As the dust settles on the autumn statement, it is clear that the government’s latest interventions in the market have received a decidedly mixed reception – not surprising, perhaps, considering the range of different interested parties.
The confirmation that capital gains tax will be levied on future profits made by foreign investors after April 2015 has captured many column inches, and perhaps rightly so as there is much at stake stemming from this decision, particularly for the construction industry.
Many will view this move as a largely politically motivated gesture aimed at appeasing those who are growing increasingly uneasy about the polarisation of the London market, where foreign investment is perceived as pushing house prices out of the reach of ordinary Londoners.
It is also seen as an equalisation measure, purely aligning with UK taxpayer rules. There is some credence to this argument, but the reality is that surely there is space for both UK domestic purchasers and renters and foreign investors in the London market?
The section 106 obligations attached to many of these prime developments are playing a major part in funding affordable housing and other planning gain commitments that benefit the wider London population.
For example, much of the mayor’s Housing Strategy, announced only a few weeks ago, will be reliant on foreign investment continuing to flow.
“The message potentially signals a reversal of a free and open investment climate”
More importantly, the London prime residential market is underpinning significant construction-related employment, which has helped the industry massively during a significant commercial and, more recently, public sector downturn.
It also has a significant multiplier effect in the wider economy, including beyond London.
The real financial benefit of this tax to the Treasury is marginal, but the message it sends to the international market, when combined with ongoing rumours of further tax interventions, is much greater.
It potentially signals a reversal of a free and open investment climate, and although many have highlighted the continued relatively low transactional taxes of London compared with, for example, New York, this is more about direction of travel.
“The government must be careful not to cut off its nose to spite its face”
On the positive side, the move on CGT will possibly force some investors purely speculating on capital growth to ensure their properties are put into the rental market to ensure a combined income and capital uplift return.
One would imagine this will benefit the local rental market in many of fringe of London prime locations – the South Bank, east of the City and west London – where overseas investors are purchasing many units in new regeneration schemes.
However, the real problem with so called ‘dark apartments’ would appear to be at the top end of the luxury market, where units are not acquired as investments but are occasional second homes.
The CGT measure is unlikely to have any real impact at this end of the spectrum, where price sensitivity is much reduced and drivers for purchasing are very different to the mass investor-led market.
It is always a tricky balancing act for politicians to trade off securing votes from the electorate while doing the right thing to secure economic prosperity.
The government, however, must be careful not to cut off its nose to spite its face.
Mark Farmer is head of residential at EC Harris and a new columnist for Construction News.