Where the more liquid securities markets lead, real estate is never far behind. As the west responded to the invasion of Ukraine with rolling sanctions directed at Russia’s economy, politicians, and oligarchs, attention has turned to the knock-on effect for one of the UK economy’s most high-profile contact points with Russia: property.
Judging by the stock market reaction in the days since the latest escalation began, some investors are concerned that freezing orders could dampen business at the top of the market.
High-end estate agents Savills (SVS), which has a small Russian desk in London, is off more than 6 per cent in the past week, while developer Berkeley Group (BKG) – known for its focus on luxury residential property in the capital – has shed 5 per cent. Berkeley, which makes a significant portion of its sales to international investors and individuals, has also targeted Russian buyers.
In a note to clients, analysts at Peel Hunt highlighted both companies, along with London-focused estate agent Foxtons (FOXT), as potentially susceptible to “second-order impacts” on UK property from the crisis, including hits to residential and commercial property transactions.
Quantifying the scale and size of this market, and what proportion of it is legitimate, remains a challenge.
Some £6.7bn in “questionable funds” from around the world have been funnelled into UK property since 2016, according to a Transparency International report released earlier this month. Of this, the anti-corruption campaigning group believes £1.5bn-worth of property was “bought by Russians accused of corruption or links to the Kremlin”.
The mayor of London, Sadiq Khan, is among those who have called for the government to seize London properties owned by Putin associates, at the same time as drawing broader attention to the capital’s reputation as a property-focused laundromat for suspect sources of global wealth.
“For far too long ministers have turned a blind eye to the use of our capital’s homes as a safe harbour for oligarchs to park their cash, which is having a negative impact on both our international reputation and our local housing market,” he said.
While oligarchs from Russian and the former Soviet republics have an outsized reputation as buyers of luxury real estate, the widespread use of shell companies by overseas investors means it is difficult to ascertain the true scale of Russian money within the UK property market.
But purchases have increased markedly in recent years. Land Registry data on titles registered to overseas individuals show a 10-fold jump in Russian property owners, from 86 in 2010 to 1,127 in 2021.
Whether that rate of growth can continue remains to be seen, following the Home Secretary’s recent decision to close a controversial 2008 tier-one visa scheme that fast-tracked residency applications depending on how much money an individual invested in the UK.
While the rise in Russian property ownership is significant, it pales in comparison to the growth in direct buyers from Hong Kong, China, south east Asia, crown dependencies and the Middle East. In fact, Russia does not make the top 20 list of countries by individual property title owners, although the figures are likely masked by the re-routing of ownership through companies and offshore jurisdictions.
This helps explain reports that the government will soon push through legislation to create a register for the beneficiaries of overseas firms, a move which campaigners say would help authorities better crack down on dirty money stashed in UK property. The knock-on effects of the legislation, while hard to predict, are unlikely to kill London’s reputation as a haven for overseas property investors.
For ordinary investors and property owners, however, the larger effect of the Ukraine crisis is likely to come from its impact on inflation and the outlook for interest rates, as the Bank of England is forced to counter surging energy prices with tighter monetary policy.
