The flow of Russian money into the capital is slowing as a result of government pressure and a tightening of anti-money laundering rules, experts say.
For several years the story of Russian oligarchs buying up prime real estate in London has been a familiar headline, however, mortgage brokers are saying that this activity may now be cooling down.
Though the political temperature between the UK and Russia has plummeted in recent months following the Salisbury poisonings, experts claim the slowdown in Russian investment has been in the making for several years.
Experts claim the slowdown in Russian investment has been in the making for several years (Pictured: A row of London townhouses in South Kensington, where there is plenty of Prime London property)
‘There has been some government pressure around lending to foreign nationals and offshore companies, which has been felt in the mortgage community,’ said Lucy Barrett, managing director of broker Vantage Finance.
‘The offshore company and offshore borrower combination is very challenging and this feels to only be getting harder. We are seeing less interest from Russian clients purchasing large assets in Prime London which previously we saw quite a lot.
‘In general there has been a desire by the UK government to try and deter overseas purchasers from buying and holding property which simply sits empty.’
In 2013 estate agency Knight Frank placed Russians as the biggest spenders on properties worth more than £1 million in London.
NGO Transparency International claims that more recently Russian investors are looking outwards as Islington, Clapham and Pimlico showed higher levels of Russian investment, growing from just two to 11 per cent of market share in those areas between 2014 and 2015.
Dmitry Zakirov runs Longrad, a Mayfair-based consultancy firm that specialises in advising wealthy Russians on purchasing what it describes as ‘elite’ real estate in London.
According to Zakirov, a range of factors have contributed to the cool down in Russian investment into UK property, not exclusively related to the political climate.
‘It started quite long ago, in late 2015 and early 2016, way before the cooling down in relations we see now,’ he said.
‘Changes to stamp duty were a bigger part of it, and then tightening regulations on anti-money laundering procedures.’
Anti-money laundering rules are deterring the oligarchs
Last year the government made changes to anti-money laundering measures to help prevent both money-laundering and terrorist financing.
‘This is a good thing, but it still has to be reasonable,’ said Zakirov. ‘When you have police searching your pockets, and asking questions in front of neighbours, even if you are innocent you feel uncomfortable.
‘So you don’t want to go through that procedure, when you can go elsewhere.’
In addition to tightening the rules around money-laundering, the government has recently introduced a new weapon to combat dirty money, known as an Unexplained Wealth Order, or UWO.
An UWO is a tool that government bodies can use to force a person suspected of involvement in financial crime to disclose assets that appear disproportionate to their known income.
The first UWO, worth £22million, was issued in March against an unnamed central-Asian politician.
Following the Salisbury incident, MPs called for greater use of UWOs against Russian oligarchs as part of the UK’s retaliatory measures. However, the proposal was soon shot down by The National Crime Agency, who stated that it would not target people based on their nationality.
‘I’ve spoke to lawyers and no-one knows how the government is going to implement UWOs,’ said Zakirov. ‘It will be interesting to see how it will work but at the moment it is nothing new, and they’ve already put in place some good barriers.’
Over 700 Russian millionaires must prove that their wealth was not built on dirty money
Zakirov also claims that pressure from major banks, as well as the government, is making the UK less attractive from a property investment point of view to wealthy Russian nationals.
‘It is the pressure from the government on major banks that causes them to buckle under pressure and make the lives of some of their clients miserable,’ he said.
‘Freezing and unfreezing their assets, or closing their accounts with no explanation. So the clients leave themselves.’
The UK’s clampdown on oligarchs in the wake of the Skripal poisoning means that the Home Office is now reviewing the visas of over 700 Russian millionaires, who as a result must prove that their wealth was not built on dirty money.
Zakirov says that while this may not completely kill the desire to invest, he expects Russian interest in UK property to cool down for ‘two to three years’ as a result.
Why is the government clamping down on Russian investment?
One of the major issues the government has with Russian investment into UK property is its potential to facilitate money laundering schemes.
According to Transparency International the UK is a ‘top destination’ for money laundering, with the level of illicit financial flowing through the UK in excess of £90 billion per year.
Transparency International says these large sums that come into the UK are often linked to Russian nationals, including associates of Vladimir Putin.
The charity stated: ‘Whilst clearly not all wealthy Russians in the UK have grown rich by corruption, over the last decade or so, kleptrocrats from Russia have continued to launder unfathomably large sums through the UK – money that has likely been plundered from state coffers and solicited in bribes.’
Transparency International has identified 176 properties worth £4.4 billion in the UK which it believes have been bought with suspicious wealth – over a fifth of which is wealth from Russian individuals.
Russians with less wealth are now looking at the UK property market
Katya Zenkovich is head of the Russian desk at Knight Frank, and like Zakirov looks after the property interests of Russian high-net-worth clients.
She says that over the past few years, there has been a shift in the type of Russian national that is choosing to buy property in the UK. According to Zenkovich, it’s no longer oligarchs spending four or five days in the country a year, but rather people committing to the UK long term.
‘It’s the new generation of wealth, for example the dot com entrepreneurs, people from the deep heart of Russia who have been successful,’ she said.
‘You have regular guys who have made good in life, they’re not billionaires, but they’re obviously successful businessmen. We still have good people with good money interested in the UK.
Experts say Russians as the biggest spenders on properties worth over £1 million in London
‘Politically things aren’t looking great, there’s a little bit of nervousness in terms of long-term commitment so people are opting to rent, but the UK is still on the radar, and a pull for people moving families.’
Zakirov agreed: ‘You have to divide the market between different levels of wealth,’ he said.
‘You have the super uber-wealthy, who have already been here for 10 years or more, and then the very wealthy, some of which are still coming here.
‘Then there are business people who are not happy in Russia, these are small businesses who want to put some of their capital here just in case.
‘If we’re talking about uber-wealthy, the oligarchs, they’re already here. The very wealthy are still coming, because if you want to leave Russia the alternative is the United States, which is too far away, and they don’t want to go to France.
‘Unless you’re retiring there are fewer options. The UK is good geographically and tax structure-wise the UK is still very favourable.’