Will the buck stop here? Dollar homebuyers eye London market

It was a visit to Royal Ascot in June that clinched it for Bobby Flay. For years, the 57-year-old New York-based restaurateur and TV chef has loved visiting London; on his trip to the races this summer, though, he finally resolved to find a more permanent base. “My girlfriend and I were thinking, ‘Wouldn’t it be great to have an apartment here? Let’s come back after the summer and do this.’ And we just did.” 

The couple looked at a dozen or so properties in central London before focusing on a trio of two-bedroom apartments in Chelsea, their preferred area. “We felt it had a nice warmth, we liked the attitude of the people, and we’re totally into that kind of style of architecture,” he says. Flay plans to return in a month or so to view again and make an offer, working with agent Vic Chhabria of LREO.

It’s a timely decision for a dollar-based, all-cash buyer such as Flay. “I’m not a person that looks at a market and says ‘I’m going to try to take advantage of this’ because I understand everything is cyclical, and I want to be a part of the community,” he adds. “But if I can maybe buy an apartment that I really want and it costs me 5 to 10 per cent less? That’s great.” 

Chhabria says that Flay is typical of many buyers he saw in the aftermath of the former chancellor of the exchequer Kwasi Kwarteng’s “mini” Budget on September 23 — within days the pound had fallen to an all-time low against the dollar at just above $1.03.

The pound has rallied since and, last week, seemed to have stabilised at around $1.15 — still an historically favourable exchange rate for dollar-denominated spenders in the UK, and about 20 per cent cheaper than it was a year ago.

Prime residential Notting Hill © Miroslav Cik/Shutterstock

The weak pound has already affected the luxury sector as a whole — Savile Row tailors, for example, report US clients have been keen to pre-pay for several bespoke suits for delivery in the next few years.

The city’s high-end estate agents claim they’re receiving a bumper load of inquiries from dollar buyers looking to take advantage of the weakened pound — but whether most are converting to sales is another question.

Tom Bill, head of UK residential research at the estate agency Knight Frank, says high-end homes are now on the market at what is effectively a “double discount”, since the more favourable exchange rate coincides with the fact that prices for homes in prime central London are considerably lower — in sterling — than they were in the middle of the last decade.

In Knightsbridge, home to the luxury department store Harrods, property prices are down 24 per cent compared with their 2014 peak. If one of the area’s grand homes came on the market in July of that year for £5mn — when the exchange rate was $1.71 to the pound — it required $8.6mn. Last month, factoring in price falls and currency moves, it would have cost $4.06mn, a 53 per cent discount.

Line chart of Estimated price of a luxury house in Kensington and USD equivalent showing Will lower prices tempt dollar-denominated buyers?

There are similar apparent discounts across many exclusive enclaves: Flay’s Chelsea is 52 per cent cheaper by the same metrics, while Mayfair and Belgravia offer savings of 45 per cent.

However, large “dollar discounts” — between 30 and 40 per cent compared with 2014 — were available between 2017 and 2020, and that didn’t precipitate a flood of US buyers.

Nevertheless, in the first six months of this year — before the turmoil in the currency markets — Knight Frank reports that buyers from the US accounted for 6.6 per cent of their sales in prime central London, notably higher than the 2.4 per cent averaged over the previous four years.

Chhabria says he conducted three times as many viewings in the first week of October compared with the same period a year earlier. These are all dollar earners, and are not needful of funding. They are not all American, of course. One customer from Hong Kong working in private equity came to view properties in London with Chhabria in the summer.

“He called me last week and said — his exact words — ‘I am back in London and ready to pull the trigger.’” And he was happy to look at things that were a little bit costlier than he would have back in July, Chhabria says.

Bobby Flay, a US TV chef looking to buy in London: ‘If I can buy an apartment that I really want and it costs me 5 to 10 per cent less? That’s great’
Bobby Flay, a US TV chef looking to buy in London: ‘If I can buy an apartment that I really want and it costs me 5 to 10 per cent less? That’s great’

He also mentions a Singapore-based buyer, keen to find a new-build property with lots of amenities, who put down a £5,000 reservation fee after a video walk-through; he then jumped on a plane to view in person, before closing the deal.

Some sellers have pivoted marketing efforts towards dollar buyers. Developer Kam Babaee of K10 Group will be heading to New York, Los Angeles and Florida this month to try to secure a dollar-denominated buyer for one of the two luxury properties he’s selling in London: the £85mn, 15,300 sq ft revamped Amberwood House in Knightsbridge, which is Margot Fonteyn’s one-time home; and the five-bedroom Culross House in Mayfair, which he initially offered at £30mn before cutting to £27mn late in October.

“Our whole marketing budget is earmarked for the US, and we intend to spend 1 per cent of the price of the property in the US over the next three months,” he says. “I’m taking advantage of the situation to get out there and make sure that every US buyer who’s just exchanged dollars into pounds and is holding them knows these properties.”

He’s even instructed an expat Briton, Gideon Lang-Laddie of LA-based The Agency, to act on his behalf there. “We have clients we’d already been marketing to who we’ll give another push and try again, but we also want to see if there’s interest where there previously wasn’t,” Lang-Laddie says.

“There are a lot more Americans who realise they can own a property in the UK now, but there is some confusion around what owning a property in the UK can result in — does it get you residency, that sort of thing? So it’s a case of walking and talking them through it.”

Savile Row tailors report US clients are keen to pre-pay for several years worth of bespoke suits
Savile Row tailors report US clients are keen to pre-pay for several years worth of bespoke suits © Phaustov/Shutterstock

One complicating factor is that the Tier 1 investor visa was suspended in February by the government, which cited security concerns as Russia invaded Ukraine.

Considering a purchase is one thing, though; taking the plunge is another. Ugo Arinzeh moved from New York to London more than a decade ago. Barely a year after arriving — and after a career in investment banking in Manhattan — she segued into founding her own real estate consultancy, Onyx. Her particular focus is on helping bridge the cultural, logistical and financial gaps for US buyers eyeing London.

“I tell people it isn’t as straightforward as what you’re used to — things like freeholds and leaseholds, and stamp duty,” she says. The latter is a particular stumbling block for Americans, Arinzeh continues, and has only become more so as it’s grown more onerous via a series of what she describes as “body blows” from the UK government.

One was then-chancellor George Osborne’s stamp duty reforms in 2014, which increased fees for higher-end buyers, and last year’s 2 per cent stamp duty premium on non-residents buying residential property in England and Northern Ireland. A non-UK resident buying a second home in the UK for £3mn would incur a stamp duty bill in excess of £421,000 — an effective rate of 14 per cent.

Closing costs for property in the US, by comparison, are far lower, typically 3-5 per cent. However, monthly property taxes — which fund local infrastructure such as schools — are far higher there than the equivalent council tax in the UK. A £5mn home in Kensington & Chelsea in the most expensive tax band would cost £2,729 for the year 2022-23. A property of comparable value at current exchange rates — say $6mn — in Suffolk County in the Hamptons would be taxed at more than $100,000 per year.

“So I tell [buyers] that if you hold on to it for five years, you start breaking even, and then you’re in an even better position,” Arinzeh says.

Line chart of Estimated price of a prime flat in Islington and USD equivalent showing The price of a luxury flat in Islington drops below $1mn

There are other considerations for dollar-denominated buyers than stamp duty, notes Edmund Fetherston-Dilke, a partner at law firm Farrer & Co. Property is a UK situs asset, and so will probably incur inheritance tax (IHT), charged at 40 per cent over a £325,000 threshold — a startling statistic for some cultures, the US included, where inheritance is reasonably financially frictionless.

In the past, he says, many clients might have opted to use corporate structures to acquire and hold property as a workaround, but changes to regulations have added both new restrictions and fees on overseas buyers working this way. In recent times, when interest rates hit historic lows, clients have instead opted to pay cash for properties and then take out a loan against that asset, and so reduce the taxable portion should they die.

As interest rates have increased, though, Fetherston-Dilke is starting to counsel clients to consider annual insurance policies that will pay out to offset IHT on death, especially if the couple has a notable age disparity.

Arinzeh has been instructed by two new American clients in the past month, both expressly attracted to the UK by the exchange rate (and not deterred by those upfront differences). One is a wealthy couple from Atlanta who’ve mulled a purchase in London before but struggled with the price per sq foot compared with their home city.

“Now the husband says: ‘I’m coming over to see some stuff, because I want to take advantage of this current market.’”

The City of London
The City of London © Getty Images/iStockphoto

But when he does come, will he buy? Data from LonRes looking at property deals in the priciest postcodes in London showed that 262 prime home sales have collapsed since the former chancellor’s “mini” Budget, an 82 per cent increase on the same period a year before.

The upper echelons of homebuying might not have been derailed by mortgage rate increases, since many purchases are all-cash, but instead by a different, ruthless instinct. With predictions from Lloyds Bank and others that home prices could fall 8 per cent or more next year, the patient and deep-pocketed could score even larger discounts by holding off: first, a currency bonus and second, a discount via the softening overall market.

As well as patient, buyers will need to be brave — after all, sterling’s drop against the dollar is a result of markets viewing the UK economy as being riskier than it was pre-Budget. One thing holding dollar buyers back might be the perception that the UK has further to fall.

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