What the stamp duty charge for overseas buyers means for London

A year ago this week, England’s housing market was temporarily closed as part of the first national coronavirus lockdown. Thousands of buyers were left stranded on the sidelines, unable to view homes or move forward with purchases. When restrictions eased seven weeks later, domestic house-hunters rushed back into the market.

But the number of international buyers, crucial to the property market in central London, has remained significantly reduced, due to limits on international travel. What is more, from April 1, non-UK residents will have to pay an extra 2 per cent stamp duty charge on any property bought in England and Northern Ireland.

With the added costs, will overseas buyers still want to invest in central London property when travel restrictions finally lift? “It’s the million dollar question,” says Chris Jones, a buying agent in the capital.

Thanks to the additional stamp duty and the strengthening of the pound against the dollar over the past year, overseas buyers will find a very different market to the one they were turned away from in March 2020.

“Dollar or euro buyers who were in the market before the pandemic might return to find that the whole show is going to cost them 10-15 per cent more than the last time they were here, which will hurt,” says Roarie Scarisbrick, a buying agent at Property Vision.

Overseas buyers are also facing the realities of Brexit and, for investment buyers, sharp drops in rents since the start of the pandemic that have squeezed already thin rental yields.

The new tax in particular will make non-resident buyers pause, says Scarisbrick. In London’s prime markets, the added costs are significant. On a £3m home, the surcharge for non-domestic buyers buying a second property will add £60,000 in taxes, bringing the total stamp duty bill to more than £423,000.

Buyers might find that the whole show costs them 10-15 per cent more than the last time they were here

Across all price bands, the prospect of the tax has encouraged some buyers to accelerate their plans. Canadian Alex LeRose, 30, and his partner moved to buy “sooner rather than later” in order to avoid the new charge. LeRose says he also wanted to lock in a saving from the stamp duty holiday, which waives the charge on the first £500,000 of any home purchase. That holiday was originally scheduled to end in March, but has since been extended and will continue in some form until the end of September.

“Home ownership seemed out of reach if we didn’t take advantage of buying before the end of March. I think it was our only window of opportunity for a while,” he says.

Will the new stamp duty charge reduce property prices for others?

Introducing the new tax for overseas buyers “will help make house prices more affordable, helping people get on to and move up the housing ladder in line with wider objectives on home ownership,” according to ministers. 

But while property experts blame stamp duty reforms in 2014 and 2016 for reducing prices in central London, the new non-resident charge may not have the same result. Those tax hikes hit buyers across the board. As a result, “while the buyers have written out the cheques, it is really the sellers who have paid as prices have corrected by the same percentage or more,” says Scarisbrick, referencing price falls in the expensive parts of London that have been hit hardest by tax rises in recent years.

The new surcharge, meanwhile, will only affect a narrow group, making it harder for overseas buyers to negotiate with sellers. “It will be a difficult argument for a buyer to say that they will simply pay 2 per cent less, if a seller would rather hold out for a UK buyer who isn’t affected,” says Scarisbrick.

Camilla Dell, a London buying agent with Black Brick, thinks the new charge will not derail overseas buyers completely. “It’s an additional cost, but you have to balance that with how a [prime] London property looks to an overseas buyer at the moment: prices are still down 20 per cent from the peak [in 2014]; the pound is up but still cheap compared to the dollar.”

On the ground, “people are not saying ‘we decided as a result of the 2 per cent surcharge that we’re going to hold off [buying],’” says Tim Hyatt, head of Knight Frank’s UK residential business. But, while he says the exchange rate and the cost of debt are much bigger factors, he is expecting a hiatus in overseas sales “while people work out what’s going on” after the surcharge comes in.

Absence of overseas buyers hits central London

The decisions made by international buyers will cause ripples across the capital’s housing market. There is no universal record of the proportion of London buyers from overseas, but there is a considerable international presence in the capital, particularly in the priciest central neighbourhoods and in the market for newly built flats.

In so-called prime central London, areas such as Mayfair and Knightsbridge, just under half of all buyers registered by Knight Frank in the past decade have been from overseas, according to the agency. Last year and in the first months of 2021, that proportion had slipped to a little more than a third, says Knight Frank.

The absence of overseas buyers over the past year has already changed which areas are most in demand. A prolonged decline in international interest would only make the transformation more marked.

“In the last year we’ve looked at areas popular with domestic owner occupiers: Hampstead Village, Richmond, Barnes. Those have been the real winner areas,” says Jo Eccles, managing director of Eccord, a property search and buying agency. “The areas which have faltered are the more international areas: Mayfair, Belgravia and Knightsbridge have been really hurting.”

Buying a London home, once a relatively straightforward transaction for overseas buyers, has become far more complicated, involving circuitous travel arrangements, quarantines and the risk of unexpected lockdowns. Many have stayed away as a result, meaning the pockets of London most popular with overseas clients have not shared in the price rises seen elsewhere in the country.

In the year to December 2020, prices fell 0.4 per cent in prime central London, according to Savills. In England overall, average prices increased by 7.3 per cent in the same period, according to Nationwide, the building society.

Overseas buyers have also been an outsized presence in the market for new homes in recent years. According to Molior London, which monitors the capital’s new-build housing market, overseas buyers accounted for at least a fifth of all sales to individuals last year.

Nic Budden, chief executive of estate agency Foxtons, says the level of overseas interest in London has dropped s

ignificantly in the past year. “Foreign buyers have diminished. There are new homes getting sold overseas directly, but that’s lower than it was in the past few years. In lettings, overseas students have basically disappeared completely.”

Tim Craine, head of research at Molior, says the tax will not deter all overseas buyers. “People buying a flat for a child [to] give to in 20 years [or those] wanting to get money safely overseas and protected by English law will be less worried about a stamp duty surcharge.”

Speculators, however, are likely to be put off, he says. International buyers eyeing luxury London flats as an investment, rather than a home, have been criticised for fuelling price rises in parts of the capital. But Craine says we should not be so quick to dismiss these “risk-taking” buyers. By buying up apartments before they are built, foreign investors have shouldered much of the financial risk faced by developers in the early stages of a project.

“They have played a massively important part in giving confidence for developers to commence,” he says. “Their absence means development is not happening.”

According to data from Molior, work started on almost 34,000 new homes in London in 2015. By 2020 that had fallen by almost 50 per cent, to 17,856 homes.

Raising property taxes risks driving buyers away from London and slowing down building, says Rob Perrins, chief executive of developer Berkeley Group, “I think London and the UK has to be careful that other cities do not become more alluring. We have to stop taking London for granted . . . Increasing tax makes people move elsewhere,” he says.

According to Molior, Berkeley Group is currently responsible for more sales to overseas buyers than any other developer in the capital.

Beyond the pandemic

Before any new tax is introduced, estate agents expect a flurry of sales — across the UK, transactions surged in February, as buyers tried to beat the original March deadline of the stamp duty holiday. But no rush in foreign buyers has been forthcoming this time.

“That hasn’t come in because of the travel restrictions,” says Dell. “We have seen some activity from clients quite keen to avoid paying the excess but not as much as one would have hoped. Not everyone is willing to fly and to quarantine.”

But sellers are optimistic about what comes next in part because of the UK’s rapid vaccine rollout. According to Scarisbrick, “Developers are confident that the cavalry will arrive once planes are back in the sky [and] will be populating south-east Asian cities with their roadshows as soon as they can.”

Key to understanding demand is the fact that most overseas buyers, like their domestic equivalents, “have their own motivations for buying and are not just speculators and investors”, says Scarisbrick. “Some are relocating, others have children here and plenty are insuring against political and economic instability in their own jurisdictions.”

International buyers looking for a new home in which to settle are unlikely to be put off by a tax hike, in other words. “The point is they have a practical need to own here and will have to roll with the punches,” says Scarisbrick.

George Hammond is the FT’s property reporter

Follow @FTProperty on Twitter or @ft_houseandhome on Instagram to find out about our latest stories first