UK Property: Have They Killed the Golden Goose?

After investment in the UK property market sank to its lowest level in four years during the quarter after the Brexit vote, with the first quarter of 2017 well behind us, investment into UK real estate is not looking as gloomy as one would have anticipated and investment by non-UK tax residents is still as prolific as ever.

However, given the uncertainties post-Brexit and now the upcoming general election in June, the question is whether the UK is still seen as a safe investment destination?

It seems that many commentators say “yes” and the general sentiment is that regardless of the uncertainty, property still remains a fundamentally safe asset class, with favourable income returns.

The RICS UK Commercial Property Market Survey Q1 2017 shows that “both rental and capital value growth projections strengthening at an aggregate level, with sentiment still strongest across the industrial sector. Meanwhile, the office and retail areas of the market appear a little flatter in comparison”.

Furthermore, it appears that the Sterling devaluation has made UK property very attractive for international investors pegged to the US Dollar or Euro, and it is expected that activity in central London is likely to be dominated by Asian investors, as well as American and Pan-European investors on a national level.

If Sterling remains comparatively weak throughout and after the Brexit negotiation process as expected, this, combined with the income security that the UK lease offers, says Mat Oakley in his 6 themes for 2017 and beyond, “will stimulate a steady rise in non-domestic interest in commercial property in the UK. This will not just be confined to London, where 75% of the purchases in 2016 were non-dom. The next five years will also see record levels of non-domestic investment outside London”.

Indeed, in the first quarter of 2017, the London office market saw a record level of nearly £5bn of transactions, 84% of which were to non-domestic investors.

In the retail property market, while the volume of transactions in Q1 was lower than average, there is a lot of stock being prepared for sale.  It is anticipated that rising yields away from the prime end of the market may well attract some more opportunistic buyers into this sector.

How can we assist?

Over the years, investment into UK property by non-residents was seen as one of the better safe havens for money invested outside of your home country.  This combined with a very favourable tax regime for non-resident investors attracted billions of pounds of investment.  In recent years, however, there has been a near constant erosion of those benefits particularly with regards to residential property.  We have seen the following:

Introduction of ATED tax on dwellings worth over £1m;

An increase in Stamp Duty for properties held in offshore structures;

A denial of tax relief on interest deductibility above the basic threshold of 20%;

A penal rate of 3% extra Stamp Duty where an individual already owns one property;

The introduction of CGT for residential property held from offshore.

The combination of all of these measures has significantly reduced the attractiveness of UK property as a store of value for non-residents particularly for residential property.

The situation is a lot better where commercial property is involved.  Use of an offshore company as the investment vehicle still offers some benefits over using a UK property company to do the same thing, including the ability to gear above bank debt and the avoidance of CGT, (although it will probably be payable in the investors country of residence).

Investment in UK property by non-UK residents can be made either directly or indirectly through an offshore property holding vehicle. With offices in the BVI, Cayman Islands, Mauritius and Hong Kong, we are ideally placed to assist with the establishment of an appropriate offshore entity.

The Osiris Group has a lot of property experience, both in the UK and in many counrties around the world.  We always looks for the inspired solution, not necessarily in Mauritius, Cayman, Hong Kongor the BVI, but rather where the optimum solution for that particular transaction or group structure can be found. We thrive on developing structures with clients to optimize their situation and assist by being very involved in implementation and ongoing administration. 

We would be delighted to do the same for you.

Read more about our Property Services here.