How Foreign Investment Impacts The New Build London Residential Market?
1. Introduction: Page 3
2. Aim and objectives: Page 4
Literature review: Page 4-6
3. The new build market: Page 4-5
4. Negative impacts: Page 5
5. Positive impacts: Page 5
6. The affordable housing crisis: Page 5-6
7. How changes to stamp duty Laws have affected foreign investment: Page 6
1.2 Methodology: Page 7-9
1.2.1 Aim of investigation: Page 7
1.2.2 Objectives: Page 7
1.2.3 Investigative approach: Page 7
1.2.4 Investigative method: Page 7-8
1.2.5 Bias and validity: Page 8-9
1.2.6 Ethical considerations: Page 9
Research Time table: Page 10
References: Page 11
1.1 London is a global city, the enormity of change that has occurred as a direct result of globalisation is apparent in cities worldwide, in no sector more so than real estate. An interlinked and interdependent network of key cities acting as a base for advanced producer service has been created. Technological advancements and wholesale deregulation has led to a new dynamic allowing investors to seek returns in foreign markets, with key cities housing advanced producer service firms becoming the preferred locations. Therefore flows of international capitol into and out of these metropolises has been greatly increased.
London is undisputedly a key part of this system , rivalling cities such as New York and Tokyo in terms of business activity, human capital and information exchange (see appendix 1)
London has always been an attractive area for investment. According to the Global Power City Index, London has been the world’s most powerful city worldwide, from 2012 to 2018 (The Mori Memorial Foundation, 2019). Applying 17 parameters and analysing the data across all of these enabled this conclusion to be reached. With its prestigious universities, political stability, high standard of health care and a thriving economy, it’s no surprise that London presents foreign investors with a desirable investment prospect. This success and pre-eminence means that there has always been an established market of foreign residential buyers who buy to live in London.
1.2 But, as is often reported and documented in the national press, the buy to live model has evolved and the pattern of investment has changed. As highlighted by the GPCI index, London has experienced notable social and economic changes over the past decade. There has been a year on year increase of rich and super rich foreign buyers in the capital, and to some degree Brexit has further helped foreign capitol inflow as the pound has devalued, which in turn strengthens the purchasing power of the Dollar, Yen, Rouble and Euro.
1.3 I intend to establish the real effect of foreign money flow into the residential London market. I will do this through displaying what percentage of the regular London residential market is sold to overseas investors by property developers. I aim to discuss the reasons for foreign investment, the actual effects on the local market, in terms of property prices and the effect this has had on affordability in terms of the ability to buy for local nationals, and also the knock on affect on the rental market. I will also explore government policy in a number of areas to determine the influence of policy on the housing crisis in London and whether in fact this has had a greater influence on the market than foreign property investment, how government has tried to regulate this market, Brexit and also how property developers have used foreign investment to drive forward their own returns and how the have evolved the design and delivery of their new build developments to satisfy demand from overseas. Has foreign investment had any specific impact on the local market in terms of its contribution to the London housing crisis? (SPERI 2016).
1.4 I aim to make the positive effects of international capitol apparent. Once a foreign national is based in London, they should theoretically use and rely on the local services and labour to meet their day to day needs, which will see more money being put back in the local market and adding to the sustainability of the local labour market as well as leading to a greater contribution to the exchequer via income tax, VAT and road tax for instance. Is this the case in reality? Developers have fed the investment drive, helping sustain their developments in terms of finical viability. Does this coincide with the development of affordable housing however? Are the properties that they develop further contributing to the housing crisis being suited to foreign buyers rather than family housing?
2. Aims and objectives
1. To examine how affect of foreign money on the London housing market
2. Why is this research important, because we have an affordable housing crisis
3. Attempts being made to solve the problem
3. The New build market
3.1Firstly, the report will use academic literature discuss how foreign investment is affecting the London market.
3.2 2 billion pounds of international capitol was invested into London’s new-build property market in 2012; this marked an increase of four hundred million pounds worth of investment from the previous year (Gilmore 2013) London has experience a large house price increase over last decade. This gives loose precedent to a correlation between an increase in house prices and increasing magnitude of foreign investment. Large volumes of buyers purchasing new-build properties are from Singapore, Hong Kong, China, Malaysia, and Russia. These nations account for more than half of the new-build property sales in central London; since 2013 China and Indonesia are the most significant potential investors in new-build property in London. (Kath Scanlon, 2017)
3.3 Between 2014 and 2016, the proportion of London real estate owned by overseas investors were 13 percent (Wallace, A. 2017). The proportion of new build sales rose across the study period; 13.1 percent of property sales in 2015 were to foreign investors, and in 2016 the proportion went up to 17.9 percent.
3.4 61 percent of overseas purchases came from citizens of 4 countries: Hong Kong, Singapore, Malaysia and China (Wallace, A. 2017). As the data from this report is now 6 years old, it could be questioned whether it is currently relevant. We can easily distinguish the outlying concepts, which my dissertation investigates. Stated numerical data presents supporting evidence of how new-build foreign investment affects the London property market. The report from (Wallace, A. 2017) supports information found by displaying similar statics on how the new investment into the new builds market is changing London property.
3.5 Many developers are giving foreign investors priority access to property being sold in London (Savills 2013). The big development companies are selling properties at overseas events before they are advertised to UK buyers. New build developers around central London are building properties tailored to Asian buyers, who are comfortable buying off-plan (Savills 2013). Large developers sell pre-build property at a discounted price to help fund future projects; large property exhibitions are set up in countries such as Hong Kong, Singapore, and Malaysia, with developers spending upwards of £150,000 hosting marketing events. High attendance levels can lead to vast numbers of residential property sold over an event, compared to slow single-digit weekly sales in the UK (Ed Hammond 2014) This source material makes it evident that property developers are indulging in increased revenue stream, but at what detriment?
4.1 The article by (Poon 2017) discusses the negative social impacts that foreign investment is having on the London residential market. Due to high demand for residential property from foreign investors, the demand currently outweighs the supply for property, therefore pushing property prices up in London. This has created a situation where local residents are being bought out of the market. It’s clearly documented that foreign investment has directly contributed to the affordable housing crisis, as it becomes increasing difficult for the working class London resident to buy. The limited supply of housing, coupled with large influx of foreign investment is having detrimental on local residents as London is becoming too expensive for many people (Poon, 2017). This relates to my research objectives set, by discussing how the negative impacts actually affect London’s property market.
4.2 As stated in a report, lower income individuals are being forced out of their residence due to the rising cost of housing. This is another example of price displacement pressures (SPERI 2016).
5.1 The injection of foreign capitol has given forward-finance to new build properties. A large number of new-builds would not have been developed, with the inclusion of affordable housing, without the investments made by foreign nationals (Savills, 2013).
5.2 Foreign investment in the London property market helps to support economic growth. Through the creation of hundreds of thousand of jobs, which contributes to around three per cent of United Kingdoms gross domestic product, overseas capitol has a defined effect on our economy (Challis, A. 2019). The Berkeley group estimates that 4.5 jobs are created for every new home built. Currently, the UK is building property at half of the demand rate. This means there’s potential for more jobs to be available, and for the economy to be stimulated further (Challis, A. 2019). It can be argued that reducing the levels of foreign investment could have a number of negative impacts on jobs and the economy.
6.The affordable housing crisis
6.1There is currently a domestic housing crisis throughout the UK; this problem is particularly acute in London. It’s believed that foreign investment has contributed to this problem.
6.2The report from the Sheffield University, SPERI, presents Land registry data from 2014. It states that annual property prices increased thought the UK by 5.3 percent in 2014, with and average property prices of £170,000. Prices increased in London by around 13.8 percent, with average property prices of £414,356.
6.3 The average wage in London is £35,703. (Payscale 2019). An income of £100,000 would be required to buy a 3-bedroom house (SPERI 2016).
6.4 The report then goes on display census data on property vacancy. The current vacancy rate in London’s super-prime property is 5.4 per cent compared to a vacancy rate of 2.9 per cent across the rest of London property.
7. How changes to stamp duty Laws have affected foreign investment
7.1The way the government is trying to solve this problem
7.2 New stamp duty laws have been implemented to try to restore a level playing field between foreign investment and UK residents (Baycat, H. 2018).
7.3 Properties are desired, and often purchased, by foreign investors. They’re often able to outbid a London native, therefore pushing them out of the housing market by driving house price inflation (Baycat, H. 2018). The London market is currently experiencing a dip in housing prices, however the average cost of a semi-detached property is still £580,000, which is way out of reach for most London residents. Stamp duty was increase by 1% with a potential increase of 3% in the future. This change will provide millions of pound more of tax revenue, but at what loss?
7.4The UK government is following the footsteps of countries such as Australia and Canada, who have already imposed levies on foreign property investment. This article relates to my study objectives, by shedding light on how government is trying to control foreign investment in the London housing markets. New stamp duty laws were imposed to make more it expensive for foreign investors to buy London property, in an attempt to restore the market back in favor of local homebuyers. The response made was designed to try address the currently affordable housing crisis. The relevance of the source can be put into questions, as it was a web article and not academic literature.
Following discussion of established studies, I now aim to illustrate how I will be approaching further investigation into the impacts of foreign investment on the London residential market.
1.2.1Aim of Investigation
• Establish the impact of foreign investment on the London residential market.
• Establishing a relationship between property market demographics and foreign investment
• To evaluate the change foreign investment has made to type of property produced
• Examine the effects foreign investment has had on the accessibility to affordable housing
• Identify if there is a relationship between property price inflation and poverty
• Evaluate the abundance of vacant properties across London
1.2.3 Investigative approach
I will gather a variety of both qualitative and quantitative data.
• By use of a set list a questions in interviews, I will collect primary qualitative data from individuals working within the London property industry that will fall in line with the aims of this investigation. This will allow knowledge and perspective from inside the industry and give reliable data to support my determination of how foreign investment impacts the London residential market.
• To ensure the presence of quantitative data, I will include numerical values that facilitate easy analysis around my said objectives. I aim to give raw numerical data to support my investigation into areas such as foreign investment rates and their impact on the number of vacant properties within the London boroughs. I will collect this data through contact with sources including JLL, Co-Star and the Land registry. Having previously completed work experience at JLL, I approached them with the intent of interviewing their residential director for Southeast and East London. They have since confirmed that this interview can take place, and are happy to provide me with access to their research teams data wherever relevant.
1.2.4 Investigative method
• A standardized list of questions will be used in an interview capacity. The questions, and a list of desired data, will be released to participants prior to the interview. The participants being questioned will be individuals working within the London property industry. At the start of each interview, I will first work to establish the participant’s involvement in the industry and how experienced they are within it i.e. how many years they have worked within London’s property market. After determining the participant’s engagement in the sector, historically and at present, I will then begin to question them in line with my objectives. This will include gaining perspective on their view towards the impacts of foreign investment, and obtaining information as to how the demographics of the residential property market have changed in-line with foreign investment.
• All interview participants will be obliged to sign a letter of consent after being made aware of what may be asked of them during the interview and data collation (via a participant information document). Participants will be made aware of their rights to privacy, and a document outlining the intended use of collected data will be required to be signed by both parties.
• By using a set list of standardized questions in the interviews, I will be able to easily draw common conclusions from answers to support my analysis of foreign investments impact on the London residential market. Furthermore, the use of set questions will allow me to assess validity in response; expected variance is low. I’d predict all participants to have a similar viewpoint given the fact they all work in the same industry, and are thus all affected by the same changing demographics.
• Only interviewing employees in the industry provides experimental drawbacks. The design only allows for insight from one area of the London property sector. This could lead to a potentially bias conclusion as to the impacts of foreign investment. In further studies, random sampling across the population of consumers in the London property market could be used to balance the data collated from this study. Statistical comparison could be carried out to determine any significant difference between the two study groups. This would increase validity in investigative results by giving increased power to the investigative design.
• By comparing quantitative data sources, I aim to establish correlations between multiple different variables over time. This will be done by graphically plotting variables against one another.
1.2.5 Bias and validity
• As previously mentioned, using only one group as subjects could give rise to bias. The variability in the group may still be low, however due to their common position in the property industry participants may share a common standing.
• Quantitative data could also be subject to bias. A lot of the data that is collated worldwide is done so with motive to act on it. To this effect, any data I am provided with may have been collected on the basis of exploiting it. For example, data collected for land prices may be subject to bias, as both parties in a land sale would want the best price they can get.
• Principles of social psychology apply in interview situations. An interviewer has the ability to sway the participant towards different answers by asking, phrasing and formulating questions in a specific way. To overcome this, I will minimize the chance of bias by providing a printed question sheet at the start of the interview.
1.2.6 Ethical considerations
• Participants must be fully informed before the study is undertaken and consent given.
• Participants must give full written consent before any interviewing or data collection occurs.
• A right to confidentiality must be preserved wherever necessary.
Appendix 1 – “The Global Elite” – Top 15 Cities by Index (A. T. Kearney, 2017).
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Joanna Poon (2017) Foreign direct investment in the UK real estate market, Pacific Rim Property Research Journal, 23:3, 249-266, DOI: 10.1080/14445921.2017.1372038
The Mori Memorial Foundation. (2019). Global Power City Index 2018. [online] Available at: http://mori-m-foundation.or.jp/english/ius2/gpci2/index.shtml [Accessed 23 Oct. 2019].
Savilles (2013). Spotlight The World in London Pdf.euro.savills.co.uk. Available at: https://pdf.euro.savills.co.uk/residential—other/spot-worldlondon-lr.pdf [Accessed 24 Oct. 2019].
Wallace, A. (2017) Overseas Investors in London new Build Housing Market London.gov.uk. Available at: https://www.london.gov.uk/moderngovmb/documents/s58641/08b2c%20University%20of%20York%20data%20report.pdf [Accessed 24 Oct. 2019].
Baycat, H. (2018). Higher Stamp Duty For Non-UK Residents – Aspen Woolf. [online] UK & International Property Investment Services – Aspen Woolf. Available at: https://aspenwoolf.co.uk/stamp-duty-foreign-investors-uk-purchases/ [Accessed 24 Oct. 2019].
SPERI (2016). International Capital Flows into London Property. [online] Speri.dept.shef.ac.uk. Available at: http://speri.dept.shef.ac.uk/wp-content/uploads/2018/11/Global-Brief-2-International-Capital-Flows-into-London-Property.pdf [Accessed 24 Oct. 2019].
Challis, A. (2019). JLL | Residential Research | International Investment In London Residential Understanding The Benefits. [online] Residential.jll.co.uk. Available at: http://residential.jll.co.uk/insights/research/international-investment-in-london-residential-understanding-the-benefits [Accessed 24 Oct. 2019].
Payscale (2019). London, England: London Salary, Average Salaries | PayScale United Kingdom. [online] Payscale.com. Available at: https://www.payscale.com/research/UK/Location=London-England%3A-London/Salary [Accessed 24 Oct. 2019].
Kath Scanlon, K. (2017). The role of overseas investors in the London new-build residential market. [online] London.gov.uk. Available at: https://www.london.gov.uk/moderngovmb/documents/s58640/08b2b%20LSE%20Overseas%20Investment%20report.pdf [Accessed 24 Oct. 2019].
Ed Hammond, E. (2014). Foreigners buy nearly 75% of new homes in inner London | Financial Times. [online] Ft.com. Available at: https://www.ft.com/content/605cdea2-fb69-11e2-a641-00144feabdc0 [Accessed 24 Oct. 2019].