A confluence of factors has boosted the potential of the UK property market for savvy investors
Beth Hirshfeld
The UK has always been a favourite for international property investors. Its global reputation, reliable and secure returns, and vibrant multicultural lifestyle have provided a compelling business case for investors looking to diversify their real estate portfolios. Though geopolitical events, increasing interest rates and costs of living have caused trepidation about the continued growth of the global real estate market, London’s seems poised for long-term appreciation. And much like the short-term real estate dips that happened during the Global Financial Crisis and at the start of the pandemic, London’s real estate market is confronting a series of short-term factors that provide a ripe opportunity for nimble international investors who can act quickly and decisively.
London was recently ranked the top European city for property investment, attracting a wealth of international investors. Though the city saw a slight slump early in the pandemic, it attracted $3bn of international investment into property in 2021—more than any other city in the world. Overseas capital accounted for 46% of UK real estate investment, in line with its 5-year average. And GCC buyers have actually increased since the pandemic, now comprising a higher percentage than they were in 2019.
Strong Upside Potential <
The London market is attractive for international buyers for several reasons, not least because of its potential for solid yields and strong capital appreciation over the long-term.
Demand in Prime Central London increased in March 2022 by its fastest rate since 2015. Prices, however, are still 16% lower than they were 5 years ago. Alongside that, London real estate is poised for long-term growth. Prime London house prices are forecast to grow by up to 10% in the coming year. Over the next 5 years, prices in the UK are forecast to grow between 20% and 30%, and those in Prime London between 20% to 35%, offering strong upside potential.
Interest in London living has increased as Covid restrictions ease and people return in earnest to the office. As a result, annual rental growth in Prime London reached 11+% in Q2 of 2022, the first double digit growth in over a decade. The average gross rental yield in the UK is now approximately 6.5%, with some areas hovering at almost 9%. Rental prices for both houses and flats are now above where they were pre-pandemic and pre-Brexit, a sign of life returning aggressively to the city and an opportunity for buy-to-let investors to generate solid yields in a globally-recognized market.
The Falling British Pound
Beyond positive yield and capital appreciation potential, the London market offers particular benefits to foreign investors because of the advantageous exchange rate. This month, British Sterling fell to a two-year low versus the US dollar. The Pound was down 0.4% at $1.22 against the US dollar. In addition, the 0.1% MoM drop in UK March GDP suggests the economy is losing momentum and the Pound is unlikely to rebound quickly. A falling Pound makes it possible for international currencies to purchase UK properties at a lower price, though the UK’s resilience suggests that this currency purchasing advantage will be time-limited.
Advantageous Tax Treatment
The UK has a special tax treatment for “non-doms”, or those not living/domiciled in the UK. Individuals who live overseas can take advantage of the UK’s remittance basis of taxation, meaning they are only taxed on income and capital gains that are brought into the UK, and not on any gains or income retained outside the country. This is a major tax incentive for those with significant sources of income outside the UK, and can result in a comparatively low overall tax rate.
The tax requirements in the UK, however, are changing. Increasing Stamp Duties, the reduction in Capital Gains exemptions and more complicated tax reporting structures suggest that the tax benefits of UK property for international investors will not last indefinitely.
Geo-Political Vacancies
Once extremely popular with Russian investors, the London property market has witnessed shifting dynamics, particularly in the luxury property segment, as a result of recent global events. Transparency International forecasts that Russians hold at least £1.5 billion in British property, and a recent analysis shows that there are 1800+ Russian-owned properties in London, three times higher than originally anticipated. The Financial Times outlines that, as this investor group exits the UK market, luxury market opportunities will become more available and more affordable. The global appeal of these properties suggest that the market will quite quickly re-align and rebound, but international property investors who are ready and able to act quickly can take advantage of some unexpected openings in the market.
Chain-Free Purchasing
Though the Russian exit will bring new properties onto the market, UK property is still in short supply. With buyers often competing for real estate, sellers have their choice of buyer and will often look for a “chain-free” purchase. For many domestic buyers, the purchase of a new house is reliant on them selling their existing home. This creates a “chain” of necessary events to occur in order to complete a home transaction. To avoid the complexity or chance of non-completion, sellers have the luxury in this competitive market to opt for chain-free purchasers. In these cases, the ownership title can pass from seller to buyer without any conditional obligations.
Research suggests that chain-free transactions have been dominating the market. In 2022, 61% of sellers accepted an offer from a chain-free buyer over a “chained” buyer, an increase from pre-Covid and 2021 levels. In fact, sellers are often willing to accept approximately 2.5% less from chain-free buyers to secure a more straightforward and reliable sale. For international investors who can enter the market without any pre-conditions, there is an opportunity to compete and secure a desired property at a slightly lower price. Though even this trend may not last indefinitely as more domestic home owners are opting to sell their current home and move into temporary rental housing to break the chaing and compete with other chain-free buyers.
The UK market has shown an impressive resilience and stamina in navigating Brexit and the pandemic. And international interest has not dulled. For international investors considering property in the UK, the pandemic has made it simpler than ever before to buy a home from overseas. New technologies make it easy to both virtually view and “walk through” a property, speak with agents and other real estate service providers, and sign property agreements.
The nuances of buying overseas, however, should not be underestimated. The importance of a knowledgeable and trustworthy team can both help optimize the potential of the UK market, while also bringing to light critical considerations around local laws and taxes. Christie’s International Real Estate is the world’s largest luxury real estate agency - with more than 950 offices across 48 countries and territories - offering real estate investors extensive global reach and on-the-ground local expertise. Investors with the ability to move quickly and decisively, and with the right international strategy, have an exciting time-limited opportunity with the UK market, and we are here to help.
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