London’s Luxury Property Market Braces For Fallout Of Russian Spy Poisonings
There are not many property markets around the world that have to worry about the fallout from the extra-judicial poisoning of former spies and their families.
But London’s luxury property market is so inextricably intertwined with Russian wealth that it cannot help be influenced by the ongoing row between the U.K. and Russia over the poisoning earlier this month of former military intelligence officer Sergei Skripal and his daughter Yulia. Both are still in a critical condition in hospital after being exposed to a nerve agent.
The U.K. blames the attack on Russia, and has expelled 23 diplomats. Moscow responded by expelling the same number of U.K. diplomats.
Now further measures to put pressure on Russia are being weighed, and London’s high-end property market is in the spotlight. A combination of financial pressure and patriotism could see Russian influence dwindle in a market that was once the playground of the country’s politicians and the well-connected oligarchs.
“We’ve had sanctions on the country, and now individuals will be targeted — you hit the Russian in the pocket,” luxury residential broker Aylesford founder and Chairman Andrew Langford said. “Russians will want to keep their London homes, but you tax them until it becomes financially untenable to remain here. I think Russians will be singled out, and the people who are here are expecting measures of some sort to be brought in.”
In the same way that Russian private jets are now facing increased scrutiny when landing at U.K. airports, with searches looking for undeclared cash as well as dangerous nerve agents, property assets will also come under greater scrutiny.
For a long time London and the U.K. have been seen as turning a blind eye to the source of inflowing wealth, particularly that coming into property, according to transparency activists. As part of the new crackdown on Russia that might change.
The scale of Russian money in London property is vast, and some of it is illicit, although of course it is important not to presume someone is corrupt simply because of his or her country of birth.
Russian buyers have typically favoured high-end areas like Belgravia, and particularly Eaton Square, Hampstead and Regent's Park.
Individual examples include the £351M of property in Highgate and Vauxhall owned by former Russian senator and fertiliser magnate Andrei Guriev; the £177M of property owned in Regent’s Park, Hampstead and Belgravia owned by Gazprom subsidiary owner Andrey Goncharenko; the £90M Kensington Palace Gardens property owned by Chelsea F.C. owner Roman Abramovich; and the £48M property in Hampstead owned by Arsenal F.C. shareholder Alisher Usmanov.
On the illicit side, Transparency International estimates that £4.4B of U.K. property has been bought with potentially suspicious wealth, most of it in London, and about 20% of that, or £880M, has origins in Russia.
“It is clear that London has routinely been the choice destination for Russians with suspicious wealth to move and they have had little trouble doing so, taking advantage of lax regulation and offshore secrecy,” Transparency International U.K. Director of Policy Duncan Hames said.
The prime example of this cited by Transparency International is a flat in Whitehall, near the Houses of Parliament, owned by First Deputy Prime Minister of Russia Igor Shuvalov. The apartment is valued at £11.4M, and Suvalov’s declared salary is just £112K.
Prime Minister Theresa May has a new tool in her armoury to put pressure on Russians living in the U.K. if they are seen to have links to the Kremlin — Unexplained Wealth Orders, a policy brought in just weeks before the attack on Skripal and his daughter.
If the source of wealth used to buy an asset in the U.K. is seen as being suspicious, it can be seized until the owner proves otherwise.
“We are calling on the Government to urgently bring in legislation that would require overseas companies who buy U.K. property to reveal who their real owners are and use the new Unexplained Wealth Orders to better investigate the U.K. assets of corrupt individuals,” Hames said.
Experts are torn on how this could impact the property market at large, but many point to the possibility of a wave of dispositions.
The Unexplained Wealth Orders could potentially drive a lot of people to sell, specialist Mayfair broker Wetherell founder Peter Wetherell said.
“I think Russians will be net sellers rather than net buyers,” Beauchamp Estates Managing Director and founder Gary Hersham said.
But the effect of the orders could ripple beyond Russian owners in London and put off international buyers.
“One thing that appeals about the U.K. is that when you buy something you own it and the government can’t take it away. That is something that happens elsewhere,” Wetherell said.
Even before the poisoning incident, real estate professionals in London property were subject to greater scrutiny from tightening money-laundering regulations, Langford said.
“As a selling agent you now have to know everything about not just the seller but the buyer as well, to know where the money is coming from,” he said. “You have to know everything up to their inside leg measurement.”
Beyond financial pressure, some market professionals believe other factors could drive wealthy Russian expats in London to return home — this affair could bring out the love of Mother Russia that might have been buried.
“Russians are extremely patriotic, and the effect of what our government has done in expelling diplomats has had the effect of causing the Russian population in London to become more patriotic,” Hersham said.
Reflecting on the general sentiment of clients as the tensions have unfolded he said: “Everyone will think that Putin has got it right and we have got it wrong, and when you couple that with the fact that Putin wants Russians to come home as well, and for their children to be educated at home, you will see less activity from Russians in the London market.”
Putin has put in place an amnesty period for wealthy Russians living abroad who may have been suspected of squirrelling funds out of the country, in order to repatriate assets to a Russian economy that has suffered as a result of declining energy prices and international sanctions.
Not everyone agrees that Russians will be so keen to return home.
“A lot of Russians in London have their businesses here, their children go to school here — they see themselves as very anglicised,” broker Black Brick Managing Partner Camilla Dell said.
Russians had not been a huge part of the new sales market for the past few years — just 3% of Prime Central London transactions were undertaken by Russians last year, according to Knight Frank, less than half the 2013 heyday when they topped the league table of overseas buyers and bought 20% of all homes above £10M.
“London has become a more international market,” Wetherell said. “Whenever new sources of wealth spring up they come to London. In the 1960s it was the Greeks, because they controlled the means of shipping oil around the world. When oil was nationalised in the 1970s it was buyers from the Middle East. And when Russia was denationalised the Russians came to London. Today it is buyers from the Far East.”
The high point of Russian buying may be past, but the high point of Russian selling may be about to begin.