Tax

Land Registry data shows tax legislation slamming brakes on London

Data for quarter three released by HM Land Registry shows a mixed picture for London property prices.

Prices in Prime London Central (PLC) have reached a new high of GBP1,350,101 which is 5.5 times more than the average price of GBP249,958 in England and Wales.

In contrast, the country as a whole has seen prices largely remaining stagnant, increasing by just 0.75 per cent across the year.

Q3 normally shows a buoyant picture for PLC, registering the completion of sales transacted during the active spring and early summer period. However, despite the price growth seen this quarter, underpinned by a very strong performance at the top end of the market, overall transactions have actually dropped by almost nine per cent versus the same quarter last year. This is in contrast to the more encouraging news in England and Wales where transactions have increased by over three per cent during the last 12 months.

The fall in transactions in PLC is almost definitely a result of the uncertainty and negative sentiment caused by the tax changes announced in the 2012 budget. In March, the government introduced a double whammy increasing stamp duty to seven per cent for people buying property over GBP2m in their own name and 15 per cent for companies. They also revealed plans, yet to be confirmed, to impose an annual charge of up to GBP140,000 per annum on properties held by these companies as well as a new capital gains tax on their sale. These measures clearly took aim at our capital where 77 per cent of properties over GBP2m are located.

The Land Registry data reflects the consequences of these tax changes on both the domestic market living all over the capital and foreign investors who focus their attention on PLC.

In Greater London, the number of sales under GBP2m has held steady (a one per cent drop in transactions versus Q3 2011). However, sales between GBP2m and GBP5m have dropped a staggering 53 per cent compared with the same quarter last year.

In Central London, the investment market has been affected in a different way. 50 per cent of purchases in PLC are by investors looking to enter the private rented sector. The deterrent to investment created by the new legislation, coupled with uncertainty of what will be revealed in December following the government consultation period, means investors have adopted a wait and see attitude.

This has had a ripple effect, not only affecting properties between GBP2m and GBP5m but on property transactions below this price point as well. As a result, according to Land Registry, overall transactions sub GBP5m have fallen by 11 per cent versus the same quarter last year. Data issued by other industry pundits, such as Knight Frank and Savills, put the fall in transactions between GBP2m and GBP5m at as much as 25 per cent.

“Greater London as a whole reflects the pulse of the domestic economy and the consequence of a fall in transactions between GBP2m and GBP5m of over 50 per cent is very concerning.  PLC is the heart beat of the private rented sector and it is clear that investors are holding back until there is a clear direction expressed by the government. The UK has always been seen as a politically and economically stable environment and, as such, a safe haven for investors’ funds. Whatever the outcome of the government’s deliberations, confidence in the UK has undoubtedly been shaken,” says Hugh Best, London Central Portfolio’s (LCP) head of investment.

The price growth in PLC, in spite of falling transactions, is the result of an exceptional performance for super-prime property. The GBP5m+ sector, where investors are less price-sensitive and likely to be buying for owner occupation, has registered 60 transactions in the last quarter, a staggering 88 per cent increase over the same quarter last year. Knight Frank also claims a bumper quarter at the top end of the market with an increase of 35 per cent in sales over GBP10m.

Whilst the government’s proposed property taxes may be a vote winner, making London less attractive to investors is likely to be a short term sop. In a report that LCP, specialist fund and asset manager, sent to HMRC and HMT in July, it stated it was not unrealistic to assume a 10 per cent suppression in the PLC’s private rented sector as a result of the measures.

As a rule of thumb, each new investment property purchase brings in additional revenue of about 20 per cent of its value; through refurbishment, lettings and all the associated professional services and trades.  Work on a London property generates business for the manufacturer of furniture in Barnsley and flooring in Birmingham. It has been estimated that the private rented sector is the 6th biggest generator of inward investment into the UK.

In its report, LCP demonstrates that the PLC private rented sector represents a hive of business activity which stimulates economic growth and that the changes would have punitive economic effects. It estimated that, by the next election, there will be a loss of GBP509m to the economy, equivalent to 13,000 jobs, and a net loss to the Exchequer. 

“Clearly, the tax changes have slammed the brakes on both the domestic and investment market. Given the evident impact of the changes in what is traditionally a buoyant quarter and the continuing uncertainty whilst investors await clarifications, the full effects may not be felt until after the consultation outcome is announced in the Autumn statement. It is likely there will be a further fall in activity and associated economic fall-out. For those who are pro-growth as a way out of our economic woes one can only hope that certainty in the new year will be a prompt to renewed action,” says Naomi Heaton, chief executive of LCP.

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