In response to targeted sanctions against Russians and pro-Russian Ukrainians, $51 billion has been siphoned out of the country in the first quarter of 2014 by some of the wealthiest individuals seeking to protect their cash amid fears of broader sanctions against entire areas of the Russian economy. Recent reports show that much of that money will be pouring in to the UK with purchases of prime real estate, principally in London.
In January, the Guardian newspaper published an investigative report on mansions standing empty on The Bishops Avenue in North London, ranked Britain's second-most expensive street last year. The report said that a row of 10 houses worth a total of $122 million have stood empty since they were bought between 1989 and 1993, supposedly on behalf of Saudi royalty. Two months later, the Economist reported that prime real estate agency Glentree International had "brokered a deal for undisclosed Russian interests" to buy these same properties as an investment, to be refurbished and sold off separately.
It seems as though the anxiety felt in Russia is filtering through the whole of Eastern Europe as the region braces itself against any further escalation in sanctions. There are no restrictions on foreigners purchasing property in the UK and it is possible to buy a house in the name of an offshore company which can serve to further protect the identity of the purchaser.
The lack of transparency with corporate purchases is one of the reasons British real estate is so appealing to those seeking to protect their anonymity. The property market in London is a particular safe haven for suspect capital because apart from it being to all intents and purposes, anonymous, it is also highly liquid and protected by an excellent legal system making it hard to beat as a destination for capital flight.
Unofficially, the government are rubbing their hands together with glee but the official line is that they are 'displeased' with the increase in foreign property ownership but 'powerless to do anything about it'. As a concessionary move to increase revenue from foreign homebuyers, the 15% stamp duty was extended from home purchases of $3.35 million or more, to any deal worth more than $840,000 when the purchaser is a company.
However the increase in tax did nothing to diminish the appetite for corporate property purchases, raising $118 million in tax revenue for the Government in 2013. It is also unlikely that many will be deterred by the introduction of capital gains tax for foreign property investors from 2015.
The net result of the massive increase in property sales to foreigners will be that prices will be driven upwards at the expense of the domestic market. London property is already expensive with locals spending an average of more than 50% of their income on rent.
In 2013 the average British home appreciated by 8.4%, while London prices grew by 14.9%. And while the average U.K. house price is 5% below its 2007 peak, London's prices are already 14% higher. It is a buoyant market in which, as the British Property Federation recently found, 61% of newly-built property was bought as an investment last year. Foreigners drove the 2013 boom, with 49% of new housing in prime areas of Central London bought by non-residents.
- Thursday 08 May 2014