Are The Russians In Trouble? (UK Property)

This article "It's Not Just Sanctions" (24th March 2014) from the Economist Magazine is worth a read. 

High-end London estate agents are starting to worry that rich Russians who have been investing heavily in London in the past decade will look to sell their properties.  Prospective buyers will also be put off.  These two shifts may hit the prime residential market very hard.

Trevor Abrahmsohn, a London property-market veteran, says he received a call earlier this week from a big Russian client who was looking to sell two properties immediately. It was, he says, “all rather peculiar and abrupt…I don’t know if it was to do with the Ukraine crisis but one has to wonder. We’re waiting to see if it turns into a trend.”

Mr Abrahmsohn runs Glentree International, which does the lion’s share of selling to wealthy foreigners in Hampstead, Finchley and other parts of North London that are traditional hunting grounds for Russians.

The assets of these Russians may be frozen as America had released lists of sanctioned individuals, and these lists target businessmen known to have links with the Russian politicians.

Russian buyers were, in fact, already thinning out before the Ukraine crisis. Mr Abrahmsohn saw 70-80% fewer of them last year than in 2011-12. Activity has remained subdued this year.

Russians Are Becoming Cannier Buyers
There are two main reasons for the decline. Russians are becoming cannier buyers. “The days of gleefully plonking saddlebags of cash on the desk are over,” says Mr Abrahmsohn. “They even scrutinise restaurant bills now.” Some of them suspect that a market correction is overdue.

UK Has Become Less Tax Efficient 
Stamp duty has gone up a lot for many buyers, particularly corporate buyers (and many Russians buy through offshore companies, for reasons of tax and confidentiality). Since 2012, foreign corporate buyers have also had to pay capital gains tax.

Possible "Mansion Tax"
Add to this the spectre of a “mansion tax” and a new tax on limited-liability partnerships. A large but unknown number of the 53,000 LLPs registered in Britain are held by East Europeans. Their motives range from the perfectly legitimate, to tax evasion, to the laundering of assets looted from their home countries.

Top Rate of Stamp Duty Kicks In Earlier
In his budget this week, George Osborne extended the pain from the super-rich to the merely rich, lowering from £2m ($3.3m) to £500,000 the threshold at which the top, 15% rate of stamp duty kicks in. The earlier changes in 2012 led to the frequency of sales over £5m dropping by more than 30%, says Mr Abrahmsohn.

Some of the slack in the boroughs in which he operates is being taken up by Kazakhs, Azerbaijanis and Ukrainians who are pulling money out of their home market because they fear further annexation. But he still sees the occasional spectacular purchase by Russians.

Glentree recently brokered a deal for undisclosed Russian interests to buy a £70m cluster of properties on The Bishops Avenue, which is near Hampstead Heath and considered to be one of the world’s swankiest residential addresses. The buyers plan to sell some of the ten houses and hold and refurbish others. The sellers are Middle Eastern. They are said to have bought in the early 1990s for the Saudi royal family, which was looking for a bolt hole to flee to, should Saddam Hussein invade their kingdom.

Impact On Investors 
We do not have Zone 1 Prime Central London properties.  In earlier blog posts, we showed that rental yields in PCL are very low.  Anyway, the entire dynamics of PCL is very different from the rest of London. There are many other factors involved, including all the global flows of money.  It is interesting to watch and wonder.

Happy Investing!