The foreign investor market in London is on its knees – with ‘hundreds’ of buyers of homes purchased off-plan over the last four years nursing huge losses.
The problem, says one large London agent, has been ‘massively under-reported’ by the media.
With values of such properties having dropped like a stone, some investors are unable to complete on their purchases, with the developers taking possession.
Others are having to sell at almost a one-third loss to avoid having to hand back distressed properties to developers, and then risking legal action and greater losses.
Steven Herd, founder and CEO of MyLondonHome, an agent which is one of the biggest players in the new homes and investment market, said that every day, his firm is having to try to help a foreign investor exit a deal with the least pain.
He said he does not know a single instance where a foreign investor who has bought in the last two years has done anything but made a loss on an off-plan purchase.
In some instances, losses have been as low as 5%-10%, but in others, investors have taken a far greater hit.
In an exclusive interview with EYE, Herd said: “At times, my firm feels as though we have become debt advisers, and not estate agents.
“My office has hundreds of files where investors have lost money.
“The problem has been massively under-reported, because the Land Registry does not record prices at exchange, only at completion.”
Developers, he said, have also not made much noise for PR reasons: “They rely on pre-sales, and investors buying into phases one and two of schemes.”
Typically, investors put down a 20% deposit on an off-plan investment. They then plan to ‘flip’ the property at a profit before it completes.
For example, they might have put down £200,000 on a £1m off-plan flat expecting it to be worth £1.2m or £1.3m within two or three years.
Instead, said Herd, they are finding its value has dropped to between £750,000 and £800,000.
In one recent case, a Russian investor bought an off-plan property in 2014 for £3.1m. He could not afford to complete and could not raise a mortgage.
MyLondonHome sold the property at £2.55m days before completion.
If – rarely – the properties do go to completion, the investor is saddled with a property worth far less than they paid for it.
The other options are to ‘flip’ it but at a loss. Or to hand the property back to the developer, with the original 20% deposit forfeited. Herd said: “The risk there is that the developer then sells the property for far less than the original price and then goes after the first purchaser for the difference.
“To our knowledge, it hasn’t happened … yet.
“However, investors are being advised by their lawyers that this could happen.
“To avoid this possibility, investors are selling at a reduction of 25% to 30% as at least it allows them to control the sale.
“Most foreign investors are only interested in capital returns – they don’t want to be landlords.”
Herd said that buyers of distressed property bought off-plan tend to be domestic owner-occupiers.
He stressed that the scenario – which he says has been going on since 2014 – is absolutely nothing to do with Brexit.
Instead, he cited taxes ATED, Stamp Duty and Capital Gains Tax – which has been charged to foreigners when they come to sell since 2016.
Herd said: “The tax regime is now very punitive and, bluntly, it has killed off the foreign investor market in London.
“My concern is for the housing market as a whole, and what it will look like.
“The Conservative government has wanted to close off foreign investors buying UK property in favour of the first-time buyer. But first-time buyers are priced out of the market anyway, and so I think that house prices will simply stagnate.
“I am also concerned that if you kill off the foreign investor market, you kill off London’s Zone 1 market, then the suburbs, then the home counties and beyond.”