Will UK’s SDLT hit as hard as Singapore’s ABSD?

January 11, 2015 12:26 AM SGT

SINGAPORE: Investors of higher-priced properties in prime Central London may have to rework their sums, while those looking to buy property in Greater London may actually benefit from tax savings.

Londoners recently got a taste of how Singaporeans felt when the government introduced hikes in stamp duties over the last three years.

On Dec 3, UK’s Chancellor of the Exchequer George Osborne’s Autumn Statement took London property players by surprise.

He announced an overhaul in the Stamp Duty Land Tax (SDLT) structure, that would see a heftier tax levied on high-end properties, with effect from midnight that day.

Mark Pollack, co-founder and director of independent London agency Aston Chase describes the midnight timeline as “a distinctly unseasonal gesture by the Chancellor”.

And, like in Singapore, the immediate reaction of buyers was to rush to exchange contracts of high-value properties before the deadline.

Under the new SDLT structure, properties priced up to £125,000 ($257,227) will not be subject to tax.

For properties priced from £125,001 to £250,000, a 2% tax applies, and for those from £250,001 to £925,000, it’s 5%.

For properties that cost between £925,001 and £1.5 million, the tax is 10%; for those over £1.5 million, it’s 12%.

This is a significant change from the old system, under which a single rate of purchase tax applied (see table).

While properties purchased for £937,500 or less will not be affected, high-value properties will be subject to significantly higher total SDLT charges, say Katie Graves and Philip Munro of international law firm Withers Worldwide LLP in a report on Dec 4.

For example, a £5 million property will incur a £513,750 SDLT (previously, the charge would have been £350,000), and a £10 million property will have a £1.1 million SDLT (£700,000 previously).

A flat 15% tax will continue to apply to properties worth over £500,000 bought by offshore companies.

The average value of properties sold in 2014 has been between £1 million and £2 million.

Gavin Sung, Savills’ head of international residential property, estimates that properties in this price range will see an increase of £13,500 in stamp duty to an average of £83,500, with the additional liability for a property worth £1.5 million equal to £18,750, taking the total stamp duty to £93,750.

Meanwhile, the average duty paid on the sale of a property worth between £125,001 and £250,000 will fall by £650.

That for a property priced between £250,001 and £500,000 will fall by around £3,100, says Savills Research.

And a property worth £255,000, which would have previously been subject to a 3% rate on the entire value, will now incur stamp duty of just £2,750, a saving of £4,900.

London has been a draw for international property investors, owing to its reputation as a safe haven and global city for those who want security, quality education, a good business environment and a multicultural society, according to property consultants.

The new stamp duty brings it in line with other cities such as Hong Kong and Singapore, which introduced higher stamp duties to moderate runaway price growth.

Unlike Singapore’s Additional Buyer Stamp Duty (ABSD), which applies to the entire purchase price, UK’s new graduated SDLT tax system will boost its housing recovery outside London, says Monty Nawaz, CEO of Saffron International, a London agency with an office in Singapore.

He reckons the high end of the London housing market will be resilient, with buyers absorbing the hike in tax.

He sees London retaining its status as “the capital city of the world”, with demand outstripping supply in prime Central London.

Alex Newall, managing director of Hanover Private Office, an advisory firm for the affluent, is less sanguine.

He sees the 12% stamp duty on residential properties priced above £1.5 million as “a disaster for prime property sales”, although admittedly, “a great help” to the mass market, which makes up 98% of the homebuyers.

In the short-term, there are bound to be those who are more price- sensitive, who are thinking of buying a property below £937,500 so they will not incur a higher stamp duty, concedes Stephen Ho, director of international project marketing at CBRE.

For vendors of properties worth substantially more than £1 million, Knight Frank Research foresees “a period of harder negotiations ahead”, with values in many instances likely to be adjusted downwards slightly to take into account the new higher charge.

‘Sidelined’ Doris Tan, JLL’s head of international residential sales and a veteran in marketing overseas projects, particularly those in London, foresees more investors from Singapore staying on the sidelines.

Some had already adopted a wait-and-see attitude following the announcement of the capital gains tax last November, and are opting to wait until after the general election in the UK next May.

Tan therefore reckons “strong buying” will return sometime in June 2015.

She also foresees fewer projects from prime Central London being launched in Singapore next year.

On the other hand, she expects more launches of UK projects from Greater London, in Zones 2 and 3, as well as large scale regeneration schemes in Zones 3 and 4.

Capital gains tax for non-resident UK homebuyers will also kick in from April 2015.

Most people expect it to be 28% of gains made on property sold after that date.

For example, if an apartment purchased 10 years ago is valued at £800,000 in April 2015, and is sold a year later for £1 million, the capital gains tax will be based on the £200,000 gain.

The earlier gains made will not be subject to CGT, explains Savills’ Sung.

“One of the [main] reasons CGT came into play was that the locals were complaining because UK residents have had to pay a GCT on their investment properties all along, while foreigners were exempted from paying it in the past,” says Sung.

“It’s a pretty fair tax.” In addition to the new SDLT charges, companies that own high- value property in the UK will also be subject to an Annual Tax on Enveloped Dwellings (ATED), introduced in April 2013.

From April 1, 2015 properties worth £1 million to £2 million owned by a company or other “enveloped” structures will be subject to the ATED regime of £7,000.

Resi dential property worth £2 million to £5 million will see ATED increase by over 50% to £23,350 (£15,400 previously).

The ATED is also higher for higher- value properties.

Subdued launches Beyond SDLT, an overriding concern among UK and overseas investors is the outcome of the general elections, says Sung.

As such, he foresees the first quarter of 2015 to be relatively subdued, with fewer weekend property exhibitions by UK developers in Singapore and Hong Kong.

“After the elections, you will find more projects launched to recapture some of the lost sales before the start of the summer months, when there’s traditionally a slowdown in the number of launches.” In 2013, there were 250 overseas property exhibitions in Singapore, of which UK projects made up at least 60, Sung estimates.

This year to date, there were 325 overseas property exhibitions, with close to 100 featuring UK properties.

For Savills, the number of projects from London that it exhibited this year more than doubled to 25, from 12 in 2013.

The significant increase in the number of overseas property exhibitions in Singapore is also the result of local agencies such as DWG Property Group, ECG Group, ERA and Huttons Asia, which traditionally focus on the Singapore property market, jumping on the overseas property bandwagon, owing to the slowdown in the local housing scene over the last two years.

This has led to overseas property purchases rising from $1.9 billion in 2012 to $3 billion in 2013, before moderating to $1.1 billion in 1H2014, according to a recent survey by the Monetary Authority of Singapore (MAS), based on data collected on overseas properties transacted by real estate agencies in Singapore.

Properties in the UK, Malaysia and Australia accounted for 91% of these transactions by value, and 76% by number in 1H2014.

However, the UK and London housing market has started to lose momentum.

The Office for National Statistics shows that London house prices were up 18.8% for the first nine months of 2014, while UK house prices were up 12.1% over the same period.

UK house price growth eased to an 8.8% annual rate in October, and to 8.2% in November, with further cooling expected in 2015, according to Halifax, one of UK’s largest mortgage brokers.

Receding buyer interest has also been felt on the ground by London real estate agencies.

Anecdotally, the level of enquiries has dropped by about 20%, and the number of sales that have fallen through has increased, says Saffron’s Nawaz.

While the overall number of UK property exhibitions in Singapore may have increased this year, sales at these shows have declined.

Even more worrying is the slowdown in traffic of people coming to these exhibitions, observes Zahid Alauddin, partner of Kingfields, a legal firm based in London specialising in conveyancing of UK properties.

Prior to opening his office in Singapore in 2010, he used to travel to Singapore almost every weekend for a UK property launch.

In 2011 and 2012, he was “booked up” every weekend.

This year saw him travelling to Hong Kong more frequently for UK property launches, than to Singapore.

TDSR effect and the ‘flip mentality’ Alauddin says one of the reasons for falling footfalls and sales at weekend property exhibitions in Singapore is the total debt servicing ratio (TDSR) loan framework, which came into effect at end-June last year.

“Every property investor will have to take a mortgage to complete their acquisition,” says Alauddin.

“And if they already have a current borrowing, it will affect them.” While some may try to get around the TDSR by borrowing from UK banks, it’s more difficult with the strict criteria, a loan-to-value ratio of just 50% and a higher interest rate than in Singapore, he notes.

Alauddin sees a proportion of buyers who intend to flip the property before completion, and have therefore ensured that the contracts with developers are “assignable”.

One of the biggest risks in buying a property off-plan is that buyers commit themselves to a legally binding contract without securing a mortgage, he says.

Any change in personal circumstances over the next two to three years — for instance, the inability to get a mortgage due to the TDSR — could mean losing one’s entire deposit.

With contracts with developers being “assignable”, a buyer who cannot complete the purchase will have the option to put the property on the market for sale and get another buyer to step in and reimburse his deposit, he explains.

What Singaporean investors need to be aware of when flipping a property is that UK banks are generally reluctant to finance someone who buys a property in a sub-sale (purchasing a property that has yet to be completed, in the secondary market).

This is because during the property boom in 2007, some contracts were flipped five to six times and the last person left holding the property often found that it was rarely worth what he had paid for it, says Alauddin.

Therefore, UK banks frown on such purchases, he adds.

However, as a project nears co mpletion, the most likely buyer in the sub-sale market is typically a UK resident, buying for his own use.

They are the biggest pool of ready buyers but will have problems getting a mortgage in the UK.

Inevitably, the sub-sale buyer will have to be another foreigner.

However, Alauddin says the number of flippers is small.

He estimates that of about 100 to 120 apartments sold by UK developers at weekend exhibitions in Singapore that he has handled this year, only five to 10 were flipped.

Most of the buyers in Singapore will go ahead and complete the purchase, he says.

Nevertheless, this year saw Alauddin busy with sales as Singaporean investors who bought properties a few years ago are cashing out ahead of the implementation of the capital gains tax next April.

Having spent close to a decade offering legal advice to UK property buyers at weekend launches, Alauddin likens it to “a market”.

He is on site to provide legal advice and explain the risks to potential buyers.

“Sometimes the buyer is in a rush and I’m surprised,” he says.

“I’m there to explain these things to them, but they are not listening.

They say, ‘Where do I sign? I’ve got to go and have my lunch.’”

Singapore developers’ London ventures It is not just individual Singaporean investors who have switched to the London property market as a result of the property cooling measures introduced in Singapore.

Property developers have also made that leap.

In September last year, City Developments Ltd made its maiden purchase of a freehold property on Pavilion Road in Knightsbridge for £80 million.

To date, it has purchased six freehold properties in London for a total of £157 million, in locations such as Belgravia, Chelsea and Croydon.

Meanwhile, UOL Group purchased Heron Plaza, a 34,445 sq ft freehold site near the existing Liverpool Street Station and the future Crossrail Station for £97 million in August.

The site has received planning consent to be developed into a 43-storey tower with 109 residential units for sale, a 190-room hotel and a retail podium.

Oxley Holdings purchased the 16ha Royal Wharf site at the Royal Docks on the banks of the River Thames for £200 million in November 2013.

It was the biggest price tag for a single-site purchase by a Singapore developer.

The first phase of 811 units, launched in March, was believed to be fully sold within two months.

The second phase of 800 units was launched last month.

Indicative prices by property agents see 388 sq ft studio apartments starting from £250,000 and 622 sq ft one-bedroom apartments from £370,000, while two-bedroom apartments starting from 844 sq ft are priced from £480,000.

According to Ching Chiat Kwong, chairman and CEO of Oxley Holdings, almost all the available units at Royal Wharf fall within the price band that benefits from a lower stamp duty.

In his view, the revised SDLT is a “recalibration”, such that lower-value properties will enjoy lower stamp duty, and higher-value properties will incur a higher stamp duty.

Likewise, the developer does not see the upcoming capital gains tax as a deterrent to homebuyers.

“Phase 2 of Royal Wharf has been well received because [it] consists of riverfront units,” says Ching.

There’s also a park within the development, a luxury that projects of a smaller scale lack.

Phase 2 is said to be seeing bookings coming in “at a steady rate” from both local UK and overseas buyers including from China and the Middle East.

According to Saffron’s Nawaz, Royal Wharf’s price point of £600 to £700 psf is an attractive entry point.

The project will also benefit from its proximity to the £1 billion Asian Business Port development in London’s Royal Albert Dock by Chinese developer Advanced Business Park.

Developers who have diversified out of Singapore owing to government property cooling measures such as the hike in ABSD will now have to navigate a UK housing market hit by increased SDLT for high-end property.

This article appeared in the City & Country of Issue 656 (Dec 25) of The Edge Singapore.

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