Overseas investors in real estate - the issues you need to know about now

Investors are always looking for new investment opportunities and real estate has traditionally produced high yields.

Now that the worst of the disruption caused by the COVID-19 pandemic is hopefully behind us, we look ahead to some of the changes that investors in the real estate market need to be aware of when making their investment decisions.

 Covid rent arrears

 Investors in portfolios which include retail and hospitality premises need to know about the legal changes being brought into effect by the Commercial Rents (Coronavirus) Bill.

A compulsory arbitration process is being introduced to resolve disputes between landlords and tenants over unpaid rent debts. It applies to debts which arose during the pandemic and which relate to periods when premises were unable to trade (or trade fully). There is also a moratorium period during which such unpaid debts cannot be recovered.

If no further COVID-19 lockdowns occur, these debts will be historic. However, it will be important for investors to seek advice on how portfolios will be affected by the arbitration process and on how any rent arrears should be treated as between buyers and sellers.

Energy performance of buildings

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 will come fully into effect on Saturday 1 April 2023. These prohibit the letting of commercial properties with low energy performance ratings (ratings F and G). The requirements apply to new leases, renewals and existing tenancies. There are some exemptions based on a number of factors, including a “seven-year payback test” and devaluation.

Importantly, the exemptions aren’t carried over when a property changes hands. Investors in property therefore need to consider whether they’re investing in properties which will need energy improvement works to be carried out before April 2023. If so, can any exemptions be claimed? And, if not, who is liable to bear the cost of energy improvements under the terms of the occupational leases?

National security and financial crime

Investors also need to be aware of new initiatives by the UK government to protect national security and prevent money laundering:

• The National Security and Investment Act 2021 came into force on 4 January 2022. This establishes a regime which allows the government to scrutinise and intervene in certain acquisitions to protect the UK’s national security. There is a mandatory notification procedure for the acquisition of some sensitive businesses. Acquisitions of land aren’t subject to the mandatory notification requirements but could be within the scope of the regime’s call-in powers. Most real estate transactions are likely to fall outside the regime, but buyers need to consider its application where they’re buying assets which are, or are proximate to, land which is key to national security, such as critical national infrastructure sites or government buildings
• A new Trusts Registration Service will require a greater number of non-UK trusts to register with HM Revenue and Customs. Registration will require trustees to disclose beneficial ownership information
• A private member’s bill is being debated in Parliament. If this becomes law, it will require overseas entities who own land to disclose their beneficial owners in certain circumstances.

For a fuller discussion of all the issues currently affecting real estate, see our what’s on the horizon guide.