Exclusive: Why London's prime property market is in gridlock

Sales of luxury London homes down 50% as Osborne gears to unveil further tax reforms

So we said it, then we said it again. Then we shouted about it, then we shouted about a little bit more. But just in case you were not listening, the proof is here – increased regulations and taxation are ravaging London’s luxury property market.

In the last three months, sales of Greater London homes worth more than £2m fell by a whopping 53% compared to the same period last year, according to London luxury real estate agents London Central Portfolio (LCP).

The figures are based on research released by the Land Registry this month. They have struck a chord with buyers and sellers alike, equally frustrated by ongoing market turbulence, largely caused by uncertainty over incoming taxes and regulations.

With chancellor George Osborne poised to make sweeping announcements about his real estate intentions during his 5 December Autumn Statement and to publish details on 11 December, the luxury property industry is waiting anxiously.

“Greater London as a whole reflects the pulse of the domestic economy and the consequence of a fall in transactions between £2m and £5m of over 50% is very concerning,” says Hugh Best, head of investment at London Central Portfolio. 

Incoming changes to capital gains tax and the possible introduction of annual charges, the so-called “mansion tax,” as well as the extension of existing levies, such as stamp duty, are at the heart of the controversy.

“It is clear that investors are holding back until there is a clear direction expressed by the government. The UK has always been seen as a politically and economically stable environment and, as such, a safe haven for investors’ funds. Whatever the outcome of the government’s deliberations, confidence in the UK has undoubtedly been shaken,” LCP’s Best said in a statement accompanying the report.

Estate agents across the capital are feeling the ripple effects.

“What’s going on has been very interesting, the price bracket has definitely been hit around that £2 to 3m mark. We have houses that would have sold, but they have just stuck around and generally the number of people enquiring and starting searches is very minimal,” Simon Bray sales director at Hudsons Property in Charlotte Street told LondonlovesBusiness.com.

“Last year, it was a lot more active, but now there is hardly anyone registering, just half a dozen in the last few months. Viewings are down too,” he adds. 

Those working more directly on behalf of buyers are also having a tough time.

“With the increased purchase costs and the lack of debt, it is incredibly difficult and expensive to move home and people are therefore staying put, unless they absolutely need to move,” Edo Mapelli Mozzi, managing director of Banda Property a bespoke luxury property search agency, told LondonlovesBusiness.com.

“Digging down or building up is a far cheaper option than moving. We were looking on behalf of a client during August and September for a four or five bedroom flat in Knightsbridge, and there were only two within this brief available on the open market.”

As availability has fallen, prices have continued to rise. In the last 12 months, prime London properties have gone up somewhere between 10% to over 15%.

But what is all the fuss really about and what exactly is causing this blockage in a once vibrant, if always bullish, market?

Much is being blamed on the Stamp Duty reforms, announced in the March budget and scheduled to come into force in April 2013.

The changes will hit the £2m-plus property band, with all people owning properties above this value soon having to pay 7% tax when selling properties, up from 5% currently. All properties owned by offshore companies, which account for a significant share of the London prime real estate market will be slapped with a whopping 15%.

“The thing I truly loathe is the Stamp Duty tax,” Patrick Bullick, the London chairman of the National Association of Estate Agents and managing director of Stanley Chelsea, told LondonlovesBusiness.

“It is a transaction tax, which we have to pay, much like VAT, but unlike VAT it still applies on second-hand properties. It inhibits turnover of homes once they have been bought, it reduces market availability and it stops people transacting homes. That is bad for the industry, bad for homebuyers and sellers and bad for the economy in general.

“The real estate sector is an imperative part of the economy. It is the oil that helps move so many other industries, from plumbers to furniture designers to craftsmen. It has vast secondary economic benefits.  The thing is making the market completely sclerotic,” Bullick adds.

“London property is helping to keep the economic wheels in motion so to consider strangulating it could have a very damaging effect not just to London but to the rest of the country,” Hudsons Property MD Jonathan Hudson told LondonlovesBusiness.

Stamp Duty has been slammed for taking a very short-term view of the situation, with estate agents, along with chunks of the Conservative backbench favouring the introduction of steeper council tax bands instead. They claim these would allow a smaller, targeted levy to be collected annually, removing the new barriers to buying and selling.

The Stamp Duty, however, does have its advantages. It is relatively simple to collect and at least the policy has been clearly laid out.

The problem with the upcoming announcement from the exchequer is that Osborne has stayed very tight-lipped about the nature of the tax reforms.

So far, he has announced that capital gains tax will be introduced, but has been non-committal about the rate of tax, when it will come in, and whether it might be lifted to the £5m-plus range, instead of the £2m currently suspected.

Conservative governments have traditionally shied away from regressive taxation. It is widely expected capital gains tax will only be applied on future gains, which is partly why we have not seen a massive flood onto the market.

In principle, taxing only from the reform announcement date or the next budget would mitigate the most worrying part of the tax. But these are difficult times.

In February, the coalition clawed back some £500m from banks involved in a “highly abusive” tax avoidance scheme, while the current crackdown on offshore tax havens, clearly illustrative of the new emerging tax reality.

There has also been suggestion from the government that an annual charge of up to £140,000 will be introduced on luxury homes. While not regressive, many owners are deeply concerned about this charge, which with other taxes would far outstrip any annual price increases.  

Additionally, there is concern over the introduction of an as yet unspecified “mansion tax.” While Osborne has spoken out against this, business secretary Vince Cable has put these rejections in doubt with his periodic outbursts in favour of the tax.

So far, no one is really sure which of these taxes will be brought in, in which combination, to what extent and when they will come into force.

“Not all of these taxes are bad, but we need clarity,” says Bullick. “We just hope that Osborne makes some clarity on what he is proposing to do. Only when we have this, will the market act accordingly.”

However, one thing about the reforms is as relatively certain, they will mainly target non-individual, non-resident entities, not people.
In other words offshore companies holding real estate likely for investment purposes.

“Prme London real estate prices have soared by more than 122% since 2000”

British citizens owning property in their own names, will not impacted by the changes, at least not yet, explains Bullick. “They already pay capital gains tax so the changes will aim to make the system more equal.”

The UK presently harbours a curious loophole where offshore companies don’t have to pay capital gains tax on properties.

The get-out-of-tax-free clause has remained pretty much unchanged for the last 30 years. It dates back to 1981 when the UK was all but bankrupt and desperate to draw in any foreign investment.

The plan brought in foreign, particularly Japanese, manufacturers into Britain and laid the foundations for the construction of the once thriving Sunderland Nissan and Swindon Honda plants. But as the good times returned, the tax came to be used by a wide array of companies, individuals, and just about anyone with several million in the bank and the sense to hire a tax consultant.

“This is a virtually unique situation. You will pretty much not get this anywhere else in the world apart from maybe tax havens,” says Bullick. “Any European and normal western government is not going to allow this. There is just no way that the French or the Germans are going to let you make a profit off your property and just not pay any tax.”

This has made prime London real estate even more popular than it would have been otherwise. It has helped endlessly drive up prices, which according to Home.co.uk have soared by more than 122% since 2000.

And, even with the present hurdles and anticipation, they’re expected to keep rising.

“The chancellor and the exchequer have made a massive miscalculation in sending out a message that foreign buyers are not welcome in the UK,” Dajit Sandhu, Director of London property finance company Urban Exposure, told LondonlovesBusiness.

“However comparatively speaking, London is still a very attractive city for the global rich, and they will always buy here. While supply is unable to meet London’s huge housing demand, prices will continue to rise.”

If the latest research by Savills is to be believed, prime London homes are expected to go up by almost 24% by 2017 compared to todays levels. Nationally, prime property is expected to be up 15%.

“This isn’t as much as it sounds,” Simon Taylor-Foster, director of Link Property London, an acquisition service specialising in foreign investor told LondonlovesBusiness.“Historically, prime London price increases have been considerably above this. This projection puts prime growth at not much ahead of inflation.

“Central London will remain a supply driven market as the capital’s population continues to grow. It received a serious boost in the last five years due to cheap Sterling and the safety and resilience which London offers foreigners in changing political, economic and tax environments abroad.” 

Herein comes another knock-on problem of the reforms. While they are targeting wealthy, tax-creative foreigners, they’re actually having a bigger impact on other buyers and sellers. 

The sales situation in prime central London locations, such as Chelsea, has been comparatively stable, explains LCP. Prime London sales, which are dominated by overseas buyers and company buyers fell by just under 10% year-on-year, while Greater London £2m-plus band fell by 50%.

“Our prediction of a 10% suppression was based on transactions in prime Central London where the globally high-net-worth may be less price sensitive. However, the Greater London market, where the 53% fall was witnessed, is representative of the pulse of the domestic economy. For these buyers, the additional cost of £40,000 plus in Stamp Duty is a big ask,” Naomi Heaton, CEO of LCP told LondonlovesBusiness.com.

Estate Agents Knight Frank estimate that the year-on-year fall in all over £2m sales has been around 25%, with a lot of the slack being picked up by ultra-luxury homes.