and Canada as well as the US.
International web traffic for UK property has risen this year
Overseas web traffic as a percentage of all users looking at UK property on the Knight Frank website
Source: Knight Frank
What is motivating the UK’s international buyers?
“Dollar buyers are currently more dominant in the UK market than I’ve ever seen in my 20-year career. This has been the case for the last three years, but even more so in 2021,” says Marcus. Both Marcus and Caroline regularly work alongside Schroders Wealth Management US, supporting American clients as they buy UK property. Marcus notes that US buyers previously tended to rent for tax purposes. “Now they buy because of sterling’s drop in value,” he explains. For example, $1.59 million was equal to £1 million on 1 January 2015. By 1 January 2021, $1.37 million was equal to £1 million, with the largest drop taking place after the Brexit vote was announced.
Dollar buyers are currently more dominant in the UK market than I’ve ever seen in my 20-year career
“The advantageous exchange rate only adds to London’s draw as a cultural and economic centre in Europe. Americans have long been attracted to the UK’s shared language and culture. In recent years, they have also favoured the UK’s political independence after the Brexit vote”, says Martin Heale, Director at Schroders Wealth Management US.
Caroline suggests that political instability abroad is the biggest driver of international demand for UK property. She argues that the recent increase in US clients was partially a reaction to political uncertainty, particularly in the run-up to the 2020 presidential election.
However, she adds: “We think we have political instability in countries like the UK and the US, but it is nothing compared to some other countries. People want a foothold somewhere with a more politically stable backdrop.” She has seen an increase in clients from South Africa and Hong Kong looking for a UK property, for example. “That is political,” she says.
All of that wealth is seeking a home – real estate was always going to be a prime beneficiary
More broadly, there has been plenty of wealth creation in recent years, despite the pandemic. “Sectors such as technology, private equity and healthcare have performed very well,” explains Martin. “There has also been tremendous central bank intervention with liquidity being pumped into the global economy. We have seen prolonged low interest rates and soaring stock markets. All of that wealth is seeking a home – real estate was always going to be a prime beneficiary,” he adds.
Key considerations for US buyers
Americans can find overseas property purchases particularly difficult due to complicated and far-reaching US tax laws. US citizens are taxed globally, so oversights when buying UK property can result in additional tax for years to come, according to Martin.
“Due diligence is key for US buyers,” Martin explains. Even if someone is a tax resident in the UK, and pay their income and other taxes to HM Revenue & Customs, they still need to file tax returns to the US. They may also be required to pay tax on gains on the sale of their main residence, wherever it is in the world. This can even apply to “accidental Americans”, such as those with an American spouse or someone born in the US, despite spending most of their life overseas.
“It is important to make sure a property is bought in the right way, using the right structure. For example, it may be beneficial for some to buy property through a trust rather than in their own name,” says Martin. Key considerations would include how much time the buyer is planning to spend in the UK and whether they have children that will be studying here. “A lot of people don’t think about this enough before buying,” Martin adds.
Many properties in the UK housing market are “leasehold” meaning they have a long-term lease from a “freeholder” for a number of years. While the lease can be as long as 999 years, the freeholder can still impose some restrictive covenants on the buyers such as not being able to change the windows or re-design a property’s exterior. “I have had a few US clients pull out of deals because they couldn’t understand the restrictive covenants on them,” says Caroline. Historic properties can also face restrictions.
Almost all of the due diligence is done on a property before contacts are exchanged in the UK. “It is a much more drawn-out process,” says Caroline. Lots of people struggle with the fact that, until you exchange contracts, there is no commitment. Buyers can easily be “gazumped” – a term coined for when a buyer has their offer accepted, but then loses the property to a higher bidder at a later date. “It matters not that they have spent a lot of money on surveys and deposits, only to have the seller pull out,” Caroline says.
The UK’s due diligence is more thorough than other countries. I think it is second to none
To combat this, super prime buyers tend to have an exclusivity agreement so that there are penalties on both sides for exiting the agreement. Although, it can take longer to negotiate exclusivity than it does to get the sale sorted. Despite these complications, Caroline adds: “The UK’s due diligence is more thorough than other countries. I think it is second to none.”
Schroders Wealth Management supports a wide range of US clients, including those living abroad temporarily for business purposes, the spouses of Americans or foreign trust trustees with fiduciary responsibilities for US beneficiaries. We operate as one of the few SEC-registered investment advisers in the UK, offering discretionary and advisory services to US clients. We can help you assemble an investment strategy, taking account of your tax considerations.
Will country estates maintain their allure after the pandemic?
The appeal of British property has not been limited to London. The pandemic created a shift away from cities around the world, as buyers sought a slice of the good life in multi-functional homes with space for both work and pleasure.
Country homes worth £2 million or more had an average price hike of 13.3% between June 2020 and June 2021, Savills data shows. Compare this to prime regional house prices rising by 8.2% and prime central London essentially flatlining at 0.5% during the same period.
Many buying regional UK properties were Londoners looking to buy second homes. “That was a real turning point in the country market last year,” says Marcus. “Rather than having a cheaper second property, people were spending as much on their countryside homes as their city dwellings,” he says.
Some believe this is set to continue, with Savills predicting UK prime regional property prices predicted to see a 25.1% increase by 2025. However, Caroline Roberjot, Partner and Head of London Residential Property at Adams and Remers, believes that countryside prices will level off once Covid-restrictions are a thing of the past.
Many overseas buyers resorted to viewing properties online and relying on advisers to view the property on their behalf during the pandemic. Estate agents across the board invested in virtual viewing technology, from 3D imagery to virtual reality viewings.
“We were instructed on a residential property in Mayfair in September 2020,” says Marcus Bradbury-Ross, Executive Director at The Private Office of CBRE. “A South-East Asian buyer offered the asking price of around £50 million in March 2021. They had never seen it, but their advisers had. Because it was such a blue-chip trophy asset, there was interest from all over the globe,” he explains.
Similarly, a Russian oil tycoon bought a £21.5 million mansion near Windsor castle in December 2020. The buyer initially viewed the home over Skype before flying in for a viewing by private jet, according to luxury real estate news site Mansion Global.
The trend was even more prevalent for commercial property buyers. For example, a large office and retail development at 1-2 New Ludgate, London, was sold for £552 million to Sun Venture without the buyer seeing it in December 2020.
“The pandemic bought the powers of online to the forefront, and this includes doing a lot more of our research online too. Even mass-market buyers will do a lot of research online today before they view properties than they would have done a few years ago,” says Marcus.
One side-effect of this is an increasing amount of pressure being put on advisers to carry out appropriate due diligence before a purchase. Marcus argues that this is just the beginning of a trend. “People will be a lot more selective about the advisers they align themselves with. A lot more professional rigour will be required, rather than just trusting word-of-mouth endorsements. Wealth managers may be asked for more recommendations more often,” he predicts.
Caroline Roberjot, Partner and Head of London Residential Property at Adams and Remers, acknowledges that virtual viewings will be increasingly relied on. However, she adds: “People want to see and touch what they are buying. My international clients kept telling me that they wanted to come over and see properties as soon as they could.”
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