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Faulty Towers: Understanding the impact of overseas corruption on the London property market

 

 

London is suffering from a severe housing crisis.

The UK Government describes the property market as “broken”.

Costs have risen twice as fast as the incomes of Britain’s under-44s. Thousands of people are homeless or sofa surfing. Many more live in cramped, substandard living conditions.

Meanwhile tens of thousands of properties lie unused for the majority of the year round.

We have spent the last year researching how overseas corruption has contributed to these problems. This is what we found.

Click here for the press release and full report.

Every year billions of pounds of corrupt money enters the UK. This is money stolen from some of the most impoverished and repressed countries in the world by corrupt politicians, public officials and businesspeople.

A large amount of this illicit money flows into the London property market.

Investing in property is desirable for corrupt individuals as it provides a safe place to hide stolen wealth.

We have identified over £4.2 billion worth of properties bought by politicians and public officials with suspicious wealth.

This could be the tip of iceberg.

London also attracts billions of pounds of ‘crisis capital’.

Crisis capital is when large amounts of wealth flees insecurity overseas, often caused by corruption. This could be families sending money abroad to escape the chaos of the Arab Spring or Chinese officials looking to avoid the country’s anti-corruption drive.

Crisis capital includes both legal and illegal money. Our research has found that the system for preventing illegal money entering the property market is not working and needs to be reformed.

Hundreds of billions of pounds has fled Russia and China in recent years.

Much of this money has been invested in London property.

Developers are becoming reliant on investment from those seeking to move their assets out of high corruption risk jurisdictions. By doing so they are exposing themselves to heightened money laundering risk.

We used Land Registry data to analyse who was buying apartments in 14 landmark London developments.

Across the 14 developments around 80 per cent of apartments were being sold to overseas investors. 40 per cent of investors came from countries with a high corruption risk or were companies registered in a ‘secrecy haven’.

Secrecy havens do not publish the details of companies registered there or who really owns them. ‘Anonymous’ companies registered in secrecy havens are often used by corrupt individuals looking to launder illicit wealth.

In a survey of Londoners, we found that more than one in five people thought overseas investors bought London property in order to launder money.

Our survey showed over 70 per cent of people thought it was unacceptable to hide the real owners of companies through the use of anonymous companies.

More details on each of the developments can be seen on the map below:

By targeting international buyers, developers have contributed to a ‘super-prime crisis’.

There is currently more luxury new-build housing than there is demand.

According to data from the property consultancy firm, Molior, in November 2016 there were around 800 newly completed homes sitting empty and unsold.

This was an increase of over 173 per cent from the previous year. Meanwhile there are almost 11,000 homes under construction without a buyer.

Whilst there is an over-supply of luxury property there is a massive under-supply of affordable housing in London. In 2015 London’s housing system delivered fewer than 5,000 new affordable homes, an all-time low.

Our research also found that corruption overseas could be having a direct impact on house prices in parts of London.

A recent academic study identified that in times of global uncertainty house prices in certain parts of London increase due to higher demand.

For example in October 2012, following the Arab Spring – an event in which corruption played a key role – investors from the Middle-East spent 50 per cent more on London property than they had done the previous year.

Our survey showed that over half of respondents believed “rich people from overseas buying top-end London property as an investment” was a leading cause of rising house prices.

There is emerging evidence that investments in luxury Central London property could be having an impact on the wider market. This is called ‘the ripple effect’.

The ripple effect explained:

1) International buyers purchase prime property in London’s most exclusive neighbourhoods

2) Existing residents from these areas feel pushed out by international demand and start to move to surrounding areas

3) As demand for homes in surrounding areas increases, prices start to rise, making future buyers start to look further out of Central London to more affordable areas

4) This in turn increases demand in outer London areas, which leads to increasing prices

5) Eventually London house prices become too expensive for many first-time buyers leading them to purchase homes outside of London

In our survey, half of 25 to 49 year olds said they had seriously considered moving out of London due to the cost of housing. These perceptions are shaping behaviour. In the past five years people in their 30s moving out of London has increased 50 per cent.

Property ownership driven by a desire to park assets here is having a tangible impact on communities.

Our research found that areas which have high numbers of properties owned by anonymous companies are often areas with high levels of electricity underuse, an indicator of empty or underused homes.

What we have identified in London is also happening across the world. Melbourne, Vancouver and New York are all struggling with the same challenges. In all of these cities there are debates about what is causing this problem and what should be done.

London property has become a global asset class. It is essential that houses in London are used as homes by those who need them rather than stores of wealth for those looking to hide wealth.

To address the impact of corruption the UK Government must take the following steps:

Introduce greater transparency to identify the real owners of London property: corrupt individuals should not be able to hide behind anonymous companies.

End the impunity for corrupt individuals with property in the UK: Law enforcement agencies should use Unexplained Wealth Order powers where necessary to address the high levels of suspicious wealth in the UK property market

Reform the UK’s anti-money laundering system to defend against corrupt wealth entering the housing market: the system for ensuring there are robust checks on investors’ source of wealth needs to be robust and fit for purpose.

Retain tackling global corruption as a key priority to reduce corruption’s global destabilising impact: overseas investors should not have to fall-back on UK property as a safe haven, they should also be protected by the rule of law.

all photo’s purchased by TI-UK through iStock except for (in order of appearance): flickr.com/creative commons LLars Plougmann; Dave_S.; Thomas Hawk

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