With the events of the last 2 months, it has become near impossible to avoid the rising tension between Russia and the UK. While the UK has been supported in its stance against Russia by other EU states, it has become clear to see that the UK will perhaps be the country most largely affected by the potential withdrawal of Russian operations from foreign shores. Lots of this wealth, whether legal or not, has been brought into the UK and is now in property. As the UK property market closely influences the financial situation of the country the removal of up to £30 billion of property investment, from London alone, could spell difficult times ahead.
The UK has greatly benefited from foreign investment in property over the past two decades, with research from King’s College London, who analysed findings from the Land Registry, reporting that this investment has pushed house prices up by more than 20% of the past 15 years. This effect has been terrific news for those who purchased in the 70’s and 80’s, but caused tremendous difficulty for the new generations trying to own their first home.
It is estimated that just 5% of residential properties in Britain have foreign owners, more than half the number it was back in 2012. It has been argued however that this small number is far too concentrated in particular geographical areas, and the overseas propensity to purchase lower-value homes, up to £500,000 rather than top-end property of £1m upwards, has caused tremendous price rises in particular areas, virtually sealing it off from those who live and work in these areas.
In 2015, foreign buyers purchased a third of all new-build homes in the capital’s most exclusive areas, and over 55% of homes worth over £5million were bought by overseas investors. It is reported also that one in four of these was sold to a buyer from Russia or CIS. It is the property on this financial level that mark an area of real concern for the government.
Why foreign investors love the UK property market
Regardless of how their wealth is accumulated, a sensitive subject at this juncture, the UK currently provides substantial tax benefits to those with assets offshore. The majority of other countries state a legal requirement for residents and foreigner to pay taxes on global income and capital gains.
However, as lawyer Joel McDonald comments “Residents in the UK can set up offshore accounts in such a way as to legally avoid these taxes. Thus, a person may hold millions or billions in offshore stock, sell it and use the proceeds to buy a London Mansion. All without paying taxes on the gains.”
Estimates from early this year, suggest that prominent Russian figures with strong links to the Putin regime account for nearly £1.1bn of property, concentrated in London. This figure is thought to realistically be much larger as buyers continue to take advantage of the offshore loopholes that have been left open under the current government, which has purposefully decided to keep it open. Although this is currently under intense scrutiny with current geopolitical developments, and although these are centred around Russia activity, it will nevertheless affect all nationalities.
It would be ludicrous to imagine that Russia are the only nation taking advantage of this legal loophole. In the last decade, Asia has been the leading investor in UK property, closely followed by various oil-rich states from the middle east, providing a large influx of fresh investment for the UK property and construction scene.
According to a report from the BBC, in England and Wales, as of January 2018, there are 97,000 properties owned by overseas firms. 44% of these properties are located in London, and over 10% of those (11,500) are located within the City of Westminster. Regarding the value of purchases from foreign investors, 33 percent were worth between £500,000 and £1m, while 16 percent were valued within £1m and £5m. Just one per cent of these sales were valued at over £5m.
Is this harming the UK Property Market?
Over the last few years increased scrutiny has fallen over these properties and the government has been urged to dig deeper into the legitimacy of the finances behind these overseas owned property collections.
As Nicky Morgan MP mentions, one estimate suggests almost £4.4 billion worth of UK property has potentially been financed with what she phrases as “suspicious wealth”. Morgan added “It has been claimed that the UK, particularly the London property market, is becoming a destination of choice to launder the proceeds of overseas crime and corruption – so-called ‘dirty money’”.
In perhaps a surprising addition, it seems to be the rare occurrence where there is bi-party unity on the matter.
Tory MP John Penrose stated, “More than £122bn of property in England and Wales is owned by offshore firms. If they’re clean and reputable, fine, they’ll have nothing to fear. But if murky shell companies have bought British property with plundered or laundered cash, we don’t want them here.”
Assuming the vast majority of these purchases are legitimate, there is no reason not to welcome the investment, argue many of those involved in London’s property market and we should not, even if unwittingly, label an entire group of investors with the misdemeanours of the few.
While the market remains legitimately funded, many of those involved in the property market debate that it would be silly to reject the substantial investments made here. “I believe in the economic trickledown effect,” says Peter Wetherell, the founder of a Mayfair Estate Agent , that frequently deals in properties over the £5m mark and the so called ‘super rich’. “When people buy these expensive properties, you have an economic benefit from it – to builders, interior designers, those who fit carpets, kitchens, to employment. When the British had money in the 1960s and 1970s we bought property in Spain, Portugal and Greece, and we spread our wealth around the world. Now the world wants to spread its wealth and bring it to London.”
Is this situation unique to the UK?
As foreign ownership becomes more closely monitored pressure is increasing on the government to modernise the current system and its lack of transparency. The majority of the UK’s foreign-owned property, valued at £33.9bn, according to data from the BBC and the Land Registry can be found in London. But these figures are more alarming due to the questionably high percentage of properties owned by companies ‘domiciled’ in the British Virgin Islands. The population of the BVIs is a mere 30,600, yet it is the registered home for owners of 23,000 UK properties. A situation that isn’t impossible but is highly improbable.
A group of representatives from the all-party parliamentary group on anti-corruption made up of writers, politicians and members of NGOs, all highlight their concern that the current system is allowing for money laundering at a substantial level. Labour peer Jeff Rooker states “Three-quarters of properties being purchased are purchased in secret, that’s wrong – it ought to be completely transparent.”
While speaking to The Guardian Rachel Davies Teka, Head of Advocacy at Transparency International UK, said: “Although I welcome a clear timetable being laid out, I am disappointed by the significant delay to primary legislation given the fact that the policy has cross party support, and has already undergone two consultations. “The longer we have to wait for this register, the longer corrupt individuals will be able to use the UK property market to hide their wealth.”
Without being truly aware of the depth that foreign investors are linked with UK construction and development firms it is hard to predict their reaction to a potential rebuke of their investments. Combined with the poor performance of large British firms such as Carillion, the immediate future could seem wobbly to say the least. However, new owners and new investments frequently mean renovations and the evermore popular ‘reimagination’ of homes, buildings, streets, and commercial areas as companies filling the void of vacating businesses impose their image on the capital. Just like the current political situation facing the UK, one cannot be sure whether the affect with be financially positive or negative, but it will have purely positive impacts on future property investment and development.