Over recent years, various changes to UK tax legislation have targeted residential property. As an example, where a non-UK domiciled individual is either directly or indirectly holding an interest in UK residential property, they are now subject to inheritance tax. This includes UK residential property interests that are held by non-resident closed companies, non-resident trust and company structures and non-UK partnerships.
In response, Channel Islands administered offshore structures containing real-estate have evolved. There now tends to be greater weighting to commercial real estate, with many residential properties moved to personal ownership.
Another recent development has been the investment of funds within offshore structures that would historically have been earmarked for a single real-estate asset (such as an office block), into Real Estate Investment Trusts (“REITs”). Here the investor gets the benefit of access to a greater number of properties, sector focus, geographical diversification, and an ability to exit and re-enter the REIT quickly.
The impact of the Covid-19 Pandemic
Covid-19 has had a marked impact on the world of real estate. In offshore structures, we have seen directors of companies and family offices grappling with how to approach their investments in shopping centres, hotels, and office buildings. Arrangements have had to be in put place with tenants on a short-term basis to take account of the difficulties faced. There has also been much soul searching, as the right direction for the structure in the short and long term is determined. This is resulting in a move to a diversified set of real-estate assets in portfolios, as well as other asset classes to act as a counterbalance.
Some real-estate sectors have fared well, though, with logistics buildings, have been in high demand as people have shifted to Amazon and other e-commerce sites, being a good example. As a result, REITs focused on logistics buildings have generated strong returns.
Travel restrictions largely kept new residents away from the top world cities in 2020 and made property purchases by foreigners more difficult. The Monegasque market remains the most expensive location to purchase residential property worldwide. Per Savills, Monaco has an average price per square metre of over €47,000, whilst the second place city, Hong Kong, saw average prices per square metre of €39,600 in 2020. New York, London and Paris round out the top five from a prime capital value perspective. Post-Covid, real estate experts expect international demand to return to these cities as restrictions ease globally.
The expectation is that the pandemic will continue to drive a shift towards e-commerce and will improve supply chain resilience by boosting local inventory. This will mean that there is a long term demand and growth prospects for the logistics sector in the US, Europe and Asia in particular.
As for the traditional high street and shopping centres, the jury is still out as to how they will evolve. Prior to Covid-19, many shopping centres had sought to position themselves as multi-purpose entertainment sites where as well as shopping, people could enjoy a meal and watch a film. The expectation is that high quality sites of this nature should recover, albeit the mix of tenants will invariably evolve as shopping habits change. The view of the traditional high street set up is more clouded at this time.
From an office perspective, real estate experts believe there will be a flight to quality with top companies wanting the best quality building for their employees, despite the increased prevalence of remote/flexible working arrangements, accelerated by the pandemic. The office will act as a hub for employees to meet, and the actual building will become more multi-purpose in its set up.
There is undoubtedly more to come in the real estate world as the world creeps back to normality, but it does seem clear that assets of this nature will continue to be an important component of an offshore structure, albeit with a more balanced and diversified set of assets likely to be more prevalent.