The super-rich are starting to feel that the welcome mat is being pulled from under their feet in key cities around the world. In Sydney, China’s 15th richest man, Xu Jiayin, is being forced to sell a Mediterranean-style mansion in the affluent suburb of Point Piper for which he had paid A$39 million ($41.7 million) last October. Xu, the chairman of Guangdong-based real estate developer Evergrande Group, has been given 90 days to dispose of the asset, or face prosecution.
Xu acquired the Villa del Mare through Golden Fast Foods Pty Ltd, a subsidiary of Evergrande Group. As a non-resident of Australia, he would have needed to obtain approval from the Australian government’s Foreign Investment Review Board (FIRB) for the purchase. Thus, the forced sale of the mansion.
In addition to this stiff penalty for foreign investors who contravene existing laws, Australia’s treasurer, Joe Hockey, also announced that a new fee would be imposed on foreigners buying residential property: A$5,000 for properties worth up to A$1 million, and an additional A$10,000 for every A$1 million increment on the purchase price of the property.
Meanwhile, the UK is said to be drafting legislation requiring foreign companies that buy property there to disclose their real owners through a registry. This is to minimise the risk of dirty money from corruption or money laundering, according to a report from non-profit Transparency International. A recent Financial Times report says that up to £122 billion ($254 billion) worth of property in England and Wales is held by companies in offshore tax havens such as the British Virgin Islands and Jersey.
Last month, Bloomberg reported that the UK National Crime Agency (NCA) is seeking to determine whether higher-than-expected revenue from a tax on luxury homes owned by corporate entities is linked to money laundering. The Annual Tax on Enveloped Dwellings was introduced last year for UK homes valued above £2 million that are owned by corporate entities and are not leased.
Elliot:: I think it’s important that administrations in all the key cities in the world work hard to find the right balance without overtaxing, as that will create stagnation
The NCA has asked Her Majesty’s Revenue and Customs why £100 million was raised in the first year, which was almost five times the forecast by the government. More than half of the revenue raised from the tax is said to have come from the London borough of Westminster, which includes the Belgravia and Mayfair districts, which are known for their expensive homes. A quarter of the total revenue was reportedly raised from properties valued at £20 million or more.
New York’s luxury apartments are also drawing foreign billionaires. A recent exposé by the New York Times states that the majority of the owners in the luxury-condominium tower of Time Warner Centre, which offers sweeping views of Central Park, Hudson River and the Manhattan skyline, are shell companies. A growing number of these companies are owned by wealthy foreigners who are “the subject of government inquiries”, according to the report. A prime example is Malaysian tycoon Jho Low, who is linked to the Malay sian-owned strategic fund 1Malaysia Development Bhd scandal. Low is said to have paid US$30.55 million ($41.83 million) for a 76th floor penthouse that was formerly owned by celebrity couple Jay Z and Beyoncé. The purchase is said to have been made via a shell company.
“There is now talk of a pied-à-terre tax in New York, a mansion tax in the UK, and restrictions on outbound capital in India,” says Nicholas Holt, Knight Frank’s head of research for Asia-Pacific. “Australia recently introduced a new tax on foreign investors, and in Singapore, there’s the additional buyer’s stamp duty (ABSD), [over which] there is a lot of debate currently.”
What is obvious is that more global cities are looking at erecting “some barriers to prevent the free flow of wealth”, observes Holt. These take the form of wealth tax, mansion tax, closer scrutiny on the ultimate owner of luxury properties and other protectionist policies. They are perceived as “threats to wealth”, and are some of the key concerns among the rich, Holt adds.
“I think there’s an obsession with the super-prime [segment] everywhere,” comments Alistair Elliot, Knight Frank’s senior partner and group chairman. “But I think [this] segment is such a small percentage of the overall housing market that the transactions are almost irrelevant to the welfare of the housing market in every city.”
‘Overtaxing to stagnation’
According to Knight Frank’s Wealth Report 2015, the top five cities with the greatest concentration of ultra-high-net-worth individuals (UHNWIs, or those with net worth of at least US$30 million) are London in top spot, followed by New York, Hong Kong, Singapore and Shanghai respectively. Sydney is ranked 14th (see table above).
“It’s been proven around the world, not least of all in Singapore, that if stamp duty or transaction taxes reach a certain level, they create a pause in the market,” says Elliott, 52, who was in Singapore last week. “I think it’s important that the administration in all the key cities in the world work hard to find the right balance without overtaxing as that will create stagnation, [which] will be worse.”
The Singapore government imposed ABSD on residential purchases in December 2011, with foreigners having to bear a higher tax of 10% of the purchase price. In January 2013, the ABSD for foreigners was increased to 15% of the purchase price. Even permanent residents and Singaporeans saw a hike in ABSD of up to 10% on their second and third or subsequent property purchases respectively.
Challenging property cooling measures
Singapore isn’t alone in implementing a series of property cooling measures. Earlier this month, the Hong Kong Monetary Authority capped borrowing limit for small flats priced below HK$7 million ($1.24 million) at 60% of loan-to-value ratio, which means buyers have to cough up a cash down payment of 40%. This is to curb over-speculation in micro apartments, which saw prices soar last year.
New loan restrictions — the seventh round of such measures — have also been introduced for buyers of second homes in Hong Kong. The maximum debt service ratio for monthly mortgage repayment has been reduced from 50% to 40% of monthly income. The previous round of restrictions was introduced in February 2013, when the government levied higher stamp duty on home purchases.
Time Warner Centre is one of the condo towers fronting Central Park in Manhattan, where most of the owners are said to be shell companies
As for China, the government had also imposed a series of property cooling measures, some of which had been rolled back. Mortgage rates were cut recently to stimulate home-buying. Housing sales in China shrank 7.8% to US$995 billion in 2014. Home prices are expected to be “volatile” this year, according to a Dow Jones report on March 5. Average new home prices in 100 cities across China sank 3.8% in February, following a 3.1% fall in January.
“In Asia, we’re concerned about the dynamics in Hong Kong, Singapore and mainland China because they are unnaturally quiet at the moment,” says Elliott. “In Singapore and Hong Kong, the property cooling measures have proven to be very challenging for the market. In China, you’ve had extraordinary growth for a number of years, and now it’s more cautious.”
‘Year of transition’
The UK government has also introduced some measures to level the playing field in the housing market. It introduced tiered rates of stamp duty in its Autumn Budget last November, following which those buying property below £937,500 will actually enjoy a tax saving, compared with the old stamp duty system. This will benefit 98% of home buyers in the UK, according to George Osborne, Chancellor of the Exchequer.
However, the new tiered stamp duty system has curtailed the rate of price growth for properties worth over £2 million in London. Hence, overall price growth in prime Central London was 5.1% in 2014 (the slowest pace of growth since 2009), and Knight Frank is projecting zero per cent growth this year, says Holt.
In addition to the higher stamp duty for luxury homes, capital gains tax will kick in from April, prompting the London housing market to “pause for breath” in the lead-up to the general elections in May. “All this will lead to 2015 being a year of transition,” adds Elliott.
In his view, London, which has a legacy of undersupply, has yet to achieve the right balance. “There’s still an undersupply of affordable housing for key workers [such as nurses, teachers, policemen and firefighters].
Luxury property in London, however, continues to be a magnet for the super-rich. Over the last few years, the London housing market had posted double-digit price growth. But now, it is also showing signs of cooling.
Had prices continued on an upward trajectory, the UK government might have faced pressure to “treat overseas investors very differently from local investors”, says Elliott. “And that would have been a shame — because if you start penalising the transient population, you begin to threaten the very cosmopolitan nature of the city”.
Despite 2014 being a year of weak economic growth and uncertainty, the annual pace of wealth creation quickened to 3.1%, compared with 2.8% in the previous 12 months, according to Knight Frank in The Wealth Report 2015, released on March 5.
Asia saw the highest growth rate (3.5%) in the super-rich population last year, says Nicholas Holt, Knight Frank’s head of research for Asia-Pacific. Among the cities in Asia, Mongolia saw the fastest pace of growth in its ultra-rich population last year (6.7%). In Singapore, the figure was 2%, while in Malaysia, it was 3%.
Asia overtook North America as the region with the second largest growth in the population of ultra-rich individuals, with some 1,419 people joining the ranks of those worth in excess of US$30 million ($41 million) in 2014, compared with fewer than 1,000 in the previous year. Europe held onto the top spot with the most new entrants into the ultra-wealthy bracket over 2014.
The ultra-rich in Asia now hold net assets worth US$5.9 trillion, which is higher than those in North America, with US$5.5 trillion. However, European ultra-high-net-worth individuals still control the most wealth, with US$6.4 trillion. The geographic concentration of wealth over the next decade remains in just five cities — Singapore, Hong Kong, New York, London and Dubai, says Knight Frank
The value of luxury residential property around the world rose by just over 2% on average in 2014, based on the performance of 100 of the world’s key cities and second- home markets covered by Knight Frank’s Prime International Residential Index (PIRI). This was lower than the 2.8% seen in 2013.
In 2014, the US dominated the top of the table, occupying four out of the top 10 positions, with New York (+18,8%) and Aspen (+16%) in first and second places respectively. The disparity with Europe’s cities is stark: While luxury residential property prices rose by almost 13% on average across US cities last year, in Europe, the average growth was only 2.5%.
Jakarta, which led the rankings in 2012 and 2013, slipped to 12th place, an indication of the luxury market slowdown evident across many Asian cities last year, says Nicholas Holt, Knight Frank’s head of research for Asia- Pacific.
Some previously strong markets such as Dubai (17% growth in 2013) saw prices slow markedly (0.3% in 2014). This is, in part, because of the mortgage cap by the Central Bank of the UAE, for property purchases above five million dirham.
Proof of the dampening effect of such macro prudential policy can be seen in the ongoing weak growth in Hong Kong and Singapore, where government policy has been deliberately aimed at limiting price rises through higher taxation and mortgage market intervention. It had the intended effect, with high-end residential segments being the hardest hit.
“This is evident with Singapore tumbling down the PIRI index with double-digit negative growth,” says Alice Tan, Knight Frank’s head of research for Singapore. In fact, Singapore is the only Asian country in the bottom 40 places of the PIRI Index, at 98th spot (see bottom table).
On the bright side, the price gap between the high- end and mid-tier residential segments has begun to narrow, especially for 4Q2014, notes Tan. This may be a good time for the ultra-rich to revisit the luxury residential homes segment in Singapore, Tan adds, “because we believe if the government relaxes the cooling measures for this segment of the market, the recovery could be significant”.
Among the super-rich, property is increasingly seen as a mainstream investment class, accounting for 32% of their investment portfolio, according to Knight Frank’s Wealth Report 2015. While 81% are interested in residential properties, commercial is becoming a popular investment asset, with 59% expressing interest in the office sector.
The most visible among wealth-exporting nations is undoubtedly China. It is estimated that 76,200 Chinese millionaires emigrated or acquired alternative citizenship over the 10 years to 2013, according to Knight Frank’s report. They are a significant force in Europe and dominate Asia-Pacific schemes.
Around 90% of applicants for Australia’s Significant Investor visa come from China. In the first nine months of 2014, about 44% of applicants for UK’s Tier-1 investment visa were from China, leading to a rise in the number of Chinese buyers of prime London property.
“The increasing impact of migrating Chinese high-net-worth individuals continues to influence prime residential markets around the world,” says Nicholas Holt, Knight Frank’s head of research for Asia-Pacific.
Despite the slowdown in the Chinese economy, wealthy Chinese emigrants are likely to continue to seek prime property around the world, providing an important segment of demand in the coming years, says Holt.
This article appeared in the City & Country of Issue 667 (Mar 09) of The Edge Singapore.