Property London |
Historically, investing in property in London has been a very good idea. But times change and if you read the news, you will come across countless stories about how the property market in the UK and especially London is on the verge of disaster. So, is investing in property in London a mistake right now?
The first thing I would say is ignore pretty much everything you read in the press – both positive and negative – because the information is far too general to be of any use and is often confusing or just plain wrong.
For example, Nationwide recently announced the biggest price falls since 2009, while the Halifax announced price rises. These are two of the largest lenders in the UK, yet they are giving a conflicting picture of what is happening.
More importantly, they focus on the “average” UK house which Nationwide tells us is worth £257,122. But do you think this bears any resemblance or has any relevance to property in London, especially prime central London?
I could go on about how inaccurate the information you read in the press is, but for brevity, it is essential that you undertake your own research.
However, if you look at property in London historically, it has been a very good investment with price increases averaging roughly 8% per annum. Indeed, you just have to look at the largest landowners like the royal family, the Duke of Westminster who owns much of Belgravia & Mayfair, or Earl Cadogan who owns much of the area around Sloane Square and the King’s Road.
Despite numerous wars, recessions, house price crashes and other disasters, their wealth has increased dramatically because of their property investments. This is also true for my parents’ generation who have lived through three massive property crashes but have more property wealth than any previous generation.
But this is only true for those who stayed in the market for the majority, if not all, of the time. Those who were forced sellers during the crashes and who couldn’t afford to buy again have done badly. So, the first piece of advice I give my clients – irrespective of their wealth – is to make sure you are never a forced seller, i.e. you have to be able to ride out any storms.
The Pros and Cons of Investing in Property in Prime Central London
There is a belief that investing in property in prime central London is a bullet-proof investment. Indeed, there is a saying in the U.K. that something is “safe as houses”, but as 2008 and other crashes have proven, property prices don’t always go up.
Nevertheless, it is true that over any given 20 year period prices have increased significantly, so it offers very good protection against inflation and more importantly, the UK has very strong property laws and a stable political environment.
This means that whatever your nationality, you can invest in London and not have any concerns about your property suddenly being confiscated or you being arrested and your assets frozen simply because a politician doesn’t like you.
(Please note that if the property has been acquired with proceeds from criminal activity or someone is on a sanctions list then the government can freeze or confiscate it.)
Consequently, property in prime central London has been an extremely good long-term asset. So, I have clients who buy with a legacy time horizon. Then there are some who simply want a stable source of income while others buy as an investment which they then give to the children to use in 5-18 years’ time as prices are almost certain to be significantly higher.
The Problems With Investing in Property in London
While this may all seem like good news, it isn’t.
In the last 10-12 years, there have been significant changes to the tax legislation which significantly affects investors. The most famous and obvious of these is Stamp Duty Land Tax (SDLT) which you pay on the purchase of a property. It has been increased considerably for properties over £1m and there are additional levels of SDLT for investors and international buyers.
Secondly, there have been changes to the expenses that one could offset, the most significant of which has been the reduction in mortgage interest relief.
Thirdly, international buyers are no longer shielded from Inheritance Tax (IHT). This law just means that they are taxed in line with UK buyers, but it is still strange for people whose countries don’t have the tax. There are ways to mitigate IHT but that is an article for another day.
It is absolutely vital that you seek tax advice from a reputable firm with experience in the London property market. If you don’t you are likely to cost yourself a lot of money, so please don’t skip this step. If you need introductions to reliable, experienced tax experts please email email@example.com and we will recommend the most suitable firms for you.
What has happened to the price of Property in London recently?
Since 2015, property prices in London have underperformed. This was due to a combination of the SDLT increases and a period of political upheaval not seen since World War II: the Brexit vote, continuing Brexit arguments within the UK, a hung parliament and the rise of Corbyn created political uncertainty which always affects London transaction numbers more than the rest of the UK.
However, despite “experts” predicting during the pandemic that no-one would ever live in a city again and that everyone would work from home, rents in London have increased 24% in the last two years and are significantly higher than before the pandemic. Indeed, there is a lack of rental property in prime central London.
The key point to remember is that despite the political buffoonery we have endured and the myriad tax changes, the London property market is systemically the same, i.e. nothing has changed in terms of the big picture.
The majority of your returns on a property investment in London will come from capital growth. What most investors fail to realise is that it is the land price that moves in value rather than the property itself.
Of course, you can add value by improving the property, but the real price movement is in the value of the land. This is why when you insure a property in Belgravia, for example, the rebuild cost of the property will be considerably less than the price you will pay for it, i.e. the majority of the value is in the land.
This is why the adage “Location, location, location” is so true. And this is the secret: landowners benefit from improvements paid for by taxpayers and businesses. The most obvious example of this is Crossrail.
It has vastly increased the price of property near the Crossrail stations but does that benefit the taxpayers in Cornwall, Leeds and Manchester who helped pay for it? No, the landowner reaps the majority of the benefits while taxpayers and tenants pay for them. This is why it has always paid over the medium and long term to be a property owner rather than a tenant in the UK.
There are also other infrastructure improvements which are more subtle and areas in prime central London which will outperform the market. It is essential that you understand what these are if you want to make a successful investment.
The one other big advantage of investing in property in prime central London (and other global cities/hubs like New York) is that you are making a play on global prosperity, so you are not as exposed to local factors – one of many reasons why prime central London property prices recovered more quickly and more strongly from the 2008 crash than any other part of the country.
Everyone’s situation is different, so irrespective of whether you read positive or negative articles in the press or hear stories from your friends of wonderful or shocking investments, you must work out what is right for you.
There are unquestionably types of property and areas that I actively advise my clients to avoid because they are almost guaranteed to be poor investments – ironically a lot of “investors” still seem to buy them. (I have put the word investors in inverted commas because most people are really speculators who don’t undertake the necessary research.)
Please don’t make the same mistake.
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Whatever you decide, please do your research, check the tax position and avoid the seven most expensive mistakes property investors in London make.