London homes beckon despite economic uncertainties

Buying a home for investment in Singapore can involve substantial transaction costs.  Citizens pay additional buyer’s stamp duty of 17 per cent for a second home and 25 per cent for a third and subsequent home.  

While rents are rising, getting an annual net yield of around 2 per cent may not appeal, amid the rising costs of home loans.

As travel restrictions lift, locals may venture to buy homes abroad.  Mature markets such as Australia, the United Kingdom (UK) and the United States are well regulated and language is not an issue.  Many Singaporeans are familiar with these places, having studied there.  

London, UK, where home prices have grown by around 6.8 per cent per annum over the past 30 years according to Savills, is popular with Singaporeans buying overseas homes.

Post-Brexit, London continues to be a leading global financial and business hub, drawing talent in search of good jobs and business opportunities.  Many technology groups have set up bases in the city.

Several Singapore groups are active in London’s commercial property scene.  Earlier this year, Ho Bee Land bought The Scalpel, a Grade A office tower in the heart of London’s insurance district, for £718 million (S$1.2 billion).  

In May, Sinarmas Land announced the proposed purchase of 32-50 Strand, which is a commercial building located near Trafalgar Square for £195 million.

Later this year, Frasers Property will complete constructing The Rowe, which is an office development in Whitechapel, London.

Strong Q1

The prime central London residential property market is off to a positive start this year.  According to JLL, prime central London home prices saw an annual increase of 3.3 per cent in Q1 2022, with achieved prices up 4.7 per cent versus pre-pandemic in Q1 2020.  Sales activity saw a 7 per cent annual increase in Q1 2022, making the first quarter the busiest first quarter for five years.

Malaysian-listed Eco World International recorded strong contribution to sales from its London projects, Embassy Gardens and London City Island, in the four months ended Feb 28, 2022. 

Residential rents, which bottomed out in Q1 2021, have rebounded and are up 15.0 per cent from a year ago in Q1 2022 according to JLL’s prime central London rental index.  Achieved rents are now higher than pre-pandemic in Q1 2020.

Amid a growing population, JLL sees an under-supply of homes in London, with estimated annual new home deliveries of about 40,000 units falling short of estimated annual demand for 66,000 new homes in 2022.  JLL forecasts price growth in prime central London homes of 7.5 per cent this year.

Singaporeans buying London homes can take advantage of the strength of the Singapore dollar - the UK pound is down by around 5 per cent year-to-date and around 8 per cent year-on-year.

A major project expected to launch later this year will see homes at Canada Water put up for sale. Developed by the 50:50 joint venture between UK developer British Land and Australian pension fund AutralianSuper, Canada Water is a large mixed-use regeneration project in London.

Over the next 12 years, the 53 acre master plan is expected to yield around 3,000 homes, 2 million sq ft of workspace and 1 million sq ft of retail and leisure space, as well as 12 acres of parks and open spaces.   The scheme has a total development cost of around £3.6 billion, excluding land and interest.

The first phase of private sales homes will be built on Plot A1 in a 35-storey building, adjacent to Canada Water tube station.  There will be 186 homes, with long leasehold titles, as well as office and retail components, and project completion is targeted for 2024.  Savills and JLL estimate that selling price of the homes will start from around £650,000.

More immediately,  the sales exhibition of homes at Brent Cross Town, which is a large urban regeneration project in north-west London, is taking place in Singapore on Jun 4-5, 2022.  There are 277 apartments, ranging from studios to one, two and three-bedroom units, including maisonettes, being launched for sale, with prices starting from £390,000.

Taxes

In the UK, stamp duty on homes applies progressively based on a range of 0-12 per cent.  Non-UK residents buying a London home pay a surcharge of 2 per cent.  Buyers of additional homes pay an extra 3 per cent in stamp duty.

The stamp duty rate for a Singaporean first-time buyer of a £1.5 million home works out to around 8.25 per cent, which is lower than transaction taxes incurred by a local buying a second home here.

The sale of a London home can attract capital gains tax.  The rate is 18 per cent for those with taxable income of up to £50,270 and 28 per cent for those with higher taxable income. 

Risks and challenges

Demand from Chinese buyers for London homes may be affected by movement restrictions to contain the Covid-pandemic in many Chinese cities.  

Weakness in the UK’s economy could hurt home prices across the UK.  In early May, the Bank of England (BOE) said it expects inflation to top 10 per cent this year, driving job losses and stagnation. 

Consumer prices in the UK rose by an annual rate of 7 per cent in March and 9 per cent in April, while the economy shrank by 0.1 per cent month-on-month in March, after recording zero growth in February.

The BOE hiked interest rates for the fourth time in a row on May 5, 2022, taking its base interest rate up to 1 per cent, which is the highest since 2009.  

For those looking to borrow to help fund a London home purchase, look out for higher costs eating into rental returns.  Higher interest rates may also dent capital values of London homes.

An annual net yield on a prime London homes of around 3.5 per cent may work for Singapore buyers, who are confident in the continued pre-eminence of one of the world’s most dynamic cities.  Investors can boost equity returns by using debt and hope for long term capital gains.

Perhaps buy a high quality London home with good outdoor space and easy access to public realm, and one has a future-proof home that meets the needs of knowledge workers, who split their time between working from the office and from home.