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The foreigners roll in...

publication date: Apr 5, 2009
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author/source: Andrea Kirkby
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The decline of sterling may have hit UK residents hard – some of us will be taking less ambitious holidays this year, and overseas property is now unaffordable for many. But it has created a massive opportunity for foreign buyers – and there is evidence that they’re taking advantage of it to purchase UK property, both residential and commercial.

The Euro has increased 30 per cent, the US dollar 35 per cent and the Japanese yen 66 per cent against sterling. Effectively that is giving foreign buyers a massive discount. Add to that the fall in the property market over the last year, 15 per cent and rising, and there are some huge bargains out there for foreign buyers.

Take one example: Alexander Kraft, CEO of Sotheby’s International Realty France, pointed out recently that London, which used to trade at double the price per square metre in Paris, is now valued at almost the same level. For French buyers who had always felt London prestige properties were ruled out as too expensive, this is a big change.

The combination of weak sterling and lower property prices has proved a potent mix for foreign buyers in the residential market. Up to three quarters of sales at some Central London estate agents are now to non-UK buyers, with a wide range of nationalities interested. Italian and French buyers have been particularly prominent, as have Middle Eastern purchasers, but Germans, Russians, Japanese and Singaporeans have also been headed for London.

Chris Sykes, partner at solicitors Sykes Anderson, says that foreign buyers are strongly motivated to consider property by the lack of good investments in other asset classes, such as equities, bonds or cash accounts. “People are sitting on cash that isn’t earning any interest, so UK property is a good place to go,” he says.

“They’re mainly looking at investment, not properties to live in. Good prospects and rental yield are therefore what they’re looking for.” A lot of these buyers are paying cash; others are getting UK mortgages, to match their currency exposure and prevent a change in interest rates reversing the benefits of their investment.

But Sykes warns that, “The value opportunity in terms of the strength of the major currencies may be lost as sterling recovers against these currencies.” That suggests estate agents should not rely on foreign interest being maintained in the long term – though it’s the foreign buyers that are keeping them afloat now.

I LOVE LONDON

London has been the main area to benefit from foreign interest, particularly the prestige areas. The city has the advantage of being easily accessible to foreign buyers. Prime areas such as Mayfair, Knightsbridge, Kensington and Chelsea are eagerly sought after, with Docklands, Battersea, Clapham and Bankside also attractive.

In fact foreign buyers were already beginning to dominate the super-prime markets back in 2007, when Knight Frank said that 50-60 percent of properties selling for over £3m were being sold to foreign residents. Savills, which specialises in properties at the top end of the market, says 68 per cent of properties selling for more than £5 million last year went to foreign buyers.

Paul Collins of Buyassociation.co.uk believes that the exchange rate is only one part of the attraction for foreign buyers, although obviously it is an important one. He says, “I think we would still be seeing a rise in the numbers of foreign buyers here in the present economic climate even without a favourable Euro price,” quoting several other reasons for the phenomenon.

One is the flight to quality. In times of economic strife, buyers tend to prefer higher quality investments and become risk averse. There may be marvellous bargains to be had in terraces in Cleethorpes, or ski resorts in Bulgaria, but investors are avoiding secondary locations and emerging markets. New trendy areas like Hoxton don’t seem to have figured much on the foreign buyers’ radar. Instead, they are investing in the top end of the market, which they expect to remain more stable, and to recover before the emerging markets do.

While Paul Collins doesn’t have figures to back up his theory, he also feels overseas buyers may generally be less leveraged than their British counterparts. The extreme loosening of the credit market (including interest-only, buy-to-let, self-certification and 125 percent mortgages) that occurred in Britain, didn’t happen in most other countries. In France, for instance, mortgage lending is tightly regulated by an ‘affordability’ formula based on a percentage of monthly income.

The relative tightness of credit in other jurisdictions may have left foreign buyers in a better position, possibly with sizeable deposits in cash. There is certainly evidence that a comparatively large number of foreign buyers are funding their UK purchases through cash rather than borrowings.

clarkeOliver Clarke, sales manager at agents Barton Wyatt, says foreign buyers are also prominent in Sunningdale and Wentworth. For instance South African buyers have bought houses here as a UK bolthole, should they ever need one. The Russians are watching, though less active than they have been, and Indians are also buying – “quietly, as ever”.

“Some UK-resident Americans are coming out of rental and buying,” he says. “You might not think this is the best time, but the return they’re getting on savings is just so poor. You can get 5-7% on some of our properties against 0.5 percent in a bank account. Over three or four years, the savings over renting will offset any further declines in value – and if the property market heads north again, the buyers will make a profit.”

INVESTING FOR YIELD

He says yields are important even for those who are buying in the longer term for personal use. “People definitely want to know about yield; they are definitely looking at property as an income producing investment.”

He’s also noticed that foreign buyers, though they may be benefiting from the fall in sterling, are tough negotiators.

“They’re making sure they get a bargain,” he says, “and the price they’re paying allows for the fact the market might fall another ten per cent.”

That’s borne out by Inessa Falina, at Hamptons, who markets to Russian clients. (Obviously Hamptons does not expect Russian interest to disappear, whether or not sterling regains its past strength.) She says price has become much more a factor than it once was: “If Russian investors ever did turn up with suitcases full of cash and just want to buy, those days are long gone.” It’s now yield above all that drives her investment clients and they don’t care whether they get it by investing in residential property, hotels, or offices – they simply want the best return.

A LONDON-ONLY THING?

Outside London the impact of foreign buyers has been much less. However, Paul Collins says, “I would expect to see foreign buyers also heading out to some of the other favourite haunts of the well-to-do.” He suggests that agents in sought-after locations like Southwold in Suffolk (‘the least affordable town in Suffolk’, also nicknamed Hampstead-on-Sea, where beach huts have been known to sell for £40,000), as well as Devon and Cornwall, should be promoting to foreign buyers.

Foreign buyers are also making waves in the commercial property markets, too, again driven by the decline in prices as well as by the currency effect. Jones Lang Lasalle research shows almost 40 per cent of transactions last year came from foreign buyers, with interest from Abu Dhabi, Kuwait and Qatar picking up.

St. Martin’s Property Group, a property company from Kuwait, was responsible for the UK’s largest investment transaction in 2008, the £390 million sale of the Willis Building by British Land. But German investors represented the largest single nationality, with over £1.6 billion investments – interestingly, they’ve been far more active as investors in commercial than in residential property. Together with Americans, these nationalities made up over two thirds of overseas investment into the commercial property sector.

They haven’t shot their bolt, either. Research by commercial property agent CBRE suggests that they have a substantial amount of cash waiting for the right investment. Opportunity funds like Blackstone and Apollo, as well as sovereign wealth funds like the Qatar Investment Authority, have significant cash reserves – so do many German investment funds.

OVER-LEVERAGED UK

On the other hand British property investment companies are already in many cases heavily indebted. That limits their ability to gear up to take advantage of lower prices. Land Securities and Hammerson have already announced heavily discounted rights issues to repair their balance sheets, while Segro and Brixton are said to be considering this option – but the move is about ensuring the company’s safety rather than raising funds for further investment.

Are UK investors missing something? Stuart Law, chief executive of Assetz International, definitely thinks so. His firm is advising UK investors to look at new build properties where distressed developers are offloading stock, which can be bought at a 20-40 per cent discount. On one Manchester scheme, he has secured 50 per cent discounts for clients. At these prices, yields can be as much as nine per cent – twice what residential yields were a couple of years ago, and higher than even the best current bank fixed rate deals.

However, recent reports that rental levels have been falling, particularly in London, means that attractive historic yields don’t quite work out in reality. A 25 per cent fall in rental levels implies a 25 per cent fall in prices – and if rents fall again next year then a 40 per cent discount to peak levels will see the effective yield falling back to peak levels of four per cent; still better than half a per cent in the bank.

UK buyers also have a potential tax disadvantage. Chris Sykes points out that foreign buyers who are not resident in the UK for tax purposes don’t have to pay Capital Gains Tax on investment properties here. Some are heading here from very low or even zero tax regimes. That’s a big advantage over the UK investment buyer.

TARGETING THE FOREIGNERS

Are UK agents missing out? Chris Sykes says “Some agents are very alive to it, particularly the prime central London agents, but others are missing a trick.” Many of the central London agents are already targeting international business, and have been doing so for two or three years already. Outside London, on the other hand, beleaguered estate agents, who are already cutting their networks savagely, appear in no mood to invest in winning foreign clients.

Yet it’s simple enough to target the foreign market. For instance Paul Collins says some agents in the prime parts of London are actively advertising to buyers from Russia, Italy and the Middle East. Media such as in-flight magazines and foreign newspapers can target precisely.

But will foreign buyers be enough to save the property market? One common theme is that they are focused on price. The main reason for investing in the UK is not superior economic prospects, better quality properties or a high standard of living, it’s simply the fact that prices for non-sterling buyers are 40 to 70 per cent what they were two years ago.

David Anderson, of Sykes Anderson, says that “What interests the heavy hitters is simply whatever makes money. They’ll buy complete developments, or fund a development through to completion in return for the lion’s share of the profit.” There are certainly customers out there who have cash in their bank accounts and who are actively seeking to make money out of the distressed state of the market – whether it’s commercial or residential property, completed or still under construction. But they are absolutely driven by financial considerations – and they will pay the lowest price they can.

Andrea Kirkby is an investment analyst and journalist working in the media and IT sectors. Her experience includes project and finance work with British Telecom, media and telecoms analysis for a number of investment houses and six years heading up a research team in the emerging markets of Eastern Europe.