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Surprise tax on foreign investment in UK CRE won't rock market, insiders say

Concerns that the U.K. commercial property market will be seriously impacted by the introduction of a capital gains tax on nonresident investors, announced by the country's finance minister Nov. 22, are misplaced, according to several industry analysts.

The immediate reaction to the surprise measure, which U.K. Chancellor Philip Hammond revealed during his annual budget presentation, included warnings that it could significantly damage investment in the country's commercial property market at an already vulnerable time, with negotiations on the U.K.'s withdrawal from the European Union reaching a critical stage.

Ion Fletcher, director of finance policy at the British Property Federation, said the trade association for U.K. residential and commercial real estate companies was "deeply concerned" that the measure would jeopardize much-needed investment. The introduction of the tax was a "game changer," according to Andy Pyle, U.K. head of real estate at professional services firm KPMG, while Mark Giddens, head of private client services at business association UHY Hacker Young, said it would "make it much harder to fund [the construction of] major flagship buildings" in the U.K. and strongly urged the Chancellor to "consider the impact on the wider economy before these measures come into effect" in April 2019.

SNL ImageSNL ImageMany properties in central London are owned by foreign investors.
Source: The Leadenhall Building Development Co.

However, senior industry analysts have questioned the outcry, forecasting that the government's move will have little effect on international investment flows into the U.K. commercial property market. "I don't think the impact is quite as significant as some may say," David Hutchings, head of investment strategy for Europe, the Middle East and Africa capital markets at Cushman & Wakefield, said in an interview.

"There are a whole range of factors that draw [investors in commercial property] into the U.K., and into London in particular, and I think they'll continue to stand the city in good stead. [The capital gains tax] doesn't necessarily change too many investors' minds if they definitely want to be [in the U.K.], it just changes the timing and how they structure what they're going to do," Hutchings added.

John Knowles, head of national capital markets at Colliers International, said in an interview that he "can't see [the tax] making a massively substantial change." The overall effect of its introduction would be "fairly muted," he added.

U.K. commercial property attracted €26.7 billion of investment in the first half of 2017, making it the largest market in Europe ahead of Germany, which received €26.1 billion, according to Savills. International investors are drawn to the U.K.'s attractive property assets and stable legal system, among other things. London, in particular, is a magnet for foreign investors, who made up 85% of investments in central London office property, Colliers said in a July report.

The introduction of the tax, which will be levied on gains made by non-residents on sales of all U.K. property types, extends existing rules that apply to homes, according to a consultation document outlining details of the measure. The move brings the U.K. in line with most other major jurisdictions, the document said, eliminating the advantage non-residents enjoy over U.K. residents and discouraging property ownership through offshore structures that avoid taxation, it said.

Some overseas investors reacted with disappointment to the announcement, said Knowles, particularly Colliers' private equity clients, but as the measure simply brings the U.K. in line with other major markets, "if they're honest with themselves, they can't really say it disadvantages the U.K.," he said. Less wealthy high-net-worth individuals might feel the greatest impact, with the reduction in any capital gains possibly deterring them from sales or acquisitions.

The government consultation process will run for 12 weeks from Nov. 22 to Feb. 16, 2018, and a response is scheduled for publication next summer, according to the consultation document. Legislation will be introduced in the 2018-2019 Finance Bill and will take effect from April 2019, it added.

"I'm not sure it's going to make a huge difference," Robert Duncan, who covers several of the U.K.'s largest real estate investment trusts as director of research at Numis Securities, said in an interview. "Of course, the changes might impact the marginal buyer, but I think there are greater forces at work drawing capital in than simply what the tax on exit is."