Will UK property remain a long-term investment choice for overseas investors?

28 April 2021 | Investment

In fact, the number of overseas landlords is at a five-year high, according to recent research by ludlowthompson, now topping 184,000.

However, all good things must come to an end, and with the stamp duty holiday concluding in September, will the recent surcharge change perspectives amongst overseas investors? We checked in with property development and investment firm SevenCapital for their thoughts.

What is the new surcharge?

Since April 2016, on top of standard stamp duty land tax (SDLT), investors have been required to pay a further flat 3% stamp duty on the full value of all additional properties worth more than £40,000.

Now, though, the UK government has also implemented a 2% surcharge for overseas investors, which is in addition to the current stamp duty rates and will be applicable for the majority of international buyers, including both overseas investors and international companies.

The government has been clear as to who will be exempt from the surcharge, predominantly those involved in Real Estate Investment Trusts and other collective investment vehicles.

SevenCapital argues the surcharge is largely being introduced in response to UK property’s upward trajectory for the past 20 years, the majority of which has been underpinned by international investment. This level of growth – bar momentary dips – has made it increasingly challenging for first-time buyers in the UK to get on the property ladder, hence the surcharge. 

What does this mean for overseas investors?

When the original additional surcharge was announced in 2016, many experts anticipated a surge in overseas buyers investing in UK buy-to-let property, followed by a sharp fall. While international investment remained strong in the years leading up to 2020, the additional uncertainty surrounding Brexit and the pandemic was almost guaranteed to discourage overseas investors, SevenCapital says.

However, the firm believes the stamp duty holiday has not only propelled the UK property market, but also ‘dissolved the majority of concerns’ surrounding Brexit.

“With the relatively positive results we’re seeing across post-Brexit Britain, combined with the continued growth arising from the stamp duty Holiday, the potential growth of UK property could significantly outweigh the overseas stamp duty surcharge,” the company claims.

But as government incentives end and the full effects of the stamp duty surcharge are felt in full effect, will UK property remain a long-term investment choice for overseas investors?

“Although we’ve known about the surcharge for some time, the whirlwind of 2020 overshadowed it to some extent. But now it is in full swing, investing in UK property will inevitably be more expensive for non-UK investors,” Andy Foote, director at SevenCapital, comments.

“Considering the standard rate, combined with the surcharge, overseas investors could face extra payments they hadn’t considered within their property investment planning.”

He adds: “That said, the performance of the property market over the past year, combined with its forecasted growth, still positions the UK as a high-performing, affordable property hotspot in comparison to alternative countries.”

Foote says not only has the average property price surpassed £300,000, but rental yields are creeping up across the country.

While the average UK rental yield currently sits at 3.53%, emerging areas such as Bracknell in Berkshire are reaching 4.80% for two-bed apartments.

“Offering a passive income of up to £1,103 a month and £13,236 annually, it’s unlikely that this stamp duty surcharge will deter overseas investors, with the potential for 14.5% growth in prices by 2025 only offering more incentive to invest in UK property.”

Foote concludes: “Between Brexit, a global pandemic and extensive tax changes, the UK property industry has seen it all. The market’s resilience alone offers investors the reassurance that property is a sturdy investment, and with this growth forecasted to continue, the stamp duty surcharge is seemingly a small price to pay for a potentially lucrative asset.”

This post has originally been featured in Property Investor Today.