Skip to main content

Horizon Scanning | UK Real Estate 2019 

Overseas Investors

In recent years, an increasing number of jurisdictions across the globe have either introduced new or strengthened existing rules controlling foreign investment: the UK is no exception and the trend for even greater transparency in UK real estate has continued, especially where overseas investors are involved, driven by the UK Government’s wider push to tackle corruption. Here we look at a number of the key changes which overseas investors in UK real estate need to be aware of; the likely impact of those changes and the reaction from overseas investors so far.

Overseas Investors

Overseas Entities Register

Some two years after this was first announced by the then prime minister, David Cameron, the Registration of Overseas Entities Bill was finally published in July and the consultation on the draft legislation closed in September. From 2021, there will be a new register of the beneficial owners of overseas entities that own or wish to buy or let UK property. Such overseas entities will be required to be registered with the details of their “registrable beneficial owners”, determined on the same basis as under the Persons of Significant Control regime introduced in 2016. Overseas entities will be unable to register the purchase, sale, charge or grant of certain leases of UK property at the Land Registry unless and until they appear on the new register. The potentially serious implications of failure to comply with the new requirements (including criminal liability and the inability to register title to UK property) will mean that additional due diligence checks and warranties will be needed to ensure that an overseas entity has an up-to-date registration number and that the one-year update period has not expired (or will not be expiring before completion of the transaction).

So, what can overseas entities do now to prepare for the new regime? Those overseas investors who either already own UK property or wish to buy/lease UK property should review their corporate structures to identify who their “registrable beneficial owners” are and continue to monitor these proposals to ensure prompt registration when necessary. While the new rules have yet to be finalised and various uncertainties remain not least as to exactly which entities will be exempt, how to raise awareness of the rules coming into force (to avoid criminal liability simply by doing nothing) and how JPUTs and foreign government pension and superannuation funds will be affected. One thing is certain: the new rules will add another layer of complexity to real estate transactions involving overseas investors.

Additional tax burdens on non-resident investors

In addition to the new overseas entities register, a number of tax changes have either been announced over the past 18 months or are in the pipeline, which will also affect overseas investors. Examples include capital gains tax on disposals by non-resident investors in UK property, corporation tax (rather than income tax) on non-UK resident companies that carry on a UK property business and, most recently, a proposed additional 1% SDLT surcharge on foreign buyers of UK residential property. We discuss these in the Tax Update below.

Overseas Investors not deterred…?

So… what has been the impact of these additional regulatory and tax changes so far? Is it really just “business as usual”…? If initial signs are anything to go by, the appetite of overseas investors to investing in UK real estate has certainly not been dented: 2018 saw record levels of overseas investment into London with Asian investors accounting for the largest share with £3.6bn in bought property, and South Korean investment in particular showing a significant increase on its 2017 levels. In addition, there are expectations for a new wave of Japanese investment into the UK, although no-one expects this to happen instantaneously. The picture is not quite so rosy for outbound investment from mainland China, which has fallen markedly over the past year but this is due more to the introduction by the Chinese Government in 2017 of tighter controls on foreign property acquisitions than as a result of these proposed changes.

Whilst there are clearly challenges ahead in terms of overseas investors getting up to speed with the new regulations, and making sure that registrations are completed and kept up to date, the changes being introduced by the Overseas Entities Register are unlikely to act as a significant deterrent to investment in UK real estate. More important are the increased tax burdens facing overseas investors but, as we said at the start, the UK is to a large extent merely playing catch up with other jurisdictions where similar rules are already in place.

As for Brexit, Asian investors as a whole remain significant investors into the UK notwithstanding the current uncertainty. Although recently there has been some shift in the sources of capital and a dip in overall UK investment volumes in the third quarter of the year, the perceived advantages of investing into the UK (and particularly London), including favourable exchange rates, have largely outweighed concerns related to the UK’s withdrawal from the EU.

Overall, the fundamentals for investing into the UK remain strong and far from pulling up the drawbridges, UK real estate remains open for investment from all parts of the globe.

Brexit 

Ever since the unexpected referendum result in 2016, the nation has been in a curious state of befuddlement and limbo. The process surrounding the UK’s departure from the EU has been enveloped by a dense and numbing political fog, punctuated by seemingly erratic whirlwinds of frenetic activity. Progress as to the terms of our exit - and future relationship - appears simultaneously to stand still, reverse and speed up. But, with approximately three months to go until 29 March 2019, the storm shows no sign of abating yet – if the last few weeks are anything to go by … that said, we can still usefully look at what, if any, progress has been made this year - and what effect this has had on the real estate market.

"The process surrounding the UK’s departure from the EU has been enveloped by a dense and numbing political fog"

Find out more >

Retail Insolvencies 

In the 12 months ending Q3 2018, the wholesale and retail trade sector saw the second highest underlying of new company insolvencies in the UK with a number of household names dramatically reducing their real estate footprint or disappearing altogether. Casual dining and fashion have been particularly affected, with the number of CVAs for Q3 2018 rising by 200% compared with the same period in 2017.  

"The number of CVAs for Q3 2018 rising by 200% compared with the same period in 2017"

Find out more >

Overseas Investors 

In recent years, an increasing number of jurisdictions across the globe have either introduced new or strengthened existing rules controlling foreign investment: the UK is no exception and the trend for even greater transparency in UK real estate has continued, especially where overseas investors are involved, driven by the UK Government’s wider push to tackle corruption. Here we look at a number of the key changes which overseas investors in UK real estate need to be aware of; the likely impact of those changes and the reaction from overseas investors so far.

"$13.7 billion of overseas capital piled into the City in 2018 attracted by favourable occupancy rates, dependable investments with yields higher than elsewhere in Europe.” (Cushman & Wakefield: Winning Growth in Cities)

Find out more >

New Telecoms Code

It is only in recent months that judgments on the new Electronic Communication Code (the “Code”) have started to emerge from the Upper Tribunal (which now decides telecoms disputes). They confirm what many businesses and individuals have sensed over the last year; that what has been referred to by the Tribunal as “the human right to mobile telephony” is likely to trump the human right to enjoyment of one’s own property. The new Code came into force on 28 December 2017 making it much easier for telecoms operators to acquire rights to install and maintain electronic communications equipment on, under or over land. In the absence of reaching agreement with the relevant landowner, an operator has the right to apply to the Upper Tribunal for an “enforced agreement”.

"The human right to mobile telephony is likely to trump the human right to enjoyment of one’s own property"                                                                 

Find out more >

Tax Update 

What are the UK tax questions that matter most to the real estate sector? How will we be taxed on our income and gains, how much SDLT will we need to pay and what capital allowances are available are invariably near the top of the list. At least for some investors, the answers to all of these will be changing over the next couple of years. Add to this a new 2% digital services tax that will apply regardless of physical presence and there is plenty to think about following the 2018 Budget.

"As previously announced, the taxation of non-UK residents in relation to UK property is to be fundamentally changed"

Find out more >

Regeneration

Urban regeneration is at a turning point. Even in our present polarised political climate, few would deny that there is a problem with housing capacity and affordability in the UK. Acknowledging the problem is, seemingly, the limit of the consensus. Perhaps one more thing is certain: private developers are inherently a key part of the solution.

"Genuine engagement with residents and other local organisations and institutions early in the development process is crucial"

Find out more >

Prop Tech

From online estate agents to smart buildings, PropTech is infiltrating the real estate sector in many different ways; in some cases seeking to replace antiquated and inefficient systems and in others introducing new technologies to drive forward an industry that has traditionally been resistant to change. Few Real Estate professionals, whether millennials or baby boomers, would deny that PropTech is changing the Real Estate industry.

"Experts are predicting that technology will play an increasingly prominent role in how occupiers use and operate their Real Estate"

Find out more >

Explore further topics across our UK Real Estate | Horizon Scanning 2019 publication.

Explore