How China is stoking London’s housing bubble

April 14, 2014

By George Hay

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It takes a long trip on the London underground to get to the Aura housing development. From Waterloo Station, 42 minutes tick by until you pull into Edgware, the stop nearest to the half-completed apartment blocks being built on land formerly occupied by a now-bankrupt football club. Attempt the journey at the weekend, when large swathes of the tube are typically shut, and you must make a detour to nearby Canon’s Park station. From there, you face a 15-minute trek taking in a boarded-up pub, a Lidl supermarket and a municipal office block with smashed ground-floor windows. In every sense, you are a long way from what estate agents like to call “prime central London.”

Yet projects like Aura say a lot about how London’s property bubble is changing. Six thousand miles away, on the thirteenth floor of Hong Kong’s Mandarin Oriental hotel, a host of investors cluster around a scale model of this latest addition to northwest London’s housing stock. Some are affluent middle-class Hong Kong couples looking to invest a couple of hundred thousand pounds for the long term. Others are looking for a quick flip. They plan to put down 10 percent of the purchase price now, wait for values to rise, and sell for a tidy profit before the development opens to residents next year.

There’s nothing new about foreign investment in London property. Since UK residential property prices bottomed in March 2009, intense overseas interest has pushed up average values in Kensington & Chelsea – the hub of prime central London – by 75 percent, according to Land Registry data. In Harrow, where Aura is located, prices have risen by just 24 percent.

But foreign cash may now be rippling out to different neighbourhoods. Over the last year, prices in Harrow are up 12 percent; in Kensington they have fallen 5 percent, Rightmove estimates. Over roughly the same period, mainland Chinese buyers have bought 7.5 percent of the properties costing less than a million pounds in a larger section of London, up from 2.7 percent in 2010, according to Knight Frank.

The smarter Chinese investors think differently from the average Russian oligarch billionaire seeking a London pad. Both like London’s stable politics. But many Chinese buyers are seeking the 5 percent-plus rental yields that can now only be found far from London’s over-inflated centre, where sub-3 percent yields are common.

There’s also plenty of less clever Chinese money, though. Three years ago, mainland China hosted just seven international property exhibitions, according to a person familiar with the situation. Now there are 200 filling huge halls with eager would-be property investors who neither speak English nor know where they are buying. Unscrupulous developers retouch sales images so that Canary Wharf appears to be right next to Tower Bridge, rather than three miles further down the Thames. One unfortunate investor in search of a London address wound up with a property in Lincolnshire.

The wave of Chinese capital is only likely to grow. Right now, mainland citizens face multiple hurdles to get their savings out of the country. But as China liberalises its capital account over the next decade, its gross international investment could jump from 5 percent of world GDP today to 30 percent, according to the Bank of England. Some of that could end up in London property. Juwai, a Shanghai-based website, predicts that Chinese buyers will overtake Singaporeans as the biggest overseas force in the British capital by 2016.

The big question for George Osborne, the UK chancellor, is whether this matters. It could be argued that soon-to-be-built developments that are sold on the basis of a floor plan, like Aura, are using foreign cash to expand the capital’s supply of housing. But unlike Aura, many off-plan flats sell at a premium to foreign investors, according to two Chinese property market observers. Over half of Juwai’s customers are buying existing properties.

Osborne could strike back. The United Kingdom has recently tried to cool its property bubble, bringing in capital gains tax for foreign investors and a 15 percent stamp duty rate for foreign investors who buy through corporate shell companies. The government is also looking at allowing local councils to impose higher taxes on owners who leave their homes empty.

But these measures fall some way short of Hong Kong, which slaps an extra 15 percent tax on all non-residents. Osborne could try to follow suit, although European rules mean that Britain cannot discriminate against buyers from the single market.

Aspiring London-based homebuyers shouldn’t get their hopes up, though. Mindful of the way geopolitical winds are blowing, Osborne has been enthusiastically visiting China, allowing the country’s banks to establish more UK branches, and granting more visas to rich Chinese individuals. Making it harder for Chinese investors to park their money in London would sit oddly alongside the charm offensive. However unprepossessing it looks right now, prime central London may in time reach all the way to Edgware.

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