28 October 2016
David Cameron speaks to workers while campaigning for votes in the general election. Photo: Bloomberg
David Cameron speaks to workers while campaigning for votes in the general election. Photo: Bloomberg

Implications of the British election for HK investors

Britain is not trustworthy politically — Hongkongers know that well — but when it comes to investor protection and fair play, the country has a time-honored reputation.

That’s why Britain still reels in many Hong Kong investors.

Its property market, especially homes in London, has experienced considerable surges in price, and one contributing factor is money from Hong Kong.

Now the close economic ties have made the British general election a constant focus of some Hongkongers.

Numerous public opinion surveys have suggested that the chance is slim of either the Conservatives or Labor securing a majority of the seats in the House of Commons.

Hence the likely outcome is another coalition, just like the incumbent Conservative/Liberal Democrat one.

The London stock market’s reaction to election results throughout the past three to four decades tells us investors like the Conservatives, believing their governance is productive for the economy.

For instance, the FTSE 100 Index posted a 10 percent rally after the Conservative Party’s John Major became the new master of 10 Downing Street in 1992.

But the benchmark nosedived 20 percent in 1974 when the Labor Party bagged the most seats, winning its leader, Harold Wilson, a second term as prime minister.

Media reports show that this time the business community, as usual, is inclined to vote for the Conservatives.

There is one more reason for them to do so — the mansion tax, one of the major initiatives in the Labor Party’s manifesto.

Under the existing regime, owners of luxury villas pay property tax at the same rate as dwellers of shoebox flats.

The result is the government does not have enough tax revenue to narrow the wealth gap.

The political climate now favors more tax on larger houses, since the majority of homeowners will not be affected.

Statistics show more than half of properties in London worth over £2 million (US$3.05 million) are owned by foreigners. Such a tax will therefore have little impact on local residents.

In an attempt to garner more support, Ed Miliband, leader of the Labor Party, has also promised to impose heavier stamp duty on homebuyers from overseas if his party wins the election Thursday.

It is also said that he has been mulling over other measures to regulate home transactions and introduce a British version of the “Hong Kong property for Hong Kong people” policy.

This is definitely not good news for Hong Kong investors who have properties in Britain, either for their own use or for lease.

So prepare yourself for some drastic changes in the British residential market if the Labor Party comes into power.

The party also aims to scrap the 200-year-old “non-dom” tax status — a rule that allows some wealthy non-domiciled Britons to limit the tax paid on income made overseas.

Labor says wealthy Britons with a permanent home deemed to be outside the country who have been benefiting from the British system must be made to pay tax in Britain.

There are some high-profile examples of such non-residents, including HSBC chief executive Stuart Gulliver, who is domiciled for tax purposes in Hong Kong, and Baroness Lydia Dunn, one of Hong Kong’s most prominent political figures before the handover, who gave up her seat in Britain’s House of Lords in 2010 to retain her non-domiciled tax status.

Surely these new proposals will deter rich investors, but so far the gravest concern of the business community is “Brexit” — the possible exit by Britain from the European Union.

Many fear that the country’s financial sector will take a battering, and once European firms ditch London as the preferred city for their head offices, upmarket commercial and residential properties will be the next to suffer.

Though Brexit would be bad for the British economy, election results since 2001 show voters are increasingly supportive of the idea.

That’s why the Conservatives are using Brexit to woo voters.

Prime Minister David Cameron said he would hold an unrestricted referendum on the issue if he is given a second term.

None of these election developments can shore up investors’ confidence in Britain.

The odds are high that the pound will weaken.

Affluent property owners will have a greater incentive to sell their homes and bonds and convert the money into foreign currencies to avoid tax.

Yet the stock market may do well.

A large part of the earnings of the FTSE 100 constituents is generated outside Britain, and a weakening currency will boost the companies’ results.

This article appeared in the Hong Kong Economic Journal on April 29.

Translation by Frank Chen

[Chinese version 中文版]

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A famous Hong Kong writer; founder of the Hong Kong Economic Journal

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