Real Estate
JP Morgan Private Bank On The Case For London's Real Estate

JP Morgan Private Bank sets out the case for why investing in London makes sense, even though headlines might suggest it is now a very expensive town.
JP Morgan Private Bank sets out the case for why investing in
London makes sense, even
though headlines might suggest it is now a very expensive town.
César Pérez, chief investment strategist
EMEA and Paul Knox, head of wealth advisory for EMEA at the bank
set out their
views.
Global residential real estate markets are centered on cities,
not
countries, and each reflects the city’s global status as well as
the behavior
of a global home-owning and investing elite. “New World”
cities have risen in the hierarchy of these markets while “old
world” ones have
descended over the last seven years. London
is the exception to this.
We recently held our annual Real Estate market conference in
which we
discussed our outlook and market insight into the UK and the
European prime
residential markets. London is probably the most
cosmopolitan of all world cities and the fastest growing city in
Europe. Based on a research carried out by property
consultant Savills, 34 per cent of all prime residential London
buyers in 2011/12 were from overseas.
Despite a perception to the contrary, the majority of overseas
buyers are
looking to London
for their primary residence.
The question is: why London?
Historically, London
has been a “safe haven” for overseas real estate investments.
Sterling weakness
has made the capital’s real estate look cheap by global
standards. However, London is a global brand, its world class
status means
that it competes with few other cities in Europe.
It is one of the top three global financial centers and the main
trading hub
for the European region.
But this is not the whole story; overseas buyers settling in
London are important to
the wider economy too. Wealth-creating incomers contribute to the
city’s global
standing and cross-border business interests. They support
high-end retail,
businesses and services as well as helping to make London the
diverse and multi-cultural city it
is and in which so many can feel at home.
Overseas buyers in London
real estate have been increasing for both residential and
commercial property.
Overseas buyers of high-end London
homes accounted for 38 per cent of deals last year compared with
23 per cent in
2005, data from Savills shows. The figure for non-British buyers
rises to 78
per cent for new-build properties worth more than five million
pounds. The
buying has had significant and often beneficial, impacts. It is
concentrated in
the new build sector and the top end of the market due to a
combination of
targeted marketing and familiarity with an international product
rather than
the second-hand market. Growth in prime London
has been strong but also unprecedentedly stable recently. London
doesn’t look overheated by global
standards although there may be pockets of concern where yields
are
particularly low.
Tax rears its head
A new key area of concern for foreign buyers of London
residential property is now tax. Historically non-UK
domiciled owners of high
value UK
residential property have used non-UK corporate entities to
provide protection
against inheritance tax. The U.K.
has recently implemented a series of measures which will deter
the use of
non-natural persons (NNP) – primarily corporate entities –
purchasing residential
property valued at more than £2 million in the future.
These measures include a new penal rate of stamp duty, a new
Annual Tax
on Enveloped Dwellings (ATED) and a new capital gains tax charge
when the NNP
disposes of the property. Additionally there will no longer be an
inheritance
tax deduction for debts secured against the property unless the
borrowed monies
are used to purchase UK
assets.
Existing owners of properties through NNPs are recommended to
review
their structures with their UK
tax advisers to assess whether these should be unwound. The
impact of the new
tax charges needs to be weighed against the potential UK tax
charges
in unwinding the structure and the IHT exposure of having direct
ownership. In
general, there will be fewer circumstances in the future when
purchasing high
value residential property in the UK through an NNP will be
appropriate.
Trophies and cores
More broadly, Europe’s real estate market is the largest in the
world
and has experienced extreme dislocations caused by Europe’s
fiscal and banking crisis. Investors have become more selective
in what they
are prepared to buy, with any element of risk being
disproportionally
discounted. Trophy and core assets remain largely in demand. Most
of the
capital flows have targeted the largest and most liquid markets
around Europe. Notably, Germany,
France and the UK have
exhibited stability during volatile markets. This segment of the
market remains
highly liquid and pricing remains competitive.
Risk aversion has driven up the pricing of stabilized prime
assets,
while undervaluing assets with manageable risks. As a result, a
large
proportion of assets previously considered prime but with minor
impairments are
now being priced as secondary. A significant market bifurcation
exists between
prime and secondary assets, creating investment opportunities.
From a portfolio construction perspective, we think that real
estate is
complementary to most asset classes. Investing in certain types
of real estate
properties may provide a hedge against inflation and complement a
fixed income
portfolio. Real estate returns have historically been resilient
against mild
inflation, and were very strong in the era of significant
inflation. As
established, investing in real estate is a great diversifier, but
location,
timing, segment, demographics, and cost of funding matter for
achieving the
targeted long term returns.