Foreign investors left nursing huge losses as they scramble to get out of off-plan deals

The foreign investor market in London is on its knees – with ‘hundreds’ of buyers of homes purchased off-plan over the last four years nursing huge losses.

The problem, says one large London agent, has been ‘massively under-reported’ by the media.

With values of such properties having dropped like a stone, some investors are unable to complete on their purchases, with the developers taking possession.

Others are having to sell at almost a one-third loss to avoid having to hand back distressed properties to developers, and then risking legal action and greater losses.

Steven Herd, founder and CEO of MyLondonHome, an agent which is one of the biggest players in the new homes and investment market, said that every day, his firm is having to try to help a foreign investor exit a deal with the least pain.

He said he does not know a single instance where a foreign investor who has bought in the last two years has done anything but made a loss on an off-plan purchase.

In some instances, losses have been as low as 5%-10%, but in others, investors have taken a far greater hit.

In an exclusive interview with EYE, Herd said: “At times, my firm feels as though we have become debt advisers, and not estate agents.

“My office has hundreds of files where investors have lost money.

“The problem has been massively under-reported, because the Land Registry does not record prices at exchange, only at completion.”

Developers, he said, have also not made much noise for PR reasons: “They rely on pre-sales, and investors buying into phases one and two of schemes.”

Typically, investors put down a 20% deposit on an off-plan investment. They then plan to ‘flip’ the property at a profit before it completes.

For example, they might have put down £200,000 on a £1m off-plan flat expecting it to be worth £1.2m or £1.3m within two or three years.

Instead, said Herd, they are finding its value has dropped to between £750,000 and £800,000.

In one recent case, a Russian investor bought an off-plan property in 2014 for £3.1m. He could not afford to complete and could not raise a mortgage.

MyLondonHome sold the property at £2.55m days before completion.

If – rarely – the properties do go to completion, the investor is saddled with a property worth far less than they paid for it.

The other options are to ‘flip’ it but at a loss. Or to hand the property back to the developer, with the original 20% deposit forfeited. Herd said: “The risk there is that the developer then sells the property for far less than the original price and then goes after the first purchaser for the difference.

“To our knowledge, it hasn’t happened … yet.

“However, investors are being advised by their lawyers that this could happen.

“To avoid this possibility, investors are selling at a reduction of 25% to 30% as at least it allows them to control the sale.

“Most foreign investors are only interested in capital returns – they don’t want to be landlords.”

Herd said that buyers of distressed property bought off-plan tend to be domestic owner-occupiers.

He stressed that the scenario – which he says has been going on since 2014 – is absolutely nothing to do with Brexit.

Instead, he cited taxes ATED, Stamp Duty and Capital Gains Tax – which has been charged to foreigners when they come to sell since 2016.

Herd said: “The tax regime is now very punitive and, bluntly, it has killed off the foreign investor market in London.

“My concern is for the housing market as a whole, and what it will look like.

“The Conservative government has wanted to close off foreign investors buying UK property in favour of the first-time buyer. But first-time buyers are priced out of the market anyway, and so I think that house prices will simply stagnate.

“I am also concerned that if you kill off the foreign investor market, you kill off London’s Zone 1 market, then the suburbs, then the home counties and beyond.”

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7 Comments

  1. Mark Connelly

    “Off plan” is and always has been a speculative investment, Usually sold by kids dressed as investment specialists who have never seen a downturn and are prone to describe each investment as a ” no Brainer ” Now as the completion part of their commission disappears over the horizon they will at least have a more balanced sell technique in future.

    That said, the governments success in killing off the foreign investor with absolutely no provision to replace them, is typical of governments ill considered approach to the UK housing market. Domestic buyers have neither the deposits or the mortgage availability. Again thanks to government initiatives.

    You can be sure there will always be a government standing by with a big sledgehammer should a small nut coming rolling by.

     

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  2. WPD

    Very good comment on the state of the market in this sector of Central London property. I’ve been saying much the same for ages. It’s interesting when you actually witness the high pressure sales tactics deployed at these exhibitions where developers peddle their bland overpriced wares through the Middle East and East Asia. Strange how the large agents who often represent the developers are complicit in selling the “once in a lifetime investment opportunity” free of the accusations of giving misleading information or the constraints of consumer regulations  etc. Whilst I have no sympathy for them, the situation distorts the market at a time when Central London is already experiencing difficult conditions.

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  3. Fencesitter

    I’m sure we are all overcome with sympathy for these poor Russian oligarchs and Greek tax-dodgers. Still, at least there is an upside – “Buyers of distressed property bought off-plan tend to be domestic owner-occupiers…”   

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    1. Mark Connelly

      I don’t believe there is a single shred of evidence to support the statement you have just made. I will accept domestic landlords who can now achieve a decent yield on a reduced capital cost. But owner occupiers?
      It’s these kinds of throw away lines that convince governments that what they are doing is correct.

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  4. Fencesitter

    You obviously failed to read the original article properly, otherwise you would have noticed that I was actually quoting Steven Herd, the author of the report. Hence the quotation marks. There is your “shred of evidence” – straight from the horse’s mouth. Unless, of course, you are taking issue with my outrageous suggestion that the benefit to domestic owner-occupiers – rather than landlords – might actually be a good thing..

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    1. Mark Connelly

      I apologise, my phrasing was clumsy I take issue with him, not you. Of course it’s a good thing but it’s a fallacy that the audience for these apts is ever domestic owner occupier. If by cutting out foreign investors, government believe that the slack is taken up by owner occupiers that is a fundamentally flawed expectation.

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  5. AgencyInsider

    Nothing new under the sun. Those of us who remember the market in the early to mid 1990s will recall the quantities of foreign buyers walking away from their deposits rather than exchanging.

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