Luxury London property market wanes

The Malaysian consortium behind the redevelopment of Battersea Power Station had planned to build more than 3,800 apartments on the site. But after selling 1,460 flats, weak demand for luxury London property has forced it to consider changing one million sq ft of the remaining space into offices. This shift points to a problem in London’s high-end  market – people just aren’t as keen on luxury property as they were a year ago.

Prices for prime London properties fell by 5.8% in 2016, despite the weaker pound, which was expected to inspire overseas investment in London property. Sales were down 21% in the most expensive areas of the capital, including Kensington and Westminster, according to property investment fund London Central Portfolio (LCP). In central London’s new-build market, sales fell to their lowest levels since 2012, based on data from consultants Molior London.

There were a number of factors behind the fall. Last April, on top of the 3% stamp-duty surcharge imposed on the purchase of second homes, the government introduced a 15% stamp-duty tax on properties bought via “non-natural persons”, such as offshore trusts. Policymakers are keen to discourage people from buying property in this way, as it allows buyers to remain anonymous and avoid certain UK taxes.

Subdued demand may also be due to greater restrictions on “investor visas” – permits that grant residency to wealthy foreigners who invest a certain amount of money in the UK. In 2014, the government doubled the minimum investment to £2m and bought in new money-laundering checks. The number of people granted investor visas in 2016 was down 80% from the 2014 peak, which seems to have affected property sales, says Jack Sidders on Bloomberg – the percentage of houses in prime central London that were bought by international buyers dropped to 41% in the three months to December, down from 60% in the previous quarter, according to figures from Hamptons International, an estate agent.

So the government’s plan to discourage wealthy foreigners from buying up London’s luxury property appears to be working, helped along by post-referendum uncertainty. But so far there is not much sign of falling prices spreading to the “less luxury” parts of the market. Within inner prime London, the “up and coming” areas of Marylebone, Fitzrovia and Soho saw price increases of almost 20%, says LCP.

Why the super-rich are renting their homes

The super-rich are increasingly choosing to rent rather than buy luxury properties in London so that they can avoid the growing tax bills associated with buying expensive houses, says Rupert Neate in The Guardian. The number of lets arranged for houses that cost more than £3,000 per week (£156,000 per year) rose by 28% in the last three months of 2016, according to research by LonRes, a property data service. And if that much rent doesn’t buy enough luxury for you, “since the start of 2017 the market above £4,000 per week has been very buoyant”, according to estate agent Savills.

The trend isn’t surprising, given that the stamp duty on a house worth £15m amounts to £1.7m – equivalent to three years’ worth of rent, Tom Bill of property consultants Knight Frank told the Financial Times last year. If the buyer owns another house and so would also have incurred the 3% stamp-duty surcharge that the government introduced in April 2016, the cost would be even greater. As a result, it can now seem more prudent to rent – especially if you’re concerned about the outlook for prime property.

That said, some of those who are still buying London properties worth more than £20m are happy to pay an extra £218,200 per year in tax to avoid declaring their ownership, says Neate. In 2013, the government introduced an annual tax on houses worth more than £20m that are owned via “non-natural persons”, in an effort to crack down on people trying to hide criminal earnings in UK property. Yet recent HMRC figures show that as many as 210 UK properties worth more than £20m are still owned by an offshore company or other similar vehicles. The number of houses owned in this way has fallen by less than 5% since the tax began.