Risk Factors Contribute to Decline in Foreign Ownership of London Property

The real estate market in London is preparing for a major turning point in 2023, after a period of instability that has hindered the influx of foreign capital that used to come to the city.

Data compiled by MSCI Inc. revealed that cross-border investment into properties in London amounted to £12.4 billion ($15 billion) in 2022. This figure is significantly lower than the £30.5 billion of foreign dealmaking in 2015, which was prior to the impacts of Brexit and the Covid-19 pandemic.

London has been a popular destination for foreign investors for many years, and it was the city that received the most capital inflows in the first half of the year. However, the recent political chaos caused by the mini-budget in September has caused some uncertainty in property valuations as interest rates rise. According to MSCI data, foreign dealmakers accounted for 57% of London real estate investment in 2022, which is lower than the 65% in 2015.

Sue Munden, a senior analyst at Bloomberg Intelligence, noted that market liquidity is currently being heavily impacted by a large gap between buyer and seller pricing due to the uncertainty of how the increase in interest rates will affect property values. She added that transaction volumes may remain low until inflation is managed and interest rates become more stable.

Investment in London real estate from outside the country's borders is increasing.

In 2016, the Brexit vote in Britain caused a portion of investment to be diverted to Paris, but the focus returned to London in 2021. Unfortunately, the mini-boom was short-lived due to Russia's invasion of Ukraine in 2022, as Munden noted. Nevertheless, London's allure to international investors and a weaker pound should keep foreign investment afloat in 2023, Munden added.

Munden suggested that the proportion of foreign buyers may remain above 50%, particularly due to the weak pound. He also noted that London's reputation as a global city will likely continue to make it a desirable investment destination for those abroad.

The proportion of international investments relative to the total amount of investments is known as overseas cross-border flows.

China's influence in the London real estate market is diminishing more than most countries, as stringent capital regulations and a decline in relations with the United Kingdom have hindered the influx of funds from the Asian country.

In 2022, Chinese investment in London properties accounted for only 1.5% of all cross-border investment, or approximately £185 million, according to MSCI data. This is a significant decrease from 2013, when Chinese investors were investing heavily in the capital city due to the efforts of then-Prime Minister David Cameron and then-Mayor Boris Johnson, and the nation held an 11% share of the total investment, which was around £2.2 billion.

Investment from China in London's real estate market has decreased in recent years.

Investment may be declining due to a shift in attitude towards China. This month, the Chinese government's proposal to construct a new embassy near the Tower of London was denied. Tower Hamlets Council unanimously denied the request, citing worries about the safety of the citizens, such as the potential for the area to become a target for terrorists and a hub for surveillance.

This year, multiple nations put more money into London real estate than China did.

In a demonstration of the deteriorating relationship between the UK and China, Prime Minister Rishi Sunak declared in his first major foreign policy address of 2021 that the "golden-era" of UK-China relations had come to an end.

Rishi Sunak has taken a different approach than his predecessor, David Cameron, when it comes to the relationship between the UK and China. Whereas Cameron sought to strengthen ties between the two countries, including a visit from Chinese President Xi Jinping in 2015, Sunak has not followed suit. The two leaders even shared a pint of beer during the visit.

Domestic Chinese policies have had the most significant effect. It is not a surprise that dealmaking decreased significantly after Xi Jinping implemented stricter capital regulations in 2016.

Rasheed Hassan, the head of global cross-border investment at Savills Plc, noted that the decrease in investment is mainly due to capital controls in China. He stated that this is the primary cause of the shift in investment volumes.

In 2022, US investors took advantage of a strong dollar and invested more than £3.1 billion in London's cross-border real estate market. This accounted for over a quarter of the total £12.4 billion of cross-border real estate flows to London.

Data compiled by Knight Frank revealed that American buyers accounted for 14.5% of all international prime London residential property purchases in the first half of 2022, a significant increase from the 6.2% in the prior six months and the highest percentage since 2018.

Charles McDowell, a real estate broker in London, reported that five out of the six properties he sold between July and November were purchased by American buyers. The prices of these properties ranged from £25 million to nearly £50 million.

McDowell noted that the current market is largely driven by dollar-based buyers, as well as those from the Middle East and Far East, particularly in Hong Kong. He anticipates this trend to persist into the next year.