Government intervention

Some countries encourage overseas ownership, while others actively dissuade it. What lessons can London learn from this?

2 July 2014, words by Paul Tostevin

 

London is by no means unique in attracting overseas money into its residential markets. Neither is it unique in charging the weight of international money for pushing residential prices to new highs. In some countries, measures have been introduced to actively dissuade further foreign investment.


 Meanwhile, in other jurisdictions, policies have been actively initiated to encourage high-spending foreigners to buy property in a bid to revive depressed real estate markets and local economies.

There is a fine line to tread between safeguarding homes for the domestic market without stifling the wider economic benefits overseas buyers bring to the wider investment economy. We outline some of the policies implemented elsewhere and their lessons for London.

Incentives: Golden Visas

Real estate investor visa programmes, or ‘golden visas’, are now a key strategy in reviving residential markets and building broader economic recovery in countries including Spain, Greece and Portugal. These schemes work by investors making a minimum investment in residential real estate in return for being granted a visa providing residency rights or, in some cases, citizenship and consequently valuable access to other European Schengen Area countries.

These countries are actively turning depressed real estate markets to 
their advantage. Many are also making a direct link, explicitly or implicitly, between the propensity for those investing in a country’s real estate to also invest in other areas of its economy.

Portugal has been among the most successful in the golden visa initiative, with its €500,000 minimum investment scheme enjoying strong traction with the Chinese, who accounted for 79% of the 734 visas issued since 2012. Russians, Angolans and Brazilians have been the next biggest recipients.

Spain, Cyprus and Greece have since followed suit with their own schemes, while a number of Caribbean islands offer particularly generous programmes. In both Grenada and St Kitts and Nevis, no visit to the country is even required.

 

Lessons for London? #1

London already offers visas to non-EU residents through its ‘Tier 1’ investor visa – although not via real estate investment. That some countries are actively encouraging more overseas ownership of residential property as a catalyst to broader economic growth is testament to the wider benefits these buyers are purported to bring.

 
Table 3.1

Disincentives: foreign buyer duties and taxes

At the opposite end of the spectrum, some governments have introduced taxes to actively dissuade overseas purchasers of residential property.

Hong Kong and Singapore have been among the biggest international recipients of new wealth generated in mainland China. The weight of money pushing into these cities from here has helped push prime prices to new highs but both cities are seeing very high population growth within a physically constrained urban area. Both jurisdictions have countered these with additional stamp duties for foreign purchasers.

Non-resident buyers in Hong Kong pay an additional 15% stamp duty, on top of standard stamp duty (8.5% on property over HK$2 million) and duties of between 10% and 20% of purchase price if the property is sold within three years of purchase.

Together, this has made Hong Kong property a less enticing investment and the market has cooled considerably. At their peak in September 2011, foreign buyers accounted for 41.1% of the prime Hong Kong market (HK$12 million+). In March 2014 they made up just 18.5%.

In Singapore, a 15% duty on foreign buyers also applies, but all buyers have been hit with a number of new duties. These include duties ranging from 4% to 16% of the sale price if the property is sold within four years, and rules to ensure that a buyer’s monthly payments 
do not exceed 60% of their income. International buyer numbers have fallen, although as a proportion of 
the whole market they still account for around a quarter of the market, down marginally from a high of a third in 2011.

These ‘new world’ taxes are under constant scrutiny and can be changed quickly in response to market conditions. In the cities of the west, when introduced, they tend to be more permanent. Sydney has long placed some restrictions on overseas home ownership. New York effectively restricts a large amount of foreign property ownership through the co-op system of apartment tenure. This makes it extremely difficult for non US citizens to participate, limiting the full potential of that city's residential market.

 

Lessons for London? #2

Property taxation targeted at foreign buyers does have a suppressing effect on transactions – at least in the short term. It is only one of many factors that drive a foreign purchaser’s decision to buy abroad. On its own, the impact appears to be relatively temporary, cooling volumes notably, while suppressing values until adjustment for the new tax are being made. Limited past evidence would suggest that prices then resume their former trajectories post-adjustment.

In London, specific restrictions on foreign buyers would seem unlikely, particularly during a period when inward investment is being courted by the most senior politicians.

The threat of a mansion tax would put the city further up the world cost rankings. Such a tax would mean that London then would rival the very high costs associated with purchasing residential real estate in Singapore and Hong Kong, if property is brought through a corporate vehicle.

 

 

 
 

Key Contacts

Yolande Barnes

Yolande Barnes

Director
World Research

Savills Margaret Street

+44 (0) 20 7409 8899

 

Paul Tostevin

Paul Tostevin

Associate Director
World Research

Savills Margaret Street

+44 (0) 20 7016 3883

 

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