Stamp duty holiday in UK spurring residential transactions by Asian investors in London

/ EdgeProp Singapore |

September 11, 2020 9:13 AM SGT

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SINGAPORE (EDGEPROP) - A stamp duty holiday is giving some London home buyers a nine-month window of opportunity to push ahead with their property purchases. According to UK developer Regal London and property consultancy Savills UK, buying activity is gaining momentum, supported by months of pent-up demand, and some Asian investors are opting for better capital gains and safe haven in the UK over their own domestic markets.

Pent-up demand resumes after lockdown

The UK’s formal exit from the European Union on Jan 31 this year was expected to rally transaction activity in London’s residential market. A period of uncertainty since the 2016 referendum has caused some investors and home buyers to hold off their purchases. In February this year, Marc von Grundherr, director of UK-based lettings and sales agent Benham and Reeves, noted that “month after month of uncertainty surrounding Brexit had caused the market to stutter”.

But the anticipated rally failed to gain momentum due to the Covid-19 pandemic, with the UK government imposing a country-wide lockdown in March this year. According to Jacob Sullivan, sales director at Regal London, overall market sentiment in London’s residential market faltered during the lockdown period. Regal London is a privately held real estate developer, and has had a 22-year track record in developing residential-led, mixed-use projects in London.

However, some lockdown restrictions have been gradually lifted over the past few months with most business activity resuming in London. Sullivan says that the developer has seen an “unprecedented level” of domestic demand for its new projects over the past few weeks, largely attributed to the fact that most of its developments are completed. He adds that local home buyers still prefer physical viewings and are more likely to buy into already completed developments.

We continue to see huge demand from the Hong Kong market for long term investments in London, helped by the currency advantage alongside stamp duty changes, says Jacob Sullivan, sales director at Regal London. (Picture: Regal London)

According to Savills UK, its website has also seen a strong increase in traffic since London’s housing market reopened, with its residential website traffic up 47% compared to January this year, and new buyer registrations are 48% above pre-lockdown levels.

“It is fair to say that demand [in London’s residential market] is higher than expected. It is a combination of pent-up demand from when the market was closed, people deciding to move after their lockdown experience, and the stamp duty holiday that is encouraging people to move sooner than they might have done,” says Jacqueline Wong, head of residential services and international residential at Savills Singapore.

Sullivan agrees, saying that most home buyers in the UK feel that they have been holding off their purchases for too long as a result of the prolonged Brexit situation and the recent Covid-19 lockdown. “July was the busiest month in a decade with close to GBP37 billion ($66.58 billion) worth of transactions occurring in London during the month,” he says.

Lockdown delayed new launches

Another effect of the lockdown in London is that it has forced most developers to delay planned new launches this year into the summer holiday season. Typically, most developers would showcase their developments earlier in the year during spring, with buying activity culminating just before the traditional summer holiday period, says Sullivan.

In general, Singaporean buyers prefer projects with top-notch views, such as The Dumont, says Wong. (Picture: St. James)

“But with most of the local buyers picking staycations this year due to ongoing international travel restrictions, it has caused buying momentum to continue over the past few weeks,” Sullivan says. He expects this momentum will likely continue through to 4Q2020.

International travel restrictions have also resulted in a smaller number of international property investors engaging in the property market this year, and the few active foreign buyers are typically already familiar with the London residential market with an established portfolio of investment properties on hand, says Sullivan.

Asian investors turn attention to London

However, one group of overseas buyers still out investment shopping in London are Asian investors, says Savills. In general, this group of foreign buyers feel that residential property in London is still a resilient asset, coupled with their broad familiarity with the city, the international consultancy says.

Most Asian investors are seeking one- or two-bedroom properties, and they have a budget range of GBP800,000 to GBP2 million, says Wong.

London, particularly with the stamp duty holiday proves to be a competitive in terms of transaction costs compared to other cities, says Jacqueline Wong, head of residential services and international residential at Savills Singapore. (Picture: Albert Chua/The Edge Singapore)

“In the Singapore context, we have witnessed new entrants to the UK residential market. Typical of Singaporean DNA, they are initially doing market research, enquiring about taxes and overall due diligence before taking the plunge, so to speak,” she says.

She adds that some Singaporean-based buyers have turned their attention to London due to the higher additional buyer’s stamp duty in Singapore, which could negatively affect future capital gains on some property investments.

But Wong notes that the impetus for Singapore buyers is distinctly different from Hong Kong or China buyers. “With Hong Kong buyers, apart from the continued protests in the city, the latest security law has further fuelled their interest to invest in properties in the UK,” she says.

The UK recently extended options to about three million of Hong Kong’s British National (Overseas) passport holders that will allow them to apply for up to five years’ leave to remain in the UK. And after a further year, they will be able to apply for British citizenship.

According to Sullivan, one of Regal London’s newest London projects, One St John’s Wood, has recorded a “good level of demand from buyers from Asia and the Middle East”. He adds: “We continue to see huge demand from the Hong Kong market for long-term investments in London, helped by the currency advantage alongside stamp duty changes. These make a purchase in the next six months favourable for any purchaser. This demand is mirrored by unprecedented demand from the UK market, with buyer registrations up 10-fold on previous years.”

One St John’s Wood is a 112-unit development that launched this month. The developer says that about 80% of the enquiries it has received for this development came from owner-occupiers, comprising upgraders and those looking to “right-size”. The development comprises studio units and one- to three-bedroom apartments, with prices starting from GBP995,000.

“Apart from location and price, investors also consider yields, potential growth for capital gains, whether it is a regeneration area and connectivity to central London. Some will also consider the track record and reputation of the developer,” says Wong.

About 50% of the area in the development Prince of Wales Drive in Battersea is dedicated to green spaces. (Picture: St William)

Singaporean buyers in particular prefer projects that feature top-notch views, such as The Dumont along Albert Embankment, she says, adding that the development’s central location in the city also makes it attractive. “The Dumont’s privileged position on a unique bend on the south bank of the Thames River means each home boasts unrestricted, vast panoramas of London,” says Wong.

Green spaces in the development are another project attribute on buyers’ checklist, for example Prince of Wales Drive in the Battersea area. “An impressive 50% of the development (2.5 acres or 1.01 hectare) is dedicated to green open space, creating an urban oasis in the Battersea regeneration area,” says Wong.

Limited stamp duty holiday

The financial climate is also encouraging buyers and investors to pick up properties. Paul Eden, CEO of Regal London, says: “With the pound to dollar still at a historic low, and demand rapidly returning to the market, London is experiencing a positive uplift which brings opportunity for early investors to secure good value before the city’s market returns to its peak performance.”

Some home buyers are also taking advantage of the government’s stamp duty holiday to lock in their purchases. On July 8, 2020, Chancellor of the Exchequer Rishi Sunak announced a stamp duty holiday for residential property buyers in England and Northern Ireland, from July 8, 2020, to March 31, 2021. As a result, the stamp duty threshold was temporarily raised from GBP125,000 to GBP500,000.

This means that stamp duty land tax will not be paid on any property that is valued below GBP500,000. According to Sullivan, this could mean up to GBP15,000 in savings for first-time home buyers, and will be enough to encourage them to push forward their purchases.

A market report by Knight Frank UK last month noted that from July 8 to Aug 8 this year, the number of home sales in London was 146% above the five-year average for properties valued at less than GBP1.5 million. This is the section of the market who will benefit the most from the stamp duty holiday, the report says.

“The holiday, it must be concluded, is working,” says Tom Bill, Knight Frank’s head of UK residential research, adding, “Whether it should become a permanent arrangement is something the government should consider.”

According to Wong, “London, particularly with the stamp duty holiday, proves to be competitive in terms of transaction costs compared to other cities. It is worth noting as well the currency opportunity in London at the moment because of the weakness of the sterling, but also the price falls we have seen in London since 2014”.

For now, the government is still expected to implement its planned 2% stamp duty surcharge from April 1, 2021, which will coincide with the end of the stamp duty holiday, says Wong. “However, it is good to note that even with that extra 2%, London is comparatively less expensive in which to acquire properties versus other gateway cities,” she says.

Moderation expected in 2021

If London can avoid another lockdown or a second wave of Covid-19 cases, it is likely that residential sales in the city will remain relatively robust until December 2020, and may even carry on into 1Q2021, says Sullivan. But he expects that the pent-up demand in the market will start to moderate next year and will no longer record the “excessive” levels seen this quarter.

“When international restrictions ease, the global wealthy will return from the country or from overseas, and central London will regain its buzz. But a recovery in prices has been delayed,” says Wong.

She says that despite having made up for some of the initial losses earlier this year, the net fall in the value of global stocks and commodities would have eroded the existing wealth of ultra-high net worth individuals who are active in the residential market. Investors will likely focus on safe-haven assets, and there is no reason why London properties will not continue to be in that investment basket.

“As a consequence of these factors, and the delayed recovery, we have reduced our forecasts for the next five years for the most expensive of UK property. However, we believe that further falls in value are likely to be limited in a market that has more than adjusted to the prevailing tax environment and looks [to be offering] good value on a world stage,” says Wong.

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