Anti-Corruption Rule Could Break London's Property Market ... or Not

 | Apr 06, 2017 | 10:00 AM EDT
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Without a lot of fanfare, the U.K. government opened consultations on a crucial piece of legislation that, if passed, could alter the fabric of the entire economy and cool down the red-hot London property market. However, if you're rooting for lower housing prices, don't get your hopes up -- Brexit may mean the measure is never enacted.

As part of fresh anti-corruption and anti-money laundering operations, the government wants to introduce a public register showing the beneficial owners of property controlled by overseas companies. It fired the starting gun in the bill's race toward implementation by launching a public consultation on Wednesday.

"While the government welcomes legitimate foreign investment in the U.K., overseas investors in the U.K. property market have also included criminals laundering the proceeds of crime," it said in a statement.

Investigations into international corruption since 2004 have identified more than £180 million ($225 million) of property in the U.K. as the suspected proceeds of corruption; 75% of those investigated used overseas companies to hide the real owners, according to the government.

However, other bodies put forth a much higher estimate for suspect money in U.K. property. Anti-corruption watchdog Transparency International said in a recent report that more than £4.2 billion ($5.2 billion) of property in the U.K. was bought with suspicious wealth.

As home prices rocketed out of the reach of ordinary employees living in London, forests of cranes have appeared over the past five years in various parts of the U.K. capital. Many of the developments are sold off-plan to buyers in foreign countries. Sometimes they are not even marketed to buyers in the U.K.

Transparency International analysed data from the Land Registry -- the U.K. body that gathers information about who owns what property -- for 14 luxury developments with more than 2,000 future homes. It found that almost 80% had been sold to investors from abroad; 40% of these properties were sold to individuals from places at high risk of corruption, or to companies based in secret tax havens.

Legislation forcing overseas owners to disclose their identities couldn't come too soon. At the same time, however, it probably will be delayed as much as possible. Just like many Americans feel richer and spend more when their stock market accounts are in the good, in the U.K. many consumers go out and spend when their homes increase in value.

Discouraging "investment" in housing from foreign buyers, even from dubious ones, is a step the U.K. government can ill afford at the moment. Last June's Brexit vote has slowed transactions in the once red-hot London luxury market to the point where price discounts of 20% are now not uncommon.

U.K. consumers, remarkably resilient until not long ago, are beginning to pull in their horns. A recent survey by financial services provider Scottish Friendly showed that 70% of British households are worried about rising inflation and the impact it will have on their disposable incomes over the next year.

Almost half of respondents have, or plan to, cut back on their spending to cope, with 53% needing the extra money to deal with the increased cost of day-to-day living. Almost half of those surveyed (46%) said they were worried about how leaving the European Union will affect their family financially, with a quarter worried that leaving the EU might affect their jobs.

Traditionally, many U.K. homeowners have used their homes as piggy banks, either by taking out second mortgages or, in the case of those who are retired, by using a form of borrowing known as equity release, where borrowers pay back the principal and the interest only when the house is sold or they die.

Over the past few years, low interest rates have attracted scores of middle-class individuals into the fast-growing "buy-to-let" sector, with many taking advantage of interest-only loans to grow their portfolios to six, seven or even a dozen properties. Because they only need to pay back the interest on the loan, paying the principal when the mortgage matures means they are very dependent on house prices continuing to go up.

Another thing to consider is that the Brexit vote already has had a negative effect on migration from the EU. Partly because the sharp drop in the pound versus the euro cut salaries by at least 15% for foreign workers and partly because they simply feel they would not be welcome in the U.K., workers from the EU no longer see Britain as a desirable place to live.

A slowdown in migration would mean fewer tenants for London properties at a time when newly built apartment blocks are nearing completion in many London boroughs. To compound the problem, banks and asset managers are beginning to move some jobs abroad to make sure they still will be able to sell their products in the EU after Brexit, increasing the supply of residential property.

With 54% of Londoners surveyed by Transparency International believing that wealthy foreign investors are one of the leading factors behind rising house prices, the government certainly would score political points if it enacted legislation stopping the corrupt ones from buying. However, it probably will take its time to do it. Britain really cannot afford a property crash right now.

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