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Mishcon Academy Digital Sessions - Inward investment from Asia: An outlook for the UK real estate market

Posted on 10 May 2021

Mishcon Academy: Digital Sessions is a series of online events, videos and podcasts looking at the biggest issues faced by businesses and individuals today.

In this session our panel considered the key issues for inward investment from Asia into UK commercial and residential property, including navigating the UK's complex immigration and tax regimes.

The panel, moderated by Real Estate Partner Nick Doffman, comprised: Managing Director at The Berkeley Group Gavin Sung; Mishcon Property Litigation Partner Joanna Lampert; Immigration Partner Kamal Rahman; and Real Estate Tax Partner Jonathan Legg.

Nick Doffman

Welcome everybody.  I’m Nick Doffman, I’m a Partner in the Real Estate Department here at Mishcon de Reya and I will be your host today.  At today’s Mishcon Academy Digital Session we will discuss Inward Investment from Asia into UK Residential and Commercial Property with a particular focus on the market and certain areas of law that will impact challenge and/or assist any decision to invest. I’d like to introduce you to our esteemed panel.  Gavin Sung is the Managing Director for Asia Pacific at the Berkeley Group, Joanna Lampert is a Partner in our Property Litigation Team, Kamal Rahman heads up our Immigration Team and last but not least, Jonathan Legg, a Partner in our Real Estate Tax Team.  Gavin, with particular reference to inward investment, what are your experiences of and predictions for the current UK market?

Gavin Sung

The last year’s obviously been quite an anomaly compared to what we’ve been used to and different markets across Asia have reacted in different ways for inward investment into the UK.  We have about 70 developments, mixed-use but very resi-led, being constructed across London and the South East of the UK.  So, we’ve always been a bit of a magnet for a lot of Asia Pacific investors and that slowed quite considerably for probably a couple of months as we saw the Covid effect.  But where we have seen a lot of positive investment has been people that have seen a much longer-term view of investing in the UK.  With the emergence of PRS in the UK over the course of the last five years, we have seen a significant amount of Asian capital looking at both development, build-to-rent as well as long-term income-producing assets in UK development.  Where we find consistent amounts of investment comes increasingly where we see countries having certain political unrest.  Political unrest in Malaysia; political unrest in the Philippines, Indonesia as well as Thailand.  We’ve seen those emerging markets increase quite significantly.  So, what we’ve seen in the last year is that we’ve seen less speculation into UK residential markets for Berkeley but we’ve seen more long-term opportunistic investors looking at what’s going to happen over the course of the next five to ten years.  We don’t see that changing.  Our long-term investment into land is sustained.  So, we have a very positive long-term view. 

Nick Doffman

Has Berkeley Group’s strategy altered in light of the pandemic?

Gavin Sung

I don’t think our overall strategy has changed.  What we have seen is much more appetite from institutional investors looking at residential, as we’ve seen the Covid pandemic affect office space.  What’s the long-term future for retail?  Many more institutions are seeing, are wanting more diversification, especially if they’re looking for long-term income and residential is by and large a relatively small player. 

Nick Doffman

Joanna, can I turn to you now? Perhaps you would just take us on a quick journey through some of the issues that you experience, particularly the legal landscape that’s impacted particularly on landlord and tenant relationships. 

Joanna Lampert

What has happened as a result of the pandemic in relation to the real estate market has really been universal and the conversation that I’ve been having with clients starts because of what has felt like landlords being under attack from Government efforts to protect jobs which has resulted in a series of restrictions on the ability of landlords to enforce tenant obligations to pay rent.  There’s been a moratorium on the forfeiture of leases, a ban on commercial rent arrears recovery via bailiffs and changes to the insolvency regime. Last week, the Court gave judgement on a summary judgement application in the case of Bank of New York Mellon International Ltd and Cine-UK Ltd and others.  A Court dismissed all of the defences raised by the tenants.  Those defences included partial frustration, supervening illegality, failure of consideration, implied terms, rent cesser on the basis of the landlord being insured for loss of rent and failure to comply with the Government Code of Practice.  The other main line of attack on landlords has been CVAs and we continue to see retail tenants pushing the boundaries with CVAs, which allow them to strip out unprofitable stores and reduce rent on other stores for prolonged periods.  The best time to influence the terms of the CVA is prior to presentation and collaboration between landlords within the bounds of what is permitted by competition law, may result in better outcomes. 

Next, I’m going to talk briefly about asset management issues such as lease renewals, rent reviews and dilapidation claims.  Where leases are coming to an end, tenants may try to use the 1954 Act to engineer lower renewal rents.  Retail and leisure tenants in particular may try to benefit from a currently depressed market by serving short notices and trying to get renewals determined sooner rather than later.  It also seems likely that many tenants will seek unusually short lease terms in order to preserve flexibility as they wait to see how the economy opens up in the coming months.  The position in relation to rent review is going to be different, with valuations based upon a hypothetical transaction on the review date.  It may be argued in relation to rent reviews but a hypothetical tenant would not have anticipated the long-term impact of the pandemic when agreeing letting terms.  Dilapidations claims could become harder for landlords.  Where leases ended at the height of the pandemic, we may see tenants trying to argue that rental values have been depressed, not by disrepair but by the market itself and the scarcity of replacement tenants could leave landlords struggling to prove the impact on capital value. 

Moving away from landlord and tenant issues, we anticipate an increase in disputes relating to conditional sale and purchase agreements and joint ventures entered into pre-pandemic.  We’re also seeing a trend towards misrepresentation claims where purchasers of underperforming assets are looking for ways to recover their losses.  Purchasers can look beyond the seller to agents and other representatives and build a case around statements assurances and representations which were made and relied upon in order to induce the contract.  And finally, an economic downturn often gives rise to an increase in professional negligence claims.  In relation to any type of dispute, it’s important to keep an eye out for tell-tale signs that an issue could be on the horizon and to take advice early. 

Nick Doffman

Kamal, what are the main ways in which investors from Asia can live and work in the UK?

Kamal Rahman

So, the two main ways in which people can live, invest and work in the UK.  First of those is the investor visa category.  The investor visa category has been in place for many, many years in the UK and really aims to attract the high net worth community globally into the UK.  And there are three main thresholds: A minimum investment of £2 million in the UK will give you permanent residency after about five years and citizenship after six years and if you increase your investment to £5 million, that period to permanent residency reduces to three years and if you increase it further to £10 million, it reduces it further to two years. 

There are a few main practical issues that applicants tend to face on making investor visa applications.  One is that they need to show that they’ve held the money for at least two years before they make that application.  The second challenge that applicants for investor visas always find is opening up a UK bank account.  You must have one.  And thirdly, the Home Office do retain an overall checking facility to make sure that the character, conduct and the associations of any applicants are not unfavourable and the applicants are bona fide. 

So, what can you invest in from a real estate point of view, if you’re here as an investor?  You can invest in property construction companies and directly into property construction.  You can invest in hotels, the Opco and not the Propco.  So, there is a distinction that they make there. 

I’m going to just touch upon the second route.  There was a change in December of 2020 in the run up to Brexit where Boris Johnson wanted to make sure that the world knew that Britain was still open for business and so what they did was create a new employment route to the UK called the skilled worker route.  And it’s really to tap into global talent and it’s really to create an easier route to UK employers wanting to employ people and bring overseas nationals to work in the UK.  Up until that changed, if you wanted to invest in a business in the UK and work in the UK, you could only do so if you held less than a 10% shareholding in that business.  Now, there is no restriction on how much you can invest in a business in the UK and work for that business.  So, you can see how it could be structured that an overseas investor could set up a company in the UK, have an individual employed in that company, have that individual responsible for the key management functions of the property in the UK and then themselves be sponsored to come and work for that UK company and make whatever investments they wanted. 

Just to go back to the investor category, we tend to see that as more applicable to people who want to invest and live here but not, whilst they’re able to work here, but not be obligated to work. 

Nick Doffman

What impact has the pandemic had on investor numbers from Asia?

Joanna Lampert

It has a significant impact because clearly, if you can’t travel anywhere, there is no point in getting a visa and so we’ve really seen a downturn, not just investor numbers but in general immigration to the UK. 

Nick Doffman

Okay, Jon and tax.  We’ve seen a lot of tax changes over the past year and perhaps you would share with the audience, that journey. 

Jonathan Legg

I’ll start with Capital Gains Tax.  I mean, there was a time back in the day sort of pre-2013 where actually non-UK resident investors actually didn’t pay any Capital Gains Tax.  Since 2013/2015, residential properties have been within the scope of UK CGT and that was then extended to cover commercial property as well.  The rate will depend on how you invest.  Generally, if it’s a company you’ll be paying the corporation tax rate of 19%.  If you’re an individual, you’ll generally be paying 20% or 28% depending on whether it’s commercial or residential property.  Another slight change and this was from April last year, 2020, relates to how rental income is taxed.  For larger scale investors, investing through companies into the UK, you are now paying tax under the Corporation Tax regime rather than the income tax regime.  And Corporation Tax is much more restrictive in terms of how you calculate profits. 

I guess, the final area I want to talk about actually is Stamp Duty Land Tax.  We have different rates of tax depending on the slice of the price so in the residential context, if you’re the slice over £1.5 million for example, you pay 12% or possibly 15% or possibly 17% depending on whether certain additional rates apply.  And the two most relevant rates for non-residents are, we now have a 3% high rate – so-called high rate on additional dwellings and what it means is you pay an additional 3% on top of the normal rate, if it applies and that will generally catch most non-resident investors who are buying an investment property.  We’ve also had a new non-resident surcharge of 2% and so anyone who uses an offshore company or is based themselves offshore, will pay the 2% non-resident surcharge on residential property only, I should add. 

So, what it means is, at the moment we have a so-called STLT holiday, where actually the first £400,000 that you pay actually it doesn’t pay any STLT at all if you’re paying the standard rates.  But actually, if I’m an offshore investor and I’m coming in through a company, actually I’m probably going to be paying 5% even if I pay only £500,000 because of this additional 3% rate and the 2% surcharge. 

There are exceptions and there are opportunities in these rules, particularly where you’re buying portfolios of properties.  The main one is if you’re buying six or more dwellings that is basically just treated as non-residential.  So, effectively you’re capped at 5%.  You may even be able to claim what’s called ‘multiple dwellings relief’ which is where you pay stamp duty based on the average price.  The difference between whether something’s non-residential and mixed versus residential is a big question and whilst I guess it’s normally fairly obvious if you’re buying a home versus buying an office but it’s not always, obviously.  Maybe, giving the example of buying a block of flats with retail at the bottom - that is mixed use and therefore you pay tax under the commercial rates.  So, you’ve got a top rate of 5% rather than 17%.  So, always make sure you get proper advice on this sort of thing.  Due diligence precise to what you’re buying and speak to your property advisors in the UK because sometimes assumptions are made, “Well, this is residential, that’s the rate of tax,” but when you look at it there may be a relief that applies, you may be able to argue something’s mixed use. 

Nick Doffman

Well, thank you very much and thank you all of you, my panel.  Thank you everybody else who has joined this conversation.  I hope you’ve found it insightful.  That remains for me to wish you all a good afternoon or a good morning and thank you for joining us.  Goodbye. 

The Mishcon Academy Digital Sessions.  To access advice for businesses that is regularly updated, please visit mishcon.com

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