What Would Make An American or International Investor Interested in a London Property
I don’t know what would make you want to invest internationally and buy investment property in London. I do know the reasons why I will buy property in London. My reasons are simple. I want to diversify my real estate portfolio. The London real estate market has consistently given healthy returns to its investors. It is an international hub of business, finance and capitalism. There seems to be an unquenchable thirst for this real estate from foreign investors. And finally I like the healthy appreciation of value on this real estate that is based on a currency that is worth 40% more than mine.
One of the biggest mistakes any real estate investor makes is investing in real estate in one area or one country. As the old saying goes, never put all your eggs in one basket. Now, I am fully aware of the real estate meltdown. I felt the pain just as much as anyone else. This melt down was not just a local occurrence it was worldwide. Every person that was involved with real estate or owned real estate took a hit.
But there were pockets around the world that took the hit and got right back up. London is one of those areas that took a good hit during the real estate boom. What is amazing is the phenomenal growth since them. Just 4 years later and the average home price has already sky rocketed past the real estate highs seen during the boom. Cities like Miami FL that have been a mecca for international real estate investors are still trying to recover. Prices are rising but they are still nowhere near the peak of the market.
Over the last 30 years London has averaged a healthy 7% appreciation rate which is highly respectable when you look at the massive hit housing prices took when the bubble burst. If you were to take out the drop in prices due to the bubble and you see some very nice numbers, double digit appreciation. In 2013 the average home price increased 17%. I like those kinds of numbers, they make me feel warm and fuzzy.
London is a true international hub of business. Corporations from all around the world have set up shop and this will continue long into the future. Asian countries specifically China are flocking to London. In fact the Chinese recently signed over $18 billion dollars in various contracts with the UK. Now Chinese banks and investment firms will be opening offices in London bringing with them hundreds even thousands of employees that will either be buying or renting property in London. This continuous inflow of businesses means one thing to investors, high demand for housing. High demands means higher rents, higher appreciation and higher returns.
There really is an unquenchable thirst for London real estate and real estate in the UK in general. So much so that the government has created a variety of schemes and enacted several laws to try and stem the flow of foreign investors. One of these changes was how foreign investors are taxed. Until just very recently foreign investors did not have to pay any capital gains tax when they sold their property. There are two sides to this argument in that one would say taxes are evil and hamper growth. The other says taxes are critical for the health and well-being of the country. I am from the camp that says taxes stymie growth.
The fact of the matter is that both camps are wrong. In the case of London real estate it has done very little to slow down the foreign investors. The only impact from this is the UK government is getting their piece of the market now. And it is a big piece of the market. Over 70% of new builds are bought by foreign investors. Another scheme was to increase the stamp tax on real estate valued at 2 million pounds and above. Once again this has done very little to slow down the massive amounts of money pouring in the marketplace from foreign investors. It has made the market for housing in the 25 million and up a little soft. But other than that very little has changed.
Exchange rates and other people’s money can provide a very healthy return. Getting mortgages in a foreign country can be tough. However, there are banks and financial institutions that specialize in these types of transactions. You will need a healthy down payment and a significant amount of liquid assets which you probably have if you are thinking about investing in London. If you can get a mortgage it is definitely something worth considering. Here is why. (use your currencies exchange rates)
If you paid cash for a property in London for 1 million pounds it would cost $1,410,000 USD. If you put 50% down and financed the rest that same property would only cost you $1,205,000 USD. Assuming you experienced an appreciation rate of 15% each year, in just 2 years the home would increase in value to 1,322,500 GBP. You would have realized a ROI of $117,500 by financing the purchase. Paying cash you would have to wait another year (assuming same appreciation) to see a ROI and it would only be $110,875 while your financed property would have leapt to a $315,875 ROI.
Obviously when you finance there are principal and interest payments but this really only effects the monthly cash flow from a property not the appreciation. As an investor you need to decide what you want to do and what makes the most financial sense. Is it the monthly cash flow you are interested in or is it the appreciation? Personally I like buying properties and financing them in a way that the investment either breaks even or provides a slight cash flow.
Those are my reason for wanting to invest in London real estate. If you are a smart investor I bet your reasons are very similar to mine. Cheers!