Foreign buyer tax is another nail in the coffin for investors

George Treacher

February 15, 2019

George Treacher (pictured) is director of Shanghai-based property investment broker, Atlas Blue Property

This week the government revealed the details of 1% stamp duty surcharge on overseas buyers.

Will adding a 1% tax make much difference? Yes, I think it would be too naive to think that it won’t have an effect on overseas investors into UK market.

Given the current situation in the UK and mass uncertainty with Brexit, adding an extra tax right now is surely going to result in foreign investors looking to other markets.

If this was during a time of strong upward market movement, say the mid 2000s, it really wouldn’t make that much difference. But while everyone is still questioning the stability of the government and what the outcome of Brexit will be, this is a significant move to put potential investors off even further.

I would prefer to see the government take the opposite approach to attract investors into the UK at a time of instability.

Government policy is flawed

Unfortunately, at this time all I see are flaws in a lot of the government’s proposals. No one is pretending that it is an easy job to run a nation, particularly in the wake of David Cameron’s Brexit mess, but I feel that the underlying issues are not being addressed directly or efficiently.

The government has been distracted with Brexit, that much is clear, and taking moves to try and win the popular vote.

There is a strong feeling from many in the UK that foreign investors are causing property prices to rise too much, and creating homelessness, and it seems that by taxing them more May is appealing to that demographic of the UK, namely those who don’t own property.

This isn’t how you deal with homelessness

Adding a further 1% tax to overseas investors is not the way to deal with homelessness. The way to deal with homelessness is to address the supply infrastructure of housing development in the UK and make providing affordable homes a priority.

The significant shortage in supply of new homes can be addressed with amendments to conservation laws and building zoning regulations. We must also free up more lending and remove restrictions in the financing industry to allow easier bank account opening and mortgage applications in the UK.

Banks and other lenders are currently in a position of ‘playing god’, refusing applications and changing their internal regulations at will, making things harder for potential investors and creating almost a guessing game out of securing financing for UK investment.

I feel that because it is so difficult to get banking licenses in the UK, that the current banks and underwriters are able to do this to maximise their own profits without too much competition. I personally know people who are very keen to get set up with UK banking licenses to allow account opening and setting up financing options for their own clients into the UK more freely, but are hampered by the significant red tape and regulation.

Investors need more power

We need to put power back into the hands of the people to be able to invest more freely into the UK. This appears to be a simple ploy from May to garner further political votes from a demographic of the population who are questioning her the most.

Under the guise of addressing homelessness, the government could consider adding incentives to foreign investors through reductions in taxes, perhaps more so if the investor is willing to buy into affordable home schemes, or into private schemes that pledge some amount of profits to go into providing affordable home schemes. This would allow for the creation of more supply of housing.

If this tax levy is genuinely used to address homelessness, then there could be more incentives for developers for giving them access to ‘desirable’ plots of land, or lessened restrictions on rezoning, provided that a certain percentage of their profits go towards providing more affordable housing, or relocating some affordable housing schemes within that region.

I think the bottom line is we need more housing supply in the UK and we need to be more creative with foreign investment money in order to maximise that for supply. I don’t think punitively taxing foreign investors, more on top of the recent tax hikes in the last few years, is the way to address that issue.

How do we even know that that extra 1% tax will be spent efficiently in creating more housing supply? Where are the affordable schemes or the evidence of supply infrastructure that this 1% is supposed to be being allocated towards? How can there be any certain extra supply on that end if it comes from further tax money, which in itself will potentially threaten the supply source?

This isn’t justified

I don’t believe it’s justified to tax non-nationals in this way. I think many developers in the UK are becoming reliant on foreign investment to help get projects built and therefore deal with the UK supply issue, and potential homelessness. By being able to offer units for investment ‘off-plan’ two or three years in advance of completion dates, at a time where there is very little interest from UK domestic buyers, UK developers can get income coming into these projects at a very early stage, allowing some extent of financing of the project which gets them to ‘financially complete’ sooner, so construction teams can get started while they move on to developing the next project.

Increasing taxes at this critical time of uncertainty for the UK will have many clients, including our own clients from China, looking to other markets, putting extra stress on sales for UK developers and therefore slowing down their supply timelines.

In the neighbourhood of Asia, there are much better ‘deals’ out there to be had. So instead of generating more foreign investment into the UK real estate by creating incentives for foreign investors, the government is potentially jeopardising the supply issue further by putting off more foreign investment.

Another nail in the coffin

Any move like this at this time is just another nail in the coffin of the heyday of foreigners investing into UK real estate market. Like it or loath it, it is essential that we keep developers building in the UK if we are going to address the supply shortage issue and therefore necessary to continue to have foreign investment into new projects.

Being more creative with that influx of money is a way to address both uncertainty into the market and the homelessness issue. I always comment that I am loved and loathed by my peers whenever I travel back to the UK.

The ones who love me are the ones who already bought a property and have seen significant increase in the value of that real estate. The ones who loathe me are those who haven’t yet bought a property and are complained about how expensive the property has become and that it is because of all my Chinese clients buying in the neighborhood.

Neither camp realize that it is not because I live in Shanghai helping the Chinese buy property in the UK that is root cause of the issue. The root cause of the issue is the supply infrastructure regulations in the UK. We need the money to be coming in, it is how we use the money more creatively that will be of most benefit, not jeopardising it by hitting that money with further tax.

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