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All investment isn’t made equal 

The government wants to attract foreign investment, but is it always good for the economy?


As part of the government’s increasingly desperate search for growth, Chancellor Rachel Reeves wants to develop a commercially attractive pipeline of investment opportunities for a global audience”. To promote the plan Reeves and prime minister Keir Starmer have toured the US, Davos, the Middle East and east Asia, wooing businesses, governments, and billionaires. But beneath the headlines, we ought to ask, what does investment” really mean? Who does it benefit and and what does it mean if more of our assets are owned by foreign entities? 

For decades the UK has operated one of the world’s most open” economies. Foreign capital has flowed into the UK at an extraordinary pace. According to the UN’s specialist body on trade and development, Unctad, foreign entities today hold a stock of foreign direct investment (FDI) in the UK worth over $3.2tn, the third highest in the world (behind China and the US) and three times more than the FDI held in the entire continent of Africa. The result is that in 2021, 38% of all (non-financial) turnover and 29% of gross value added (GVA) in the UK flowed through foreign-owned businesses.

Orthodox economic logic would have us believe that these figures are a mark of success. But if we’ve had so much foreign investment”, then why has actual productive investment in the UK been so low? The answer is complex and clouded by poor data, but we do have some hints as to why. 

The Unctad’s dataset above suggests that two-thirds (64%) of the FDI that flowed into the UK over the past 20 years went not into so-called greenfield” investments (new ventures) but into mergers and acquisitions”. This means money was spent on the purchase of existing assets, including public infrastructure. Academic studies suggest that this type of investment” often brings little-to-no productivity benefit and can lead to reduced innovation and greater use of tax-avoiding accounting tricks. 

While millions struggle with extortionate rents and homeownership slips ever further out of reach, evidence suggests homes are being snapped up by overseas investors” in ever increasing numbers”

Foreign capital has found the UK’s increasingly privatised public services particularly enticing. Many of these services offer monopoly positions and captive markets which have enabled businesses to extract rents, rather than invest. A well-documented example is the UK’s water industry, heavily foreign-owned, and deeply neglected. The full picture is difficult to capture, but the ONS estimate that £77bn of assets were under foreign ownership in the broad electricity, gas, water and waste” grouping of sectors in 2023 and £2.2tn across the whole economy.

Foreign ownership of UK housing is an area of growing concern. It’s well-established now that foreign purchases typically target existing homes rather than building new ones, so they raise demand and prices while leaving supply broadly unchanged thereby making housing less affordable for people who live and work here. While millions struggle with extortionate rents and homeownership slips ever further out of reach, evidence suggests homes are being snapped up by overseas investors” in ever increasing numbers.

Through our recent freedom of information request, we know that properties registered with the Land Registry to private individuals (not corporate entities) with a foreign correspondence address rose by another 8,600 this year, taking the total to 198,100. This data would suggest ownership by private foreign individuals increased 60% over the past decade and that the total value of their holdings surpassed £100bn in 2024. But this data on possible ownership by foreign individuals is just the tip of the iceberg. Corporate ownership of housing is surging in Britain, yet there’s little robust monitoring of the ownership trails that lead overseas.

Interestingly, while as many as 16,000 UK properties may be owned by individuals in Singapore, Singapore does not welcome foreign ownership of its own property. The government of Singapore, faced with its own housing crisis, started with an additional buyer’s stamp duty (ABSD) on foreign purchases at 10% in 2011 and has been progressively increasing it with consequent improvements in rent affordability, as speculative investment cooled. 

Strong controls are needed to direct and encourage the foreign investment the UK receives to productive parts of the economy”

The UK applies an additional duty on foreign property purchases of just 2%. This paltry tax may be notable in a nation that otherwise seeks to minimise obstacles to foreign asset purchases as much as possible but leaves the UK as an international outlier among nations with overheated property markets. Australia recently banned foreign purchases of existing properties, and Canada extended its ban last year. Spain has announced plans for a tax of up to 100% on property purchases by non-EU residents. 

In the UK, average private rents have increased by 6.7% over the past 12 months, reaching an average of £1,399 per month, with rents up 9.7% in the north-east, a joint record rise. We know that foreign ownership is making this worse, but the contribution of foreign speculation to this growth is not inevitable.

NEF research suggests that tripling the current stamp duty surcharge to 6% for non-residents could raise £300m-£400m annually. That would be enough to cover the public grants required to build over 2,000 social (council) homes every year. If foreign purchases declined more than expected, we would raise less money, but we’d also see some cooling in the housing market, making homes more affordable. 

Strong controls are needed to direct and encourage the foreign investment the UK receives to productive parts of the economy. All investment isn’t made equal.

Image: iStock

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