Family Office Council

Family Office Real Estate Premium

UK risks turning away property investment from family offices

by

The British government seems determined to proceed with a self-defeating public register of foreign owners of UK property.

In late July the UK government published the draft Registration of Overseas Entities Bill, ostensibly designed to provide transparency over the identity of foreign owners of UK property.  This, we are told, will help crack down on money laundering and increase the confidence and trust of legitimate foreign investors in the UK property market.  

UK prime minister Theresa May’s government inherited the policy from her predecessor David Cameron and there were hopes among many that it might be ditched or delayed.  However, now that draft legislation has been set out there are ongoing fears that the policy will contribute to a narrative among family office investors that the UK is closed for refurbishment, not open for business.  

In many respects, this unwise policy seemed originally inspired more by its ability to generate goodwill among non-government organisations and positive headlines in the UK’s left-leaning Guardian newspaper than prevent criminal activity.

The family are horrified by this.  Wait until they see the headlines in the papers

The idea that foreign investors lack confidence to invest in UK real estate because of money laundering is a non-starter. This inward investment is currently very significant, with $8.9 billion of private overseas investment recorded by real estate agent Knight Frank in UK commercial real estate alone in 2016.   In this context law enforcement’s estimates of £18 million of money laundering a year, suggest the government’s approach is taking a sledgehammer to crack a nut.  The government is addressing a problem where there is precious little evidence one exists.

Rather than increasing the confidence of foreign private investors, the register will likely have the reverse effect.  There is significant concern among family offices that the policy will undermine personal and commercial privacy and will be interpreted as targeting foreign investors in order to cool the housing market.    

On family office executive told me: “The family are horrified by this.  Wait until they see the headlines in the papers.” Another principal from a Latin American family office said: “We left home because we could not trust our government.  This policy will expose us both to political risk and to kidnapping. We have had ransom demands before. Unequivocally will sell our UK property if this goes ahead.”

The Government themselves admit this concern, as their own impact assessment makes clear 

“Foreign private real estate investors….[are] more likely to react in a negative manner …because foreign high net worth individuals using family offices are probably placing a relatively high value on maintaining their anonymity.”

 They also admit that: “ultra-wealthy individuals and families may well respond to their loss of anonymity by exiting their investment positions in UK property. This is because they are more likely to value their anonymity very highly. If it is the case that these private investors represent a significant proportion of the overall 45% of commercial real estate investment coming from overseas, then their retreat from the market could have a significant impact.”

Despite admitting these warnings the UK government refuse to put any estimates on the negative consequences, just as they are also unable to estimate any monetary benefits for the potential reduction in crime.  

This isn’t surprising because the Register, while putting off legitimate investors, is not a credible deterrent.  The public register is to be self-certifying and the idea that genuine money launderers will give the correct information is unlikely.  Of course existing property transactions that involve a professional such as a lawyer, banker or estate agent are already required to undertake due diligence on clients and the source of funds. The public register will be all burden with no upside.

In fact, rather than decrease crime there is some cause to believe it may increase fraud because of its public nature. The UK’s Information Commissioner’s Office recently warned that trust beneficiaries would be placed at a “real risk of identity theft” by EU legislation that will make the (very similar) trust register fully open to the public. Meanwhile, the Land Registry has highlighted the type of properties particularly vulnerable to registration frauds are exactly those you would expect to see on the register.

Removing privacy will have a number of other negative impacts.

Most obviously by detailing in public the ownership of property, it will be significantly easier to identify those individuals and families who are very rich.  The public register will lead to increased levels of speculation over levels of wealth which will further lead to unwarranted intrusion into the private lives of investors.  It’s easy to see how the register could become viewed as an officially sanctioned surrogate to the “Sunday Times Rich List”.

The UK media, and misguided NGOs, will have a field day using this public information in a manner which is sensationalist and driven by economic nationalism and a misunderstanding of the legitimate uses of offshore structuring.   The mythical narrative that dodgy foreigners are to blame for the UK’s housing crisis will be further embedded. 

Worse still the register will discourage inward investment to the detriment of the public interest

The loss of privacy will also increase concerns over personal safety and kidnapping, as it would not only identify wealthy individuals but also, in some circumstances, their private residence.   And although there is a carve-out for those who are politically influential, it’s unclear how broadly this will apply.

Worse still the register will discourage inward investment to the detriment of the public interest. This foreign investment in UK real estate is in the public interest, contributing to jobs, taxation and the overall housing supply, extending beyond residential and office blocks to student accommodation and care homes.

Residential investment also benefits locals by creating a physical tie to the country. The foreign owners of London’s prime and super-prime properties spend a lot of money here, contributing at least £2.3 billion to London’s economy annually, according to Ramidus Consulting.

Also, the UK’s competitors in Europe are highly likely to develop private, not public registers.  Thus the UK will be going both further and faster than its competitors, and will end up creating a permanent black mark in the column headed: “Reasons not to invest in the UK.”

In the absence of evidence that the scale of the problem requires such radical action, the government should give serious consideration to a rethink, and at the very least move forward with the register on a private basis.  The consultation closes on 17 September and I would encourage you to participate.

Keith Johnston, is CEO of the Family Office Council

The deadline by which to provide feedback on the bill is 5 pm on 17 September 2018.   

Leave a Reply

Your email address will not be published. Required fields are marked *