The UK has announced plans to hit international real estate investors with a new double digit tax. What’s behind this bold move? How will it impact the prime London market? What could it mean for hot secondary markets like San Diego?
The British and international media began ringing the alarm bells in the final quarter of 2013, and the UK’s Chancellor of the Exchequer, George Osborne announced plans to institute a new tax on real estate investors. Some have voiced fears that it could collapse values in one of the most popular international property markets. Beyond the hype, what is the real potential fallout of this dramatic attempt to control property markets?
London’s Big New Capital Gains Tax
The institution of the new UK capital gains tax appears to mostly be a move to help moderate dramatically rising property values, and avoid a major crash.
Statistics show that 70% of prime London property acquisitions have been made by foreigners recently. Intense global demand, fueled with incredible amounts of capital have been pushing up property prices in the trendy European city sharply. Britons are being priced out of buying in their home country, and haven’t been too happy that they have been taxed on capital gains on investments while foreigners and expats have been privy to a loophole which has given them a free pass.
The new capital gains tax goes into effect in April 2015. Gains made going forward from then will be taxed at 28%.
While the Bank of England’s new governor, Carney might be the best qualified to guide a nation to a soft landing, many are still very concerned about the potential this could have for causing a crash.
The Impact on London’s Investment Property Market
The obvious concern is that this new tax could eliminate London’s advantage on the global investment map. Yields and growth for prime central London property haven’t been the best, but the absence of taxes, and perceived safety for wealth have lured many wealthy international investors.
Clearly this tax will make investing in the city less appealing for some, though could drive a significant spike in activity through the first quarter of 2015 as investors sell and restructure ahead of the deadline.
UK estate agencies say the very top of the market is already being impacted, with asking prices coming down to price in the new tax. Investors also need to question how they will be protected in terms of which values will be used to calculate taxes in the future.
The biggest change to be expected is in simply waking investors up to the fact that they need to look around at other options.
From London to San Diego
If the world’s wealthiest real estate investors stop investing in London, where will they go?
There are many reasons why they ought to, and will be attracted to sunny Southern California, and particularly to San Diego County.
Proximity and culture makes SoCal an ideal choice for wealthy Asian investors. Even more so now due to fears of a Hong King and mainland China property crash. California has always been a favorite destination for UK investors and many may choose to not only invest in income properties in San Diego County, but buy second homes, vacation property, and retirement homes. The same goes for many other European countries too. Migration from South and Central America and amnesty plans also appears to be on the increase. This is on top of many US investors which may bring capital back home.
Consider that very low yields, decelerating growth, and property prices pushing $10k per sq. ft. in London make even the hottest California markets a steal in comparison. San Diego in particular offers great value, higher levels of cash flow from rents, better prospects for equity and length of house price growth, and all the legal benefits of the UK. For those interested in leverage US mortgage lenders have perhaps never been more aggressive in loaning to single family rental property investors, in bulk.
What it all means for San Diego County
A significant uptick in interest, and activity in the San Diego, CA market likely means substantially elevated property prices and values, higher rents, and rapid returns.
Of course prime areas could effectively separate themselves as their own asset classes, and become detached from local fundamentals such as employment, and wage growth, etc. The same has already happened in central London, and US markets such as Key West, Manhattan, and San Francisco.
For California homeowners this means swelling home equity and net worth. For renters and buyers it could become tougher over the next 7 years. Prices will be higher, inventory scarce, and competition more intense.
This definitely signals the time is now to make a move to a new home, as well as bulk up investment property portfolios.
