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Is prime London property good value on a global scale? High house prices in locations such as Knightsbridge and Mayfair, where property prices soared by 7.5 per cent last year according to Knight Frank, along with the impact of rising property taxes over the past few years, have prompted concern among property professionals that the wealthy could begin to take their investments elsewhere.
Several changes to the marketplace have already occurred to incite this unease, such as the higher stamp duty bands of 5 per cent and 7 per cent introduced in the UK over the past few years, and the annual tax on enveloped dwellings introduced in April 2013 (essentially taxing those who buy properties through offshore companies).
And there could well be more on the way: the “mansion tax”, an annual levy on homes worth more than £2m, proposed by the Liberal Democrats, plus the extension of the 18 to 28 per cent capital gains tax to apply to non-residents as well as British taxpayers, which is expected to come in to play next year.
Mark Parkinson, of the London and home counties buying agency Middleton Advisors, says: “Every time there is a proposed change in taxation everyone hangs their heads and predicts the end of the world.”
However, a new report seen exclusively by the Financial Times suggests that prime central housing in the UK capital is still competitively priced in comparison with the world’s two other top financial centres – New York and Hong Kong. The report, compiled for Middleton Advisors, compares the property prices, as well as both the buying costs and ownership costs of homes in the prime hotspots of these three cities.
At first glance, London does not look cheap. Today the average cost of a prime, two-bedroom apartment in Knightsbridge, the capital’s most expensive area, home to Harrods, Hyde Park and exclusive crescents lined with white stucco-fronted town houses, is £1.69m, up 86 per cent from £908,972 in the first quarter of 2009, according to the report. When you take into account purchase costs of about 5.8 per cent of the property price – stamp duty of 5 per cent plus legal fees and a Land Registry fee to register ownership – this home would ultimately cost a buyer about £1.78m in total.
Indeed both Hong Kong and New York have lower purchase costs in percentage terms, of 5.3 per cent and 1.1 per cent respectively, due primarily to lower stamp duty. A permanent Hong Kong resident pays a 4.25 per cent rate of stamp duty on properties worth HK$21.73m (£1.67m) and above, while in New York the equivalent transfer tax is paid by the seller rather than the buyer. This is despite the fact that, since 1989, buyers pay a “mansion tax” on the purchase of a property, which is 1 per cent for homes of $1m-plus.
However, London starts to look more attractive when you consider that prime house prices in Hong Kong are far higher – rising 294 per cent between 2003 and 2013, according to provisional figures by the Hong Kong rating and valuation department. This puts the price of a typical two-bedroom apartment in an upmarket area on Hong Kong Island, such as Jardine’s Lookout, the Peak or the Mid-Levels, at HK$35m (£2.69m), taking the total purchase cost for residents to HK$36.86m after taxes. In addition, as part of cooling measures introduced to stall an overheating market, non-residents now pay a far higher stamp duty rate, set at 8.5 per cent for the top band of property. Since 2012, non-permanent residents have also had to pay an additional buyer’s stamp duty (BSD) charged at 15 per cent of the property’s market value. It means a non-resident purchasing a HK$35m flat could be looking at a stamp duty and BSD total of HK$8.22m, equating to 23.5 per cent of the purchase price.
Prices are likely to remain buoyant, in spite of some falls as a result of the cooling measures. Thomas Lam, of China Knight Frank, says: “Domestic buyers are the key buyers of luxury residential market on Hong Kong Island. With a relatively limited future supply on Hong Kong Island, it is expected that the prime residential market will stay resilient.” Christie’s International Real Estate is selling a two-bedroom apartment in Sheffield Garden in the prestigious Mid-Levels East area for HK$24m.
That said, there has been a slowdown in buyers from mainland China, say local agents, in large part due to the real estate cooling measures. “The Chinese like to put their money into bricks and mortar traditionally, and Hong Kong tends to be their first choice,” says Denis Ma, head of research at Jones Lang LaSalle in Hong Kong. “However, quite a few buyers from mainland China have been withdrawing their money from Hong Kong, and in the super prime market, above HK$100m where mainland Chinese buyers were dominant, some luxury developers have been offering discounts on apartments of up to 30 per cent. The main buyers in the prime market now are Hong Kong locals.”
By contrast, New York has much lower prices across the prime market and far lower buying taxes, making it an attractive proposition for those who want to buy now. The Case-Shiller home price index puts New York prices in January 2014 at 20 per cent below their 2006 peak, demonstrating the continued impact of the credit crunch. Even in trendy and elite pockets of downtown Manhattan like Chelsea, where prices are highest according to the Corcoran Report (a regularly updated report produced by the broker the Corcoran Group) the average price of a two-bedroom condo is $2.27m (£1.36m), still much less than in prime London or Hong Kong.
However, the catch is that New York has the highest taxes for the vendor of the three cities (a combination of transfer tax and agents’ fees that add up to about 6 per cent, compared with agents’ fees of about 1 per cent in the other two cities) and also the highest ownership costs due to its monthly real estate tax. A two-bedroom condo worth £1.36m in downtown Manhattan would cost the owner £4,436 a year, or 0.3 per cent of the property’s value, according to Middleton Advisors, compared with £2,134 (0.13 per cent) of annual council tax for the comparable property in prime London, and £2,071 (0.08 per cent) for a similar flat in upmarket Hong Kong.
“We actually often have buyers checking with us that their council tax payments are correct, because £2,000 a year might seem quite low to someone who has paid £10m for a house,” says Mark Parkinson. “If a mansion tax were to be introduced, I think there are plenty of buyers in prime central London who would not be hugely surprised or deterred. Despite the difficulties of the past few years, London still manages to come out on top in many ways, with neither the highest prices nor the highest taxes.”
Some studies suggest that the Chinese buyers withdrawing from the Hong Kong market have headed straight for London instead. Between 2010 and 2013, the number of Chinese buying London properties priced between £2m and £5m almost tripled, growing from 1 per cent to 2.7 per cent of all buyers in that price bracket, while Chinese buyers in the sub-£1m bracket grew from 2.7 per cent to 7.5 per cent during the same time period.
There is still room for debate as to where such buyers will go in the future. “Will the traditional hotspots become too expensive, as taxation increases, leaving room for markets in places like Australia and other pockets of the US to grow?” asks Ma. “It’s too early to tell at this stage. There is certainly room for change, although the fact that London, Hong Kong and New York are global financial hotspots as well as real estate havens is always going to be a big draw.”