The chill in Russian-UK relations is likely to lead to a significant number of Russian investors retreating from their British property investments. UK investors should be ready to face the problems and the opportunities this potential mass exodus presents.
Following a crackdown on Russian business activities after the Salisbury spy poisoning scandal and the repercussions of Russia’s annexation of Crimea, Putin’s favourite oligarchs are feeling the scrutiny of the UK Government and the tide in Russia may well be turning against British investments.
The result of a withdrawal of Russian investors from the UK’s property market could be a shortfall in funding on forthcoming construction projects, but also a rise in the number of highly desirable properties on the UK property market. Kensington, for example, has become known as Londongrad because so much of the area is owned by Russian nationals. A large scale Russian retreat could have a significant impact on this market.
As what some political analysts are calling a ‘second Cold War’ opens between Britain and Russia, a number of extremely desirable London properties are likely to return to the market as Russian investors cut their losses, while wealthy billionaires may also be preparing to quit their Surrey country ‘dachas’.
Though Prime Minister Theresa May says she is not targeting Russian private citizens in the UK, following the Salisbury spy poisoning case, plans are underway for greater monitoring of private jets and freight, alongside new powers to stop people at borders. Significantly the UK has also announced a review of 700 visas granted to wealthy Russians. Bloomberg revealed in March that Home Secretary Amber Rudd said her officials will be investigating the cases of 700 Russians who were given permission to come to the UK before 2015 under the investor visa scheme, in which they promised to invest 2 million pounds ($2.8 million) or more.The potential loss of these investors is likely to have repercussions.
Cold War chill
This new Cold War chill in what was previously a warm relationship between the U.K. and wealthy Russian investors looks highly unlikely to thaw anytime soon, and wealthy Russians are already looking to new markets, and in particular Germany, as a safer place to invest.
Britain’s new sanctions bill underlines the Government’s power to freeze Russian owned assets and impose visa bans. And the crackdown may not end there, as The Guardian revealed in March, the House of Commons foreign affairs committee chair Tom Tugendhat has gone further and says there should be action to bar wealthy Russian oligarchs from accessing their mansions and other luxuries in London and face sanctions if they cannot explain where their money has come from. One way this could happen is through the use of Unexplained Wealth Orders, which allow government officials to seize assets including property until they have been properly accounted for.
Russians have long favoured the UK as a place to send their children to school and for its legal protection; but were already losing their enchantment with Britain as a consequence of the Brexit vote, sanctions following the Crimea dispute and recent changes to stamp limits on high value properties. The latest sanctions could well be the final straw; but what might be the repercussions of Russians rushing from UK investments?
Estimates reveal that prominent Russian figures with ties to the Putin regime own British properties worth nearly £1.1bn, mostly in London, although the true value is likely to be far greater, claims The Guardian. In 2013 alone estate agency Knight Frank put Russians top of the list of foreign buyers of £1m-plus London homes, spending over £500m.
Super prime investments
Between 2007 and 2014, Russian investors snapped up UK real estate at a staggering rate. Data from the real estate and investment management company JLL – which specialises in services to Russian investors – estimates that in early 2014 almost 10% of all money spent in property in London was Russian. In the luxury residential market, numbers were even higher. According to Knight Frank, more than 20% of London homes with asking prices in excess of £10m were purchased by Russians.
Russians are also significant investors in ongoing property developments across the UK. Their potential withdrawal from these investments is both a threat to some much-needed developments, and an opportunity for UK and other non-Russian investors to pick up on these investment prospects.
On top of investment opportunities around legitimate Russian property activities, there is also the question of less straightforward transactions. A fifth of suspicious property purchases from 2008 to 2015, £729 million worth, were made by Russians, according to anticorruption watchdog Transparency International.
The result of such concerning claims is a growing call that Russian politicians and oligarchs should be forced to disclose their property assets in the UK and face sanctions if they cannot explain where their money has come from. Senior Labour and Liberal Democrat MPs are currently pressing for such action as a response to Sergei Skripal’s poisoning.
And it’s not just the British Government that is scrutinising the legitimacy of wealthy British based Russians carefully.US sanctions in the wake of the Salisbury attack are also hitting Russian UK investors. Bloomberg reported last month that one of Britain’s most well-known Russian businessmen, Oleg Deripaska, was among 38 targets in the latest round of US sanctions aimed at Vladimir Putin’s inner circle.
Aluminium magnate Oleg Deripaska owns significant property in the UK. He is accused by the White House of “directly or indirectly” acting on behalf of the Kremlin. Mr Deripaska’s best known in Britain for hosting George Osborne for drinks on his yacht in 2008.
Sanctions on hugely wealthy figures such as Deripaska could have a very significant impact on the UK’s property market – an unintended consequence of any Russian crackdown.
But it is far from the case that most Russian property investment here is the result of ultra-rich oligarchs laundering shady money. It’s a stereotype long past it’s sell-by date.The truth is that in recent years, many Russian investors, whether super-rich or of far more modest means, were legitimately investing in UK property. They saw investing their hard-earned roubles in British developments and properties as safer than leaving it in Russian banks and investment schemes. And Property Week says many Russian buyers had recently become increasingly interested in commercial as well as residential assets.
Dmitriy Zakirov, founding partner of LonGrad, a Russian property consultancy based in London, told Property Week this April: “Our clients have become increasingly sophisticated over the last couple years” He revealed the greatest room for optimism was in the commercial sector, which had not attracted a lot of attention from Russian investors previously. The entry point for many Russians investing in the UK is often a second home, but there was a sharp turn towards more lucrative commercial developments in recent years.
For example, a private Russian buyer acquired the City Edge student accommodation block in Birmingham from Shaylor Holdings for £10.6m in March. The buyer started out with four flats in London, worth around £6m.“It was a good investment but the returns were not very high,” Alisa Zotimova, founder of AZ Real Estate told Property Week. “He wanted to have more impact, so his next mandate was for a commercial asset.”
Were the property and investment market to see a further move away from UK investments by Russian nationals, a number of such developments might be returning unexpectedly to the market this year.
The result of retreating roubles may go in two ways. Britain may lose some cash-rich investors funding much-needed new property developments; but there may also some significant opportunities to snap up some unexpected properties at lower than usual prices: from Hyde Park stores to Kensington mansions to Birmingham student flats. It is an ill Cold War wind that blows no one any good.