Features

Central London

Central London is ever the trendsetter. As the influx of international investors here continues to soar, the rest of the country is starting to experience the same phenomenon as Britain’s property market – for farms and commercial units as well as homes – begins to go global. So why does an island nation suddenly become the focus for international buyers?

There are two intertwined reasons for this. Firstly, Britain has facilities and an economy that welcomes overseas buyers. “Successful financial markets, a welcoming tax regime for overseas investors, airports with unrivalled international links, the universal language of English and a positive global image. Britain has it all,” says David Stubbs, Chief Economist at the Royal Institution of Chartered Surveyors, and one of Britain’s most respected property market analysts.

As a result, over 65 per cent of Fortune’s Global 500 companies – a key barometer of the world’s financial operations – have chosen London as their European or world headquarters. London also has more foreign banks than any other city in the world. US business magazine Forbes says the number of British-based billionaires has risen from 33 in 2006 to 42 today – and the three richest are not even British.

Secondly, status and lifestyle are important. “The uber-rich used to say they had a place in Manhattan as a status symbol. Now that place has become London. Then there are British schools, shops and restaurants. They’re all world standard,” says Jonathan Hewlett, Head of Savills London. “There’s a multiplier effect. Services and businesses grow around these people who buy here, then spread to outer London and the rest of the country. Foreign buyers now look to country properties too, so the whole process is starting again,” he says.

However, this globalisation of the property market is two-way. Many Britons are buying overseas, for pleasure or as an investment to augment pensions. A report from the Office of National Statistics shows Britons have invested over £23 billion in overseas property, most in holiday homes in Europe. Increasing numbers are turning to Canada, New Zealand and the Caribbean. New markets for British investors, from Bulgaria to India via Chicago, are emerging too.

New Markets

“We think of the traditional type of British investor, but, remember, there are 2.5 million British Asians and they, as well as the healthy British economy, attract investment from Asia into the domestic market,” explains Sheetel Halai, who hails from Gujurat in north-west India and is now head of Savills’ South-East Asia Desk in London. “But British Asians are also looking overseas for investments. India has eight per cent annual growth and is now embracing international property investment. British Asians can get some of this as they fulfil requirements for foreign investors to have family links with India,” she says.

Worries circling the US economy and in some European banks have inevitably led to concern about whether international demand for British property will be sustained. “There’s nervousness about the credit crunch, but no other city rivals London, and no other country rivals Britain for attracting such diverse international buyers. That won’t change, short-to-medium-term,” admits David Stubbs of the RICS. “Historically, no other national residential market offers better investment returns than Britain. Foreign buyers may keep many of our markets going this year as domestic demand takes a breather,” he says.

Other analysts are concerned that a new tax being introduced in Britain this spring, obliging non-domiciles – people resident much of the time in Britain, but not living here permanently – to pay a £30,000 annual fee. This will effectively allow them to keep their offshore income and gains outside of the UK tax net. “There was some concern that this, together with other proposed changes, would cause some overseas owners who have benefited from favourable tax conditions to reconsider their position. However, important changes in the recent budget, which allow the fee to be offset against overseas tax and mean that other changes will not be retrospective, significantly limit that risk,” says Lucian Cook, Director of Research for Savills.

So the global fascination with Britain looks set to continue. The latest evidence is at the historic Chelsea Barracks, where Qatari investors have paid a record £959 million for a 13-acre site set for regeneration by developers Candy & Candy.

Oh, that house in Kensington, by the way, was snapped up by a Singaporean. These days, it’s a small world.

Agriculture

The frenzy of international buyers in Central London recently is now being replicated in an unexpected sector of the UK’s property market: Britain’s farming community.

In 2007, 10.3 per cent of all buyers of farmland were Danish, up from 9.3 per cent a year earlier. Of the larger farmland acquisitions, of plots with 500 acres or more, Danes account for no less than 37 per cent of purchases. The Irish are on the march, too. In 2007, they accounted for 4.8 per cent of all British farmland purchases, up from 2.5 per cent in 2006. The numbers of US, German, Italian and Australian buyers – although still relatively small, accounting in total for little more than five per cent of purchases – have roughly doubled from 2006 to 2007.

“It’s down to culture and economics,” says Ian Bailey, Savills’ Head of Rural Research. “Danish land prices are twice those of Britain at up to £10,000 an acre compared to £5000 an acre here. Danes also have domestic restrictions that allow them to buy only within a small radius of their existing farms. So, when land comes on sale over there it’s expensive and fought over by nearby farmers, driving up prices further. Therefore, Danes look to Britain where, by comparison, land is good value,” he explains.

Other nationalities look enviably on Britain’s farm-friendly climate – more so than we do, no doubt – and the result is that there has never been more global competition for British farmland, even though relatively little of it comes to the market. An average of 0.6 per cent of British farmland is sold each year, nowadays, down from a typical 1.6 per cent or more in the 1970s. “Farmers’ debt is low and therefore fewer farmers have to sell land to pay it off,” explains Bailey.

As a consequence prices are very strong by historic standards – English and Welsh farmland is up by over 80 per cent in the past four years, with Scottish farmland doubled. The international trend is not one way. Now some British farmers like Andrew Luddington, who sell in a strong market and then use the equity, move overseas too.

Last summer Luddington sold Wallington Hall – a 580-acre estate in East Anglia, complete with a shoot, fishery, farmland, woodland, lakes, cottages and a bed-and-breakfast business – to fund his family’s move to New Zealand. He hopes to resume farming there and is enjoying the country already. “It’s a healthier, safer and better place to raise two children than the UK,” comments Andrew Luddington from his new home.

An estimated 10 per cent of British farmers who sell each year follow his example and take their skills overseas.

Commercial

The UK’s commercial property market remains one of the world’s most attractive and sought-after property markets, even with today’s current financial uncertainties.

The reasons are simple. Investment activity is huge at around 80 billion euros of commercial property transactions per annum (as opposed to 50 billion in Germany and 25 billion in France). “It is a big market, which gives investors plenty of choice,” says James Goldsmith, International Investment Director at Savills Commercial. “It is also transparent and liquid – easy for an investor to enter and exit the market safely and quickly – which investors love.”

The UK commercial lease structure is also attractive with upward only rent reviews and tenants paying costs. “Investors come here and find our very landlord-friendly leases. They’ve never seen anything like it. They get 100 per cent of rent paid, unlike in so many other countries where there are often hidden costs.”

Overseas investors are also treated kindly by the UK tax authorities. London has also been a real playground for overseas investors. “All investors love London, where the quality of buildings and tenants is high, but it is not only London that attracts global investors. These days, there are few parts of the UK that aren’t on the radar for overseas investors,” says Goldsmith.

However, like every market, the UK is cyclical. Only a year ago, overseas and domestic investors alike were chasing investment deals and prices were continuing to rise, but in August, the credit crunch hit. “The UK was used to cheap bank finance and to high loan values, which was fuelling a boom in property prices, but all of a sudden this came to an end,” says Goldsmith. “Today, we face a different environment where bank finance is scarce and expensive at a time when a number of UK retail funds were forced sellers. The inevitable result: falling prices.” Yet this represents opportunity and so, once again, cash-rich investors are back.

“We are focussing on high-quality investment property for overseas equity investors and we’re finding plenty of good opportunities,” says Goldsmith. “We will never compete with the spectacular returns achievable in emerging markets in Asia, for example, but that is not the point. Sometimes, investors want at least some of their portfolio in a safe place and history tells us that in the long term few places are as safe as the UK”.

Residential

“We’ve had international buyers in London for decades. Middle East and American purchasers started coming in great numbers in the 1960s, but we’ve never, ever seen anything like this,” says Jonathan Hewlett, Head of Savills’ London.

Savills’ Research department says in so-called prime Central London (including Holland Park, Notting Hill, Bayswater, Mayfair and the West End) Britons bought only 45 per cent of homes sold for £4 million or over in 2007. Indians account for 11 per cent, western Europeans for nine per cent, with eight per cent from the Middle East, six per cent from each of Russia and the United States, and three per cent from Ireland. “Overseas investors want a stake in London. The properties are of a high standard in this city compared to most others. The uber-rich have got high security and privacy – two musts for them – so they go from an underground car park directly to their home without going outside,” explains Hewlett.

Major schools in London and the south-east of England report growing intakes of children from India and China. “Education has always been a pull for international buyers, who believe British schools are unmatched. Often parents buy close by to a school,” explains Justin Marking, Director of Prime Purchase, a bespoke buying service offered to Savills’ customers.

Don’t be seduced into thinking overseas interest in British homes is confined to the Home Counties. “We had a Russian purchase of a beautiful house with land and views in Cornwall last year – a first for us,” says Martyn Rohrs of Savills Truro in the far South West. “There has also been American interest in another of our best properties coming on sale.” At the other end of the country, Russians have also purchased Scottish country estates, some with up to 20,000 acres to maximise space and privacy.

In between there have also been foreign purchases (particularly by Irish investors) at new developments in regenerated city centres and in niche schemes of student accommodation. Some large country houses have also had foreign interest, in the Lake District, Wales and Cheshire.

“There’s been no lessening of international interest despite the credit crunch,” explains Hewlett. “Almost all overseas buyers want the best, whether it’s a London house or country estate. There’s a shortage of these ‘best’ properties on sale, so demand will always exceed supply.”