Should we restrict overseas buyers?

Overseas buyers displacing local buyers in the London housing market is regularly flagged as a matter for concern. And given the supply and demand imbalance, it seems logical to restrict the number of overseas buyers, which would then free up housing stock for Londoners. Indeed, in April 2021 a stamp duty surcharge was introduced for non-UK residents to suppress demand. But should UK policy go even further? For example, Canada has recently introduced a two-year ban on non-resident foreigners from buying homes in the country. While a complete ban hasn’t been mooted in the UK, restrictions on the level of new build sales have been. But could this well-intentioned policy have unexpected negative consequences?

Firstly, it is worth clarifying what is meant by an overseas buyer because otherwise the issue can be overplayed. London is a truly international city, and 37% of London residents were born overseas. It is inevitable that the composition of London’s population is replicated in its housing market, with a huge range of nationalities owning property in London. But it would be misleading to suggest that there is anything wrong with a foreign national buying a home in London if they live and work there. And yet many of the statistics report foreign buyers by nationality rather than non-resident buyers. Non-resident foreign buyers make up a much smaller proportion of the market; recent estimates suggest around 105,000 homes in London are currently registered with an overseas correspondence address or to an overseas company, and 270,000 in total across England and Wales. That means in London, less than 3% of homes are owned by non-residents.

The criticism of overseas owners is that the homes are left empty, and that these buyers are using our housing stock as a store of wealth. However, the majority of overseas buyers – between 60 and 70% – rent the property out. This effectively puts the homes ‘back into circulation’ in the private rental sector.

Focusing on overseas buyers of new build schemes, In 2023, 20% of new homes in London were sold to overseas buyers. Even so, there is no evidence these homes are being left empty. Most developers estimate occupancy rates for individual schemes are generally up to 95%.

Overseas buyers – who tend to favour new-build stock and are comfortable buying off-plan – have an important role in supporting London’s development market. The majority of developers of large-scale urban apartment schemes need off-plan sales to enable construction activity to start. This is partly because off-plan sales are often required by the debt funders, but pre-sales also help de-risk large apartment schemes. These buyers can be particularly important during weaker market cycles. During recessionary periods overseas investors have been attracted into London by the favourable exchange rate and have plugged a gap left by domestic buyers unable to get a mortgage. Indeed, this has been the case in 2023 with overseas buyers essentially underpinning the market. This has helped keep momentum in the housing market and deliver future supply. If the number of overseas buyers were restricted, developers might struggle to get the level of off-plan sales to support their funding requirements, which would make some schemes unviable. And of course, it wouldn’t just be the private homes for sale at risk, but by extension, the affordable housing associated with that development and any linked Section 106 agreements.

Restricting overseas buyers would give the impression London is “not open for business” and may have further implications for residential development. Many of London’s very large residential development sites have used overseas investment to get them started and speed up development. Perhaps the most prominent example of this in recent years has been the redevelopment of Battersea Power Station, which has delivered a total of 1,800 homes to date, as well as significant office and retail space, a new underground station, and created over 6,500 jobs. However, when the first phase of residential units launched, it drew attention for a large share of overseas buyers. However, without investment from its Malaysian shareholders and the capital injection from these initial off-plan sales, the development would not have been able to proceed and the site would have remained derelict. And of course, subsequently the balance between domestic and overseas buyers has become more balanced. In addition, there are several other development schemes across the city which would not be going ahead without overseas capital. These include Greenwich Peninsula, led by Hong Kong developer Knight Dragon, and Stratford City, which is being jointly delivered by Qatari Diar (the property development arm of Qatar’s sovereign wealth fund) and the London investment company, Delancey Real Estate.

In addition, many Build-to-Rent schemes have benefited from overseas funding during the development process, and/or are owned by foreign institutions. This funding would be at jeopardy even if directly restricted.

There are also wider economic benefits from the building of homes, which can be attributed, in part, to overseas buyers. It is estimated that for every 100 homes built in central London, £28 million is contributed to the economy and 550 jobs are created. In addition, overseas high net worth individuals tend to contribute a lot more to the wider economy. It has been estimated that owners of homes worth more than £15 million spend between £4 and £5 million a year in the UK, while those with homes worth over £5 million spend between £2 and £3 million a year.

On balance we consider it would be counterproductive to ban overseas buyers. Although a small amount of housing may be left empty, the largest share will be rented to locals. Moreover, overseas buyers play a pivotal role in stimulating the residential development market, particularly at the start of the development cycle. As such, the gains more than outweigh any loss from the small number of high value homes that might be left empty.