Many new built prime houses stand empty in central London. One can rarely see light from the windows, as their owners are not in the country. The phenomenon is is know as “buy-to-leave”, whereby the wealthy purchasers, especially rich Russian, Middle-Eastern and Chinese individuals are buying up the expensive houses, but leaving them empty at most of the time.
Foreign demand and safe-haven seeking investors helped push London to the title of the most overvalued market in Europe and drove house prices to the highest point since 2007, despite the fact that London is in the highest bubble-risk territory in the world. According to a new report from Union Bank of Switzerland, London scores of 1.88 at bubble index. Cities at or near the bubble risk zone(1.5) may face a higher risk of a large price correction.
House prices in London’s prime market have fallen 0.9% per square foot in the second quarter of 2015 than the same period in 2014. Meanwhile, transactions were down 23%, according to data firm LonRes. Some analysts anticipate that parts of the London market will suffer more hit due to the economic turmoil in emerging markets and new tax policies in the UK.
Research from property agents Savills and Knight Frank show that international investors only purchases 34% of properties in prime markets in the first half year of 2015, compared to 40% in 2014. Over 12 months to June 2013, 49% of all £1m+ sales in prime central London went to foreign buyers. Among international investors, the number of Russian buyers in prime market reduced 1.2% to 2.9%, whilst purchasers from China decreased to 3.8% from 4.1%.
In Russia, the continuous oil price decline and Western sanctions since 2014 dragged the country to the edge of economic collapse. According to New York Mercantile Exchange data, crude oil has lost 60% of its value and crude gas has declined 64% since February in 2014. Heavily depending on energy export, GDP plunged 4.6% after the economic sanctions, with a GDP growth rate of -2.01% in the second quarter of 2015. China has also seemed to suffer. Economic growth slowed down to 6.9% in the third quarter this year, which hits the lowest point since first quarter in 2009. Weak demand and feeble global economy contributes to downward pressure on Chinese economy, said the spokesman for China’s National Bureau of Statistics. Meanwhile, the booming stock market initiated by low interest rate went bust 35% in summer, partly due to shorting deals by speculators and de-leveraging reform from the government. The Central Bank of China devalued the RMB 10.3% to sterling in 4 months.
“The falling of RMB and strengthened sterling hit the initiative of Chinese investor to buy house in London. Chinese Foreign Exchange Control also holds the investors back.”
Jay Zhang, Manager, SnailProperty UK
Foreign Exchange Control in China imposes restrictions such that individuals are not allowed to transfer more than $50,000 abroad within any single year. Underground banking sectors witnessed great development in recent years as private capital has been flourishing and the domestic investment situation has stagnated. Investors can remit large amount of money via underground banks to foreign countries without legal control. However, greater efforts have reportedly been made by Chinese governments to fight against the underground banks. The big rise in stamp duty last December also led to a sharp decrease in property sales. Knight Frank reveals that the number of transaction, for properties worth more than £1.3m declined 19% in the first seven months this year, whilst 25% drop has been seen from homes worth more than £3.3m.
Based on the new stamp duty policy, property buyers are asked to pay a 5% tax for houses valued between £250,001 to £925,000. In terms of prime property, 10% is due for properties worth between £925,001 to £1.5m, whilst 12% is for those over £1.5m. Before the reform, only 3%-5% of tax was required for property value between £250,000 to £2m. Moreover, 3% surcharge on buy-to-let purchases will be introduced next April, regardless of the fact that landlords have already been informed that they will no longer be able to claim tax relief worth 40% or 45% of the interest payments on their buy-to-let mortgages from 2017.
Apart from investment in prime property, rigid demand related to education and immigration is another significant motivation to foreign buyers. London is the home for many world’s top higher education institutions, with 4 of top 50 institutions in the city. 27% of current university students are from outside the UK, among which 66.7% are non-EU, with London taking 23% of the foreign student population for the whole of the UK.
Compared to many other Western countries, the U.K. has relatively flexible policies to immigration. However, the threshold of investment immigration policies was elevated since October last year. The minimum requirement of £1m was rose to £2m. In addition, property budget is no longer part of the minimum fund. Immigrants are asked to raise more money in order to live in the UK. According to Mr Zhang;
“London will still be a hot spot for Chinese investors, despite the new stamp duty policies. The uncertainty towards Chinese economy will keep fueling the housing market in London. But in the short-term, Chinese investors might slow down their pace.”
Meanwhile, some analysts in property market warned that Chinese investors who own property in London are beginning to sell their investments as they seek their profits and run, according to an article from Daily Mail Online.