Prime residential property

High interest rates may have slowed down most of the housing market, but not the luxury market. According to Knight Frank’s 2024 UK House Price Forecast, political uncertainty and potential changes to the current tax treatment for UK resident non-domiciled individuals have introduced some hesitation in Prime Central London.

Despite these factors and a revised forecast predicting a 1% price decline this year, the luxury market is thriving. Sales of homes priced above GBP10 million in London have reached their highest level since 2014, presenting a compelling opportunity for astute investors. Long-term prospects remain strong, with a projected cumulative growth of 16.4% in Prime Central London property by 2028.

The luxury residential markets in France and Dubai are proving just as robust, seemingly unaffected by instability elsewhere. For those looking to buy and sell prime residential property, it’s imperative to seek expert help to comb through the complexities that might arise, from negotiating transactions and tricky legal processes to tackling overseas acquisitions and potential disputes.

Ultra high net worth individuals favour prime real estate due to its potential to diversify investments globally and across various asset types. Whether it’s a ski chalet in the Alps, an island retreat in the Caribbean, or a London townhouse, such properties offer not only financial benefits but also lifestyle enhancements.

Paddy Dring, Joint Head of the Private Office and Global Head of Prime Sales, Knight Frank

The appeal of London

It’s easy to see why London remains one of the world’s most sought-after destinations for buyers seeking a luxury property. For those with global business commitments and a private jet, London remains the crossroads of the world. Its time zone means you can do business from LA to Singapore to Dubai fairly smoothly. There’s also easy access to New York, your villa in the South of France, chalet in the Alps, and yacht in the Med.

Importantly, London also has a reputation as a safe haven during periods of global political instability and is repeatedly ranked as one of the most desirable cities for UHNW individuals to live, invest and do business in. While cities like Monaco and Dubai offer tax havens, they don’t have the history, education system, diverse society, and culture that London offers.

Prime Central London residential property

Rising interest rates have not had as large an impact on the Prime Central London market as elsewhere, and the prime country market, although not immune, has also been less affected than some regional areas of the UK. Indeed, 77% of country properties sold for more than GBP5 million are transacted in cash, and prime London sales worth more than GBP10 million saw a similar percentage of cash buyers.

During the pandemic, there was undoubtedly a move to the country, but not to the detriment of London, as families acquired country properties in addition to their London homes. We’ve seen working arrangements become more flexible, and as a result, buyers increasingly want dedicated office space in homes in addition to outdoor areas. For those who did leave the city, many have returned. After all, commuting in the summer is one thing, but in the dark winter months, it’s quite another.

There’s also been increased interest in ‘turnkey’ properties: ready-to-go, fully furnished homes that people can instantly move into and host dinner for friends that same evening.

These properties are hugely appealing to buyers moving from afar or to those looking for a ready-made second home, as well as to downsizers. Their popularity has also increased as a result of uncertainty of supply, rising costs and labour shortages to fulfil major renovation projects; a luxury development with extra warranties despite a higher GBP per square foot is more appealing than an older property with costly, potentially unknown problems.

At the time of writing, the government is seeking to reform legislation relating to leasehold residential property, and we refer to its proposals later in this chapter.

Maximising value

Subterranean development

With habitable space in London at a premium and significant restrictions on extending property vertically or laterally, extending into basement areas is an increasingly common way of gaining valuable space, with one recent report by estate agent Foxtons finding it boosted property values by 54%.

Assessing the opportunity for subterranean development depends on several critical factors. Clearly, you will need to own the land you want to expand into. It is also important to understand any relevant policies adopted by the Local Planning Authority. You will also need to consider the impact on neighbouring properties, particularly where the properties are attached.

Amalgamation

Where more space is required, the combining of properties may seem like the ideal solution. But unless the properties have existing planning permission to amalgamate, the possibility of proceeding to do so is now limited in London due to the concerns of the Local Authorities that dwellings are being lost.

Of course, there are exceptions to the rule, and advice should be sought as soon as possible.

Enfranchisement

Enfranchisement is a complex legal area and refers to the rights of tenants to extend the term of their lease or buy the freehold of their leasehold house or block of flats (collectively with the other leaseholders).

Taking each of these in turn:

Claiming the freehold of a house: Except in limited situations, it is no longer possible for a developer to create and sell a leasehold house. However, if you currently own a leasehold house or are seeking to buy one on the open market, there is a statutory process available to enable, subject to certain qualification criteria, the acquisition of the freehold. The process arises under the Leasehold Reform Act 1967 (as amended) and is, as with a lease extension, complicated and as such, the advice of a valuer and an experienced lawyer should be sought before embarking on the claim.

Lease extensions of flats: To extend the term of a lease, an investor/tenant can either negotiate with the landlord or, subject to certain qualification criteria, serve a statutory claim under the Leasehold Reform Housing and Urban Development Act 1993 to force the landlord to grant the lease extension.

The tenant of a property may, subject to certain qualification criteria, make a claim to acquire a new lease. A statutory lease extension is a technical and complicated area of law and can be costly both in legal fees and in the premium to be paid.

The advice of a valuer and an experienced lawyer should be sought before commencing the process and/or making a claim.

Claiming the freehold of a block of flats: In a block of flats, whether with or without commercial units, the residential tenants can act collectively to purchase the freehold and any head leases, subject to a number of qualification criteria and the motivation of the tenants in the block. Although the qualification criteria and the statute are complicated, the process is possible with the assistance and guidance of an experienced valuer and lawyer. The new legislation proposes to simplify the process and expand the number of buildings that may qualify, as well as potentially reduce the costs to the collective group of tenants.

Preliminary considerations of ownership

Speed

Both sides of the market require speed. The starting point should be to ensure all money laundering requirements with respect to identification have been settled. As this takes time, ideally you’d begin this process before you’ve identified a property or put a property up for sale. If you’re selling, we recommend having a full pack of title and due diligence documents prepared in advance to issue to prospective buyers to ensure there’s no loss of momentum on a sale.

Inheritance tax

Although there’s a move to cash purchases, for those buying in the millions, putting debt in place has the advantage of potentially mitigating any inheritance tax exposure. With that in mind, it’s important to consider the most tax-effective structure for holding the property. There are various options, but if the property is to be enjoyed personally by the family, owning it in personal names is usually the preferred choice. However, seeking tax advice early is advisable.

Capital gains tax

This is also a consideration for both UK resident and non-UK resident owners of UK property. UK residents are subject to capital gains tax when disposing of property, unless it’s their main residence. Since April 2015, non-UK residents have been liable for capital gains tax on the increase in value when a property is sold (at rates currently up to 24%), unless it’s the owner’s main residence and the conditions for relief are met. The tax only applies to any increase in value since April 2015, so if you could be affected you should obtain a professional valuation. Income tax will also apply if the property is rented out.

Stamp duty land tax

This is payable on residential property in England and Wales at progressive rates, with additional rates applied for non-resident purchasers, purchasers with multiple properties, and in cases where the purchaser is a corporate or non-individual entity. Purchasing using a corporate vehicle is no longer popular, unless the purchase is an investment property.

The timing of completion

Whether you’re the buyer or seller, agreeing on a completion date when the buyer can assume possession of the property is important. Buyers should factor in both the financing of the payment of a deposit at exchange of contracts, as well as how long they need to prepare to take full possession of the estate and pay the residual amount of the purchase price.

How to secure your dream London property

Since demand and supply are out of kilter in the London market, with stiff competition, the speed of a transaction is important. It’s common for a property in a desirable location to be snapped up before it even reaches the open market. A buyer needs to be known to the agents, and having a well-known law firm acting for you will improve your credibility.

It’s often worth hiring a ‘property finder’. As well as having their own network of agents who can do a lot of the preliminary searching for you and adhere to your wish list, they can also help with negotiations on price. Although they come with a fee, it’s often a price worth paying if you’re seeking access to properties not available on the open market.

Antilia, in Mumbai, India, is said to be one of the world’s most expensive residential properties. It’s valued at over

USD1 billion

and is notable for its 27-story structure with extensive amenities.

Source: Guinness World Records

Around 20% of UHNW individuals stated they were interested in residential property investments in the last year.

22% of UHNW individuals plan to buy a home in 2024.

17.7% of UHNW individuals identified the UK as the top destination to buy a home in 2024, followed by the US (9.8%), France (7.2%), Australia (5.6%) and the UAE (5.4%).

Investment is the key driver for purchases of residential property for 45% of HNW individuals, followed by lifestyle at 21%.

Source: The Knight Frank Wealth Report 2024

France

The popularity of ultra luxury real estate that emerged at the end of COVID-19 lockdowns hasn’t waned, despite global conflicts, the increase in interest rates and instability in the equity market. This contrast between the top-end and the rest of the market has been observed during other crises in the past.

While prices are beginning to fall in the ‘regular’ Parisian real estate market, they aren’t in the ultra luxury sector. In the 6th, 7th, 8th and 16th arrondissements (some of the most sought-after districts), prices are exceeding EUR30,000 per square foot for turnkey properties.

These exceptional properties are not affected by the crisis, provided they meet international standards of hyper-high-end real estate, meaning a 200 square metre pied-à-terre with a terrace, air conditioning, a nice view and a garage.

In this regard, the expectations of the buyers seem comparable at all international locations, perhaps with the exception that the buyers would like to enjoy the French style of life.

It is remarkable that foreign buyers are investing in Parisian real estate. Especially since the exchange rate favours the dollar compared to the euro. For example, 33% of the properties currently sold in the Marais district are to foreigners. In the 8th arrondissement, the proportion of international clients is up to 30%, while it is 25% in the 7th arrondissement.

The appeal of France

Luxury real estate has also benefited from the international renown of several French regions.

This is the case for Paris, the French Riviera, the Alps, Provence and the West Coast – all popular thanks to their remarkable historical, architectural, cultural and natural heritage. These regions make the country a safe place for real estate investments; they also mean competing with other buyers attracted to the many lovely places and exceptional amenities on offer, not to mention the French art de vivre.

Preliminary considerations of ownership

If you’re a foreign investor and want to acquire a property in France, you’ll need to prepare for the transaction well in advance.

The French legal profession must undertake a thorough ‘know your customer’ (KYC) review when onboarding new (foreign) clients, which includes a detailed examination of information about the purchaser and the origin of their funds. We’d advise you to prepare the documentation required for this review upfront to avoid delays later when you’re trying to secure the property of your dreams.

It has become ‘market standard’ that your legal adviser (either a lawyer or notary) will establish (in a sales scenario) or require (in a purchase scenario) a set of standard documents about the property, which will give you the key facts about the property (ownership title, excerpt of the land registry, energy, and environmental reports, etc) so that you can make an informed sales or acquisition decision.

It’s important to point out that it’s uncommon in France to have title insurance because the notary will provide a title certificate and assume legal responsibility for the certificate whose findings are covered by a (captive) insurance company established by the French notary offices. In exceptional cases, when the notary report indicates issues about the legal title, an insurance policy might be requested.

The structure for acquiring French real estate should be considered early on to identify any issues that might lead to the transaction being held up. This could be due to challenges related to setting up a French partnership structure, a Monaco partnership or even a corporate, depending on the purposes of the investment.

The structure will be heavily influenced by certain tax considerations, some of which we discuss below.

The purchase of French real estate is subject to taxes and duties, which can amount to up to 7% of the transfer price (ie registration duties, property security contributions, notary fees), while the purchase of shares in companies whose assets mainly consist of French real estate is subject to registration duties at a rate of 5% of the transfer price.

The ownership of French real estate requires the annual payment of a property tax (taxe foncière), the amount of which may vary depending on the location and size of the real estate. Also, since 1 January 2023, the dwelling tax (taxe d’habitation) has been abolished for principal residences but remains in place for secondary residences.

All legal entities, whether established in France or abroad, that directly or indirectly own real estate in France are subject to an annual 3% tax levied on the value of said real estate on 1 January. Such legal entities may, however, be exempted from the 3% tax provided, in particular, that they disclose to the French tax authorities information on their French real estate and their shareholders.

The transfer on death of French real estate is subject to French inheritance tax (droits de succession) levied at a progressive scale ranging from 5%-45% for direct descendants, after application, as the case may be, of specific tax allowances (eg EUR100,000 between parents/children).

Capital gains arising from the sale of French real estate or shares held in companies whose assets mainly consist of French real estate are taxed in France according to different rules depending on whether the seller is an individual or a corporate entity.

Non-resident individuals whose French real estate wealth exceeds EUR1.3 million on 1 January are subject to the French real estate wealth tax (impôt sur la fortune immobilière) levied at a progressive rate ranging from 0.5%-1.5%.

How to secure your dream property in France

Dream properties in France are generally either located in Paris, in the Côté d’Azur or in the Alps.

We’d recommend you task a well-known international estate agency with a search mandate – they normally have a market overview of which properties are officially (or unofficially) for sale and can introduce you to the seller. It’s become common practice to define a detailed mandate to save time.

Dubai

Demand for luxury and ultra luxury homes in Dubai has soared during the post-COVID-19 economic bounce back. In times of economic uncertainty across much of Europe, Dubai has emerged as a preferred destination for wealthy property investors. Its reputation as a virtually crime-free city and the ease with which investors can gain residency status have seen it shoot to the top of the list of the busiest USD10 million+ markets in the world, ahead of Hong Kong, New York and London.

Ultra prime areas in Dubai include Palm Jumeirah, Emirates Hills and Jumeirah Bay. Below that level are the prime areas, that include Al Barari, Jumeirah Golf Estates and the newly released Tilal Al Ghaf. Rates in the ultra prime market can reach USD1,800 per square metre, whereas in the prime market, the average is USD970 per square metre. This is still regarded as competitive when compared to rates in Hong Kong, New York, London and Monaco.

As we’ve seen in the UK, rising interest rates have had a limited impact on the luxury Dubai market, where, on average, 80% of deals in 2023 were transacted in cash.

Most luxury residential properties in Dubai are bought as second homes, to be occupied only in the cooler winter months. Unsurprisingly, this has led to an increased demand for branded residences where high levels of service facilitate the maintenance of empty units over the summer period.

The Dubai Land Department (DLD) currently levies a 4% transfer fee on all freehold property transactions. In addition, the UAE introduced corporate tax in June 2023, which will prima facie apply to any corporate entity holding property in Dubai (whether the entity is incorporated in the UAE or overseas). Tax is currently payable at a rate of 9% on income and capital gains over a threshold of AED375,000.

Where personal ownership is preferred, succession concerns can be addressed by filing a will with the Dubai International Financial Centre (DIFC) which allows non-Muslims to bequeath their Dubai property as they wish, expressly excluding the application of Sharia law.

The appeal of Dubai

Dubai and the major cities in the other Emirates that make up the UAE are among some of the safest in the world, with low crime rates maintained through close monitoring and strict enforcement by the authorities.

There is no personal income tax and a relatively low rate of corporation tax. The climate is attractive in the winter months, and the standard of living is relatively high for most of the population. Tolerant and stable leadership has encouraged a multicultural society to thrive in Dubai.

Residential real estate: when issues arise

Trophy real estate – commercial or residential – often forms the foundation of a high net worth individual’s investment portfolio. Iconic buildings in prime locations can be attractive propositions. However, owning real estate can introduce various issues. Many of these problems are avoidable if the parties involved are fully aware of the risks before the transaction takes place.

Potential areas of conflict in the real estate market are wide and varied. Contentious real estate matters that investors can face include:

development issues including rights of light and vacant possession
enforcing the contract
obtaining possession from tenants
contractor disputes
defending or objecting to proposed planned developments
service charge disputes

problem neighbours
listed building consent
conservation area consent
planning permission for a change of use (ie office to residential).

This section explores some of these key issues in further detail.

Sealing the deal

The current property market in the UK is extremely competitive, with trophy assets typically attracting multiple bids. The ability to move quickly and avoid potential disputes with the seller puts the buyer at a competitive advantage.

You will increase your chances of sealing the deal by:

demonstrating that you are in a good position to complete
getting any funding structures in place in good time
ensuring that the terms fully reflect all points you’ve agreed with the seller
checking the lease for obligations to carry out works on the property and instructing a surveyor to advise on the physical condition of the property and likely ongoing maintenance responsibilities
being aware (overseas buyers particularly) that a 10% deposit is required to exchange contracts in the UK – and having the funds available when needed
having a clear investment strategy for the property (ie whether to hold onto it for the long term or seek an early exit)
ensuring a lawyer is instructed at an early stage.

If you’re looking to buy in France, you should:

select a broker specialised in luxury real estate with international experience
mandate a lawyer and a notary public who are used to working together for international investors
understand the obligations of a property owner with regards to the current environmental and tax regulation for real estate and, as the case may be, to the regulation for historical monuments
consider the investment structure for French real estate before starting the search
consider financing the acquisition early on since the promise to buy will require payment of a deposit of 10% of the purchase price.

If you’re buying in Dubai, you should look to:

retain a professional broker to source suitable properties
instruct lawyers to perform due diligence, handle funds, provide representation under Power of Attorney and advise generally
understand ownership restrictions in areas not designated for foreign nationals
consider inheritance planning, whether through company structuring or a DIFC will in the case of personal ownership.

Tenancy agreements

In the UK, the previous government proposed seeking to reform tenancy agreements that fall into the Assured Shorthold category, meaning those with individuals as tenants where the rent is equal to or less than GBP100,000 per year. The new government has stated it intends to take the proposals forward and indeed might go further. The proposals set out by the previous government seek to remove the ‘term’ and ensure that tenancies are rolling and can only be ended for one of a few reasons.

These reasons include:

where the landlord wants to sell the property
where the landlord and/or their family want to move into the property

where the tenant has a pattern of rent arrears
where there is a serious breach of the terms of the tenancy.

All private landlords will be required to join a Private Rented Sector Ombudsman Scheme, which will deal with disputes between landlords and tenants, with powers to award compensation and ban landlords from letting in serious circumstances.

Landlords will also be required to sign up to a Private Rented Sector Database and will be unable to let properties until they have done so.

In Dubai, residential tenancies are regulated by legislation enforced through the Rent Disputes Committee. Tenants are protected by restrictions on rental increases and the requirement for landlords to give 12 months’ notice to take vacant possession, and then only in limited circumstances, such as the intention to sell or occupy the property personally.

Leasehold reform

The UK government is also seeking to amend the leasehold legislation. A ban on the inclusion of ground rent for new leases is already in effect, and further legislation was passed in June 2024 (by the previous government) to make it easier and cheaper for leaseholders to extend their leases or buy their freeholds. However, there is little detail on the method of valuation and it is unlikely this legislation will come into force before 2026, and not before challenges from the larger landlords directly impacted by the proposals.

The removal of ground rent for new leases has brought about a two-tier system, those leases with ground rent and those without – this has not yet affected prices but may, going forward, impact the marketability of leases. Furthermore, investors are now paying more for ground rent reversion income.

Although the timetable for bringing the rules into force is unclear, the legislation introduced reforms to enfranchisement valuation, used to calculate the cost of extending a lease or buying the freehold, which include:

Giving leaseholders of flats and houses the same right to extend their lease agreements ‘as often as they wish, at zero ground rent, for a term of 990 years’.

Abolishing marriage value (anticipating this will result in the process being cheaper for a leaseholder).

Abolishing the requirement to pay the landlord’s legal and valuation costs.

Enabling leaseholders with a long lease in place to buy out the ground rent without having to extend the lease term.

Asset performance

While sales volumes took a hit in 2023, capital values continued to grow. According to The Knight Frank Wealth Report 2024, luxury residential property prices climbed 3.1% on average in 2023, with Manila (26.3%) seeing the biggest price growth, followed by Dubai (15.9%).

Key points to remember

Be prepared

Before buying or selling a property, have a full pack of title and due diligence documents prepared in advance to avoid delays.

Get expert help as early as possible

If you’re buying in the UK, consider using a property finder and a credible lawyer to help secure off-market properties and beat the competition. For prime overseas acquisitions, always use a well-known international estate agency with a search mandate and a legal team that is well-versed in working with international investors.

Do your research

Consider the most tax-effective structure to hold the property and make sure you understand what fees you will be liable to pay, from capital gains tax and stamp duty land tax in the UK to property tax in France and transfer fees in Dubai.