Overseas Property Investors: flight or future?

The last three years have seen a myriad of changes affecting overseas investments and investors in the UK property market.

At a time when the commercial property market is undergoing another state of flux as a result of significant market shifts in retail, logistics and distribution and residential development (to name a few recent trends), we have seen an increasing public awareness and – some might say –hostility to overseas property investment structures.

From regulation to disclosure, from registration to taxation, the overseas investment landscape is now being actively shaped by government to address public concern in this area.

Upcoming Changes

But what are these changes and what impact are they likely to have on non-domiciled investors looking to invest in the UK over the next 5 years?

  • Capital Gains Tax – From April 2019 non-UK residents disposing of commercial property will be subject to a tax on capital gains as if they were UK domiciled. Arising primarily as a result of the 2018 “Panama Papers” scandal and subsequent public outcry against the use of overseas structures to evade domestic taxation rules, the government’s response was a “standardisation” of the tax code.  The new rules seek to effectively eliminate any existing tax liability bias in favour of overseas investors – i.e. on-shore and off-shore commercial property investors will be taxed the same.  Asset valuations will be based on their April 2019 value and it is widely expected that there will be a rush for overseas investors to realise gains by disposing of properties before the new tax rules takes effect.  Deliberately designed to have broad effect (applying to both direct and indirect disposals), the changes represent a fundamental shift in the taxation of UK property held by overseas investors.
  • Indexing – The November 2017 budget contained a “footnote” to the effect that indexation would no longer be permitted as a way of mitigating CGT liabilities. Applying universally (but of particular importance for overseas investors given the tax changes due in April 2019), this will make the entire profit on the sale of a commercial property asset potentially subject to taxation.  In combination with the new CGT rules, this will further slash yields for overseas investors.  It is worth noting that some funds structures have been specifically exempted – so we will undoubtedly continue to see the popularly of REIT structures throughout 2018/2019 as both domestic and overseas investors seek tax efficient ways to manage their UK commercial property portfolios.
  • Beneficial ownership register – The government’s consultation on the creation of an overseas beneficial ownership register was published in May 2017 to great fanfare and not a little consternation from overseas investors. The current proposal is a fixed requirement for all overseas companies to register details of their beneficial ownership when acquiring property in the UK within a central database to be maintained by Companies House.  Such information would be publicly available and free to access.  An associated prohibition on overseas companies buying, selling and even granting long leases of any property without having first completed the required registration will add teeth to such measure.  Draft legislation is expected to be available in the summer of 2019 but already at least two jurisdictions (the BVI and the Caymans) are considering their legal options in challenging the scheme on constitutional grounds.  Whether (and in what form) the register materialises will no doubt be – to some extent at least – dependent on the political reality the UK faces after Brexit but currently there is plenty of domestic appetite for such changes.  The increasing level of compulsory public disclosure is widely expected to be a material deterrence to overseas companies looking to invest in the UK.
  • Overseas Companies Ownership Register – In November 2017 HM Land Registry made its overseas companies register publicly available for the first time. Previously access to such data had been prohibitively expensive – between £2,000 and £10,000 per data set – and therefore, whilst such information was theoretically available, it was generally rarely accessed.  However, now anyone willing to confirm a few personal details can – at no cost – immediately access over 100,000 entries relating to properties held by overseas companies.  Data available includes property location, price paid and company details (including jurisdiction and registration particulars).  In conjunction with some of the proposals above, this may be one more factor impacting on overseas investments decision to look to othr property markets other than the UK in the short to medium terms.

External Factors

Notwithstanding the considerations above, there are external factors operating on a macro level which may more than offset the negatives for some overseas investors when looking at the UK property market:

  • Currency values – One obvious point which is often underestimated is the impact of fluctuations in the global currency markets. With the value of sterling on a downward spiral due to concerning economic forecasts and Brexit “woes” (amongst other things), many overseas investors are seeing this as a perfect moment to increase their exposure to the UK property market in order to maximise their investment potential.  With UK property still seen as providing stable long-term returns, for some overseas investors (such as sovereign wealth funds or pension funds) this is potentially a far more significant factor than that they will see as “minor” regulatory changes.
  • Brexit – It would be short-sighted not to recognise that Brexit – whilst posing innumerable challenges to the UK economy in general and the property market in particular – is likely to prevent opportunity as well. Many overseas investors who are not as concerned with Brexit’s other (more political) outcomes feel that it may represent a suitable time to drive forward their property investments into new or developing areas which will be stimulated by the inevitable political and economic changes which are fast approaching.
  • Changing regulation overseas – We are not alone in the UK in facing changing regulatory regimes. Earlier in 2018, China relaxed its restrictions on the re-investment of funds within the UK property market and investments in development and infrastructure – both of which had previously required central government approval.  Moves such as this across the globe need to be taken into account when considering the UK property market’s wider appeal to overseas investors.
  • Transaction volume – With the upcoming implementation of the new CGT rules in April 2019, there has already been considerable speculation on whether many overseas investors will seek to dispose of assets wholesale before this date in an effort to minimise their tax liabilities. Other overseas investors are considering doing the opposite and are keenly waiting for their competitors to bring properties to market at discounted values.  For overseas investors looking for long-term exposure to the UK property market, the run up to Spring 2019 may well bring with it a whole host of opportunities at desirable prices.

Movin’ On Up

As with all regulatory changes, impact is hard to assess until implementation is well underway. In addition, governmental consultations in the UK have a long history of ending in very different outcomes than those initially anticipated (or as politically advertised!).  All of this uncertainty reinforces the widespread feeling of potential difficulties ahead for overseas property investors.

However, as always in fluctuating markets, change produces as many opportunities as it does challenges. For those who are familiar with their chosen markets and asset classes and benefitting from coherent investment strategies, the UK property market may just be the perfect answer to their current investment needs.

John Leasure is a Senior Associate at Hamlins LLP who regularly advises both overseas and domestic enterprises on their UK property investments.

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Overseas Property Investors: flight or future?