UK property market faces challenges for Hong Kong investors

[EUROPE] The UK property market has long been a favored destination for Hong Kong investors, but recent developments may be changing the landscape. As of December 5, 2024, Hong Kong investors owned 25,972 property titles in the UK, representing a 5.7% increase from the previous year and accounting for 13.7% of all foreign homebuyers. However, a combination of factors, including rising education costs, new tax schemes, and slowing rental growth, could potentially dampen the enthusiasm of Hong Kong buyers for UK real estate.

The Current State of Hong Kong Investment in UK Property

Hong Kong-based investors have consistently been the largest foreign buyers of homes in the UK. In 2024, approximately 190,000 properties in England and Wales were owned by foreigners, marking a 2.6% increase from the previous year. This trend has been beneficial not only for the UK property market but also for businesses catering to these investors. For instance, Skipton International, a Guernsey-based bank and mortgage lender, reported that in 2024, one out of every seven of its UK mortgage loans was held by a Hong Kong resident.

Factors Potentially Deterring Hong Kong Investors

1. Rising Education Costs

One of the primary attractions for Hong Kong families investing in UK property has been the opportunity to provide their children with a British education. However, recent changes in education fees for international students could make this prospect less appealing.

2. New Tax Schemes

The UK government has introduced new tax regulations that could significantly impact foreign property owners. These changes include:

Stamp Duty Land Tax (SDLT) Changes: From April 2025, the nil-rate threshold for residential properties will revert to £125,000 from £250,000. This change will result in an additional £2,500 in SDLT for every buyer of residential property above £250,000.

Capital Gains Tax (CGT) Increase: The CGT rate has risen from 10% to 18% for basic rate taxpayers, and from 20% to 24% for higher and additional rate taxpayers.

Non-Resident Surcharge: A 2% surcharge on SDLT for non-UK residents purchasing residential property in England and Northern Ireland.

3. Slowing Rental Growth

The UK property market has traditionally offered attractive rental yields for investors. However, recent data suggests a slowdown in rental growth, which could potentially reduce the appeal of UK properties as investment vehicles.

Impact on Hong Kong Investors

These changes could have several implications for Hong Kong investors:

Higher Initial Costs: The increased SDLT and additional surcharges for non-residents will significantly raise the initial investment required to purchase UK property.

Reduced Returns: Higher taxes, combined with potentially slower rental growth, could lead to lower overall returns on investment.

Education Affordability: Rising education costs may make it less feasible for Hong Kong families to send their children to study in the UK, potentially reducing the demand for properties in popular university towns.

Marc von Grundherr, Director at Benham and Reeves, notes:

"Hong Kongers remain by far the most dominant nation, with their share of the market increasing year on year. Other factors, such as geopolitical tensions and shifting economic conditions, have also driven demand from new entrants like Israel and increased activity from established markets like the United States."

However, he also acknowledges the potential impact of recent changes:

"Recent developments in the UK, however, stand to put a damper on demand."

Alternative Investment Destinations

As the UK market becomes potentially less attractive, Hong Kong investors might consider alternative destinations for property investment. Some possibilities include:

Other European Countries: Countries like Portugal, Spain, and Greece offer attractive property investment opportunities and potential residency options.

Southeast Asian Markets: Countries like Malaysia and Thailand have been gaining popularity among Hong Kong investors due to their proximity and potential for growth.

Australia and New Zealand: These countries offer stable property markets and high-quality education systems, which could appeal to Hong Kong families.

The Future of Hong Kong Investment in UK Property

Despite the challenges, the UK property market still holds several advantages for Hong Kong investors:

Political Stability: The UK's stable political environment continues to be a draw for international investors.

Currency Advantage: The weaker pound has made UK property more affordable for foreign buyers in recent years.

British National (Overseas) Visa Scheme: The BN(O) visa scheme, launched in 2021, continues to facilitate migration and investment from Hong Kong15.

Keith Egan, Managing Director of Magnate Assets, comments:

"This data reinforces the UK's enduring appeal as a secure and profitable property investment destination. The diversity of international investors demonstrates the resilience of the market, even amidst global uncertainty. For overseas buyers, the UK offers not just strong returns but also a robust legal framework and unmatched transparency."

While higher school fees, new taxes, and slowing rental growth pose challenges for Hong Kong investors in the UK property market, it's unlikely to completely deter investment. The long-standing relationship between Hong Kong and the UK, coupled with the latter's stable political and economic environment, continues to make it an attractive destination for property investment.

However, Hong Kong investors may need to adjust their strategies, perhaps focusing on areas outside of London that offer better value, or considering different types of properties that could yield higher returns. As always, thorough research and professional advice will be crucial for those looking to navigate these changes successfully.

The coming years will reveal whether these new challenges will significantly impact the flow of investment from Hong Kong or if the UK property market's fundamental strengths will continue to attract buyers despite the increased costs and complexities.