Mansion Tax Already Hits London Property Prices
Tue 30 Sep 2014
Anup Pankhania had to cut the offer price for apartments he's developing in London's Bloomsbury district by as much as 500,000 (600,000) because of a luxury-home tax that doesn't exist yet. Anup Pankhania had to cut the offer price for apartments he's developing in London's Bloomsbury district by as much as 500,000 (600,000) because of a luxury-home tax that doesn't exist yet. The discounts are just one example of price increases for the best London homes stalling after more than five years of gains as investors wait to see if the Labour Party will take power next year and impose a promised annual "mansion tax" on properties valued at 2 million pounds or more. Owners of second homes who are based abroad would pay more than those who possess a single U.K. property and live in it.
"There's too much uncertainty and that rings in the ears of all the buyers," said Pankhania, managing director of developer Jaspar Group of Companies. "Foreign investors get worried and that's a direct effect of all these politics to do with this mansion tax."
Prices of the city's most expensive homes gained at the slowest pace in more than three years in the third quarter, according to London-based broker Marsh & Parsons. A new tax will add to concerns among overseas buyers who are already contending with a rising British pound as well as a series of levies imposed by Prime Minister David Cameron's coalition government.
The eight apartments in Jaspar's Bloomsbury project were valued at an average of about 2m before the price cuts, Pankhania said. The central London boroughs of Westminster and Kensington and Chelsea contain 46pc of homes valued at 2mor more in all of England and Wales, broker Knight Frank estimates.
"Every investor has a choice and they don't need to choose London," said Nick Candy, the property developer who helped conceive the One Hyde Park apartment project. The luxury-home market "may have a slowdown toward the back end of this year, and maybe even a pause next year, before we know who's going to be in power."
One Hyde Park was completed in 2011 in Knightsbridge and it has secured some of the highest prices ever paid for apartments in the capital including one that was valued at as much as 175m when it sold in April.
High-value London homes, which rose even when average prices were still dropping across the U.K., now trail the rest of the capital's residential market. The average price in the 13 areas that Knight Frank defines as prime central London rose 7.7pc in the 12 months through August. Houses and apartments in the UK capital climbed by 19.6pc on average in the same period, according to the Office for National Statistics.
A mansion tax "threatens to douse the growth at the top tiers of the market," Marsh & Parsons Chief Executive Officer Peter Rollings said. "In London especially, thousands of ordinary families would get swept up in its wake."
Labour, which has backed a mansion tax since last year, stepped up its support this month in an article by Ed Balls, its finance spokesman, in the Evening Standard newspaper.
"Ordinary Londoners should be protected and wealthy foreign investors must finally make a proper tax contribution in this country," Balls wrote on October 20. Those who own homes worth "10m or more "should make a much bigger contribution."
The party plans to raise 1.2bn from the annual tax. The amount would be about 3,000 a year for London- based homeowners with properties valued from 2m to 3m, according to Balls. He wasn't specific about how much more second-home owners would pay. Labour leads the Conservatives among voters by 32pc to 30pc, an ICM poll published by the Sunday Telegraph found.
Labour's plan will raise 120m a year from homes valued at 2m to 3m, according to an estimate by Lucian Cook, head of residential research at broker Savills. That will leave 57,000 homeowners who hold property valued at more than that having to pay the rest of the 1.2bn target, he said.
"The tax charge for the remaining, more expensive properties will have to be of a different order of scale, which suggests that it will have some impact on the market," Cook said.
The plan to tax all owners of luxury homes contrasts with a proposal in New York for a levy on non-resident holders of apartments valued at more than $5m. The owners would pay a 0.5pc surcharge at that level, which would gradually raise to 4pc for units valued at more than $25m.
If the UK mansion tax is introduced, apartments now valued at as much as 2.3m will probably sell for less than
2m, said Michael Lister, a lecturer at University of Westminster and a former head of UK property lending at Bank of Ireland.
"One would expect developers to find sales at, say, 2.2m, very difficult," Lister said. "This could lead to reductions in sale prices and difficulty in selling."
Values in London's best districts have risen more than 70pc since the last trough in 2009 as overseas investors sought a safe haven for their cash and the pound slumped in value. Prices in many parts of the city have now been driven beyond the reach of most Londoners, putting pressure on politicians to rein in values and making developers more dependent on continued foreign investment.
By April, Cameron's Conservative-led government will have introduced or extended taxes on luxury homes at least seven times, according to broker Savills.
The measures include a 7pc stamp-duty tax on home purchases of more than 2m. Chancellor of the Exchequer George Osborne also introduced a 15pc tax on empty homes owned by companies and he's introducing a capital gains tax for overseas owners of UK homes.
Sales of upscale new homes in central London are declining. The number sold in core locations fell 33pc in the first half of 2014 from a year earlier, Jones Lang LaSalle Inc. said last month. The broker defines core as Kensington to Canary Wharf on the north side of the Thames, including Bloomsbury, and from Nine Elms to Waterloo in the south.
"Serious developers are now looking at peripheral areas of London, which we see as growing more," Pankhania said in an interview near Berkeley Homes' 375 Kensington High Street project, where a two-bedroom apartment is priced at 2.1m. "Central London is sort of a transient place at the moment."