Many Asian investors are following in the footsteps of the trio of Malaysian giants – SP Setia Bhd, Sime Darby Bhd and the Employees Provident Fund (EPF) which have together invested in the redevelopment of the iconic Battersea Power Station in London.
The Channel Islands were the location of choice for the Malaysian trio when they were structuring their investment in Battersea and remain the location of choice for many investors when choosing how to invest and hold property.
“The Channel Islands have a strong reputation for efficient asset holding structures, particularly given their ties with the banking and business community in London,” said Collas Crill (Singaporean office) head of offshore firm Marcus Hinkley.
JLL head of residential research Adam Challis believes that there is a misconception about the sort of person who is investing in the London property market from Asia.
“We are typically seeing middle and upper middle class buyers. This is not high-net worth money,” he said.
In contrast to Middle Eastern or Russian property investors seeking trophy homes in what are called “golden postcodes” such as Chelsea and Knightsbridge, the motivation of the Asian or particularly Malaysian buyer is typically to generate income return rather than capital growth, to buy as an investment rather than a second home, and most specifically as self-investment for their pension.
The nationality of purchasers of newly built residential property in Central London ranges widely.
JLL data from 2013 shows that Chinese buyers represented 6% of the total, of which 17% were from Hong Kong and 11% were from Malaysia. British buyers accounted for only 19% of the total.
However, towards the end of the year and into 2014, the figures have shifted such that domestic buyers make up a much larger proportion of the market today. Taxes may not trouble the sort of person who can afford a Chelsea postcode but they will be a consideration for those with a more modest sum to invest, so understanding changes in the residential property taxes in the United Kingdom (UK) is as essential as knowing the market itself.
Cynicism in the UK market is that foreign investors “buy to leave” that is, they leave the property empty but in fact, says Adam, 90% of transactions are purchases in which the buyer intends to get a market renter, or to allow their university-going children to stay.
Identifying the trends
Using the property for rental, rather than locking it up, means that investors will get a better deal from changes in taxes as they benefit from exemptions in the taxes designed to encourage genuine commercial investment.
Malaysian buyers are more likely to buy into regeneration zones outside prime London. Their average budget of £700,000 (RM3.85mil) to £800,000 (RM4.4mil) means that they are typically looking at a very modest, one-bedroom property in a good Zone 2 location, a two-bedroom further out in Zone 2 or a three-bedroom family property even further out in the east.
The student market makes up a small but significant proportion of purchases and, while some Malaysian students take up places in the nearby region, particularly Manchester and Cambridge, the focus is still on London.
Setting the framework
So, if you are looking at buying property in the UK, what are the top tips? That depends on your investment objectives.
“Buying into London property is capital growth orientated, while the regional market (areas outside London) reflect income return. It is always prudent to understand your local market – it’s in the interests of the individual to engage with their investment and go into it with their eyes open,” said Challis.
Of course, many Malaysian investors purchase their London property, having visited the city. But many do not and, in common with Hong Kong and Singapore, there is an established programme of overseas property marketing in Malaysia, particularly Kuala Lumpur. If you’re investing from abroad and can’t investigate the market first hand, Challis recommends researching the market well to ensure you know what you’re getting into. It’s about doing your research and making sure that you are getting the best advice.
Personal observations
Collas Crill partner Michael Morris said that, as non-UK residents, Malaysian investors need to take specialist advice both at home and in the UK to ensure that the relevant property taxes are being taken into consideration.
“Historically, many Asian buyers have purchased property by using an overseas company, often incorporated in the Caribbean or the Channel Islands. The reason for doing so was that this limited the exposure to UK inheritance tax, which is chargeable on the UK estate of individuals, whether they are residents or not,” he said.
“The new taxes introduced by the UK government have made that decision more complex. If you buy UK residential property in an offshore company, and there remain many good reasons to do so, you may face additional taxes,” added the head of the UK property division at the offshore law firm.
Firstly, when buying in the name of a company, there would have been an extension in the amount of stamp duty (paid on the value of the property) which has been increased to 15% for all property worth over £500,000 (RM2.75mil).
However, if you let out your property, rather than locking it up, then you will get the benefit of an exemption from this higher rate and will pay the same amount applicable to an individual, provided that you rent the property for a three-year period. In essence, he said this could represent valuable savings if one wanted to purchase a property now, but perhaps use it in the future, provided that the three-year period is observed.
Another recent tax is the Annual Tax on Enveloped Dwellings (ATED). This tax was introduced in 2013 for properties purchased in a company.
“This year, the Government also extended this tax and introduced a new annual charge of £7,000 (RM38,500) for properties priced between £1mil (RM5.5mil) and £2mil (RM11mil). Next year, with effect from April 1, 2015, the tax will apply to properties priced between £500,000 (RM2.75mil) and £1mil (RM5.5mil). The properties will face an annual charge of £3,500 (RM19,250). An exemption will apply for buy-to-let properties.”
He said that if the ATED applies for example, where the property is not let out, then an additional capital gains tax will also apply.
“With effect from this year, capital gains tax will apply to all properties sold by overseas companies worth over £1mil (RM5.5mil). With effect from April 2015, this tax will also apply to properties worth over £500,000 (RM2.75mil),” he stressed.
Finally, CGT (Capital Gains Tax) will be charged on gains made by non-UK residents disposing UK residential property with effect from April 2015, whether they hold the property in a company or in their own name. This brings the position in line with UK residents who already pay this tax. CGT is, of course a tax on profits made, rather than a tax on the property value.
Challis sums this as “long-term expectations” pointing to the fact that London will continue to perform strongly. “London is the de facto capital city of the globe, and house prices will reflect that and remain high over the long-term.”
For buy-to-let investors, the tax changes will have little impact and the use of an offshore company may still be a useful tool. For owner-occupiers, the taxes may represent a small price to pay for the potential IHT (Inheritance Tax) saving and the privacy that comes from owning the property in a company name.
