Situated in the English Channel, the “Channel Islands” consist of the two crown dependencies of Jersey and Guernsey. While not officially part of the United Kingdom, the UK is responsible for defence and international relations of the islands. The extremely close relationship with the UK goes back hundreds of years and, again, while not part of the European Union both of these crown dependencies also have a relationship with the European Union via what is known as Protocol 3. This is related to the active ascension to the European Economic Community in 1972 and allows for free movement of goods (but not services, they are covered by individual agreements).
The latest official data shows that Guernsey has a population approaching 63,000 and Jersey a population of around 107,000. There are other islands associated with Guernsey but for this article, we are focusing specifically on the islands of Guernsey and Jersey.
There is a common misconception that both islands are “tax-free” when in reality this is not the case. Residents and non-residents living in Guernsey/Jersey will pay tax on their personal income and may also pay additional contributions towards specific public services. The situation with regards to corporation tax is generally seen as more favourable with the majority of Jersey registered companies exempt from local taxes (although there are some exceptions to the rule). However, worldwide income will be taken into account and may be subject to double taxation agreements. If looking to invest or move to Jersey/Guernsey it is sensible to take advice about your tax situation and specific implications.
The Channel Islands are perhaps best known for their proactive financial service industries which are integral to the economies of both islands. As we await official economic data for 2019, looking back at 2018 we see Guernsey posted GDP growth of 2% contributing to the sixth straight year of economic growth. While this figure was well down from the 4.6% seen in 2017 it still compares well to the UK and many other countries. Jersey has been lagging behind Guernsey in recent years and only posted GDP growth of 0.4% for 2018. There is no doubt that the uncertainty relating to Brexit, and UK trading arrangements going forward, has had an impact but this is starting to lift after recent developments on the UK political front.
In 2018 employment in Guernsey fell by 0.2% although there was an increase of 0.5% in Jersey. When looking at both Guernsey and Jersey there is no doubt that the financial services industry leads the way.
Interestingly, the financial services industry accounts for 21% of employment numbers in both Guernsey and Jersey. Over the last five years, the number of jobs in financial services has increased by 7% in Jersey and 4% in Guernsey. In many ways, this reflects the extremely strong position held by Guernsey and Jersey with regards to international financial services. It is also worth remembering, over the last decade we have seen an unprecedented attack by governments around the world on secretive tax havens. The fact that Guernsey and Jersey appear to have benefited from this crackdown shows the stable structure and transparent regulations surrounding their financial services sectors.
At this moment in time, there is obvious concern regarding Brexit and the U.K.’s future relationship with the European Union. While, as we mentioned above, both Guernsey and Jersey are not part of the United Kingdom they are described as “crown dependencies” and future prospects are very much aligned with those of the overall UK. There is also a very close relationship between the Jersey/Guernsey and the “City of London” in terms of financial services. Those who believe London will lose its prominence in the worldwide financial sector may well be jumping the gun a little.
There may be some short-term volatility with regards to the hospitality industry across Jersey and Guernsey. However, it is worth reminding ourselves this is an area of the world that attracts high net worth individuals who tend to maintain their luxury lifestyle whatever the short term economic fluctuations.
Before we take a look at the Jersey and Guernsey property markets there are a number of issues to take into consideration with regards to eligibility and property purchase restrictions. The Jersey property eligibility regulations have a clear focus on those born locally. There is however a high-value residency (HVR) system under which those contributing a minimum £145,000 in tax will be eligible to acquire a property. There is also what is described as “unqualified” properties which are often placed to one side for non-locals with a prominent position in the local economy.
The situation in Guernsey is a little more simplified with 6% of the islands housing stock (around 1600 properties) deemed as “open market”. These properties are available to any UK/EU nationals without restriction and those outside of the UK/EU via special business/investment visas. Those with an employment licence will also be eligible to acquire from the “local market” pool of properties set aside for those born on the island.
The Jersey property market enjoyed significant growth in 2018 with average house prices rising by 3.5%. Aside from the fact that the Jersey economy is still growing, albeit lagging Guernsey of late, and interest rates are relatively low, many experts point towards a shortage of stock as the fuel for the recent rise in prices.
In 2018 the number of property transactions under £500,000 fell by 17% which was not a sign of investor concern but more a lack of stock. Interestingly, as property prices continue to rise we have seen a trend towards upscaling, resulting in a 31% increase in transaction numbers in 2018 for property valued between £500,000 and £1 million. There was also a significant increase of 47% during the same period for properties in the £1 million to £2 million price range.
While the financial service industry in Jersey tends to grab the headlines, there is more to the region than just financial services. The local government is extremely proactive with regards to attracting high net worth individuals. The standard of living and quality of services (especially education and hospitality) in Jersey are extremely high. The ability to market the island as both a business hub and a place to live is expected to lead to significant population growth going forward.
If forecasts are correct, the population of Jersey could reach 128,000 by 2035 which would be an increase of 21%. This ongoing growth in the population combined with the significant shortfall in new homes has created a strong backbone for the Jersey residential property market. To put this into perspective, to fulfil current demand over the next three years the island will require an additional 2750 newbuilds – as for the future, the numbers just go up and up.
While Guernsey has recorded higher growth in GDP compared to Jersey in recent years the property market has not followed suit and is still in a recovery stage. Thankfully, a period of property price falls appears to be over having reached the bottom in early 2018. During the final three-quarters of 2018 residential property prices in Guernsey bounced back. This resulted in an annual growth rate of 4% in 2018 bringing the average property value up to £438,000.
Even though transaction numbers are still well below 2007 levels, prior to the worldwide economic downturn, they are 14% above the 10-year average. Open market transaction numbers recently hit an 11 year high which again indicates the underlying strength. The improvement in the number of open market buyers is interesting and suggests concerns over Brexit could lead to more high net worth individuals looking towards Guernsey. The government also brought in a tax cap for open market buyers in 2018 which would appear to have caught the eye of would-be investors.
Ironically, while the Jersey population is expected to increase by 21% to 2035 the population of Guernsey is only expected to show 3% growth by 2034. Guernsey is likely to benefit more from a recovery in transaction numbers and pent-up demand for property. It is worth reminding ourselves that transaction numbers are still well below the 2007 peak which would indicate significant room for improvement.
The economy of Jersey is valued at around £4.3 billion with Guernsey boasting an economy valued at just over £3 billion. It will come as no surprise to learn that around 40% of the gross value added (GVA) for each economy is associated with the financial sector. When you also consider that each financial sector accounts for 21% of total employment it is fair to say that both Guernsey and Jersey have very prominent and very proactive financial sectors.
This is reflected in the mortgage market with high net worth individuals able to negotiate extremely competitive rates and terms to suit their particular financial situations. There are a number of issues to take into consideration with regards to mortgage markets in Jersey and Guernsey, such as affordability and accessibility. It is also worth reiterating the fact that Jersey mortgages and Guernsey mortgages are regulated in the same manner as the UK mortgage sector and linked to Bank of England base rates. As a consequence, with UK base rates near historic lows (and rumoured to be headed lower in the short term) mortgage rates are also relatively low at the moment.
We will now take a look at some bullet points regarding the comparison between Jersey/Guernsey mortgages and their UK counterparts.
• The mortgage tax relief system is different to the UK and will not be phased out until 2025
• There is a limit to the level of mortgage tax relief available (subject to change)
• Most international banks and financial companies have a presence in Guernsey
• LTV ratios tend to be similar to the UK although private bank/bespoke arrangements can vary significantly
• It is possible to secure mortgage rates from 1.5% upwards depending on individual circumstances
• Comparing Guernsey mortgage rates can be difficult as terms and conditions tend to vary quite a lot
• The high net worth individual mortgage market is extremely liquid in Guernsey
• As with Guernsey mortgages, Jersey mortgages are considered an international mortgage although valued in sterling and linked to UK base rates
• Buy to let mortgages may be subject to housing qualifications and individual status
• Mortgage tax relief is limited in Jersey with full-time residency taken into account
• Jersey registered businesses are exempt from local taxes, therefore, commercial property mortgages are very popular
• Stamp duty and land transaction tax are applicable but there are concessions for first-time buyers
While there has been a significant reduction in bank deposits held in Jersey and Guernsey over the last decade, there has been a significant increase in the level of funds administered on the islands (investors switching from low interest savings accounts?). This has fuelled the already liquid mortgage market which in many cases is being held back by a lack of property and shortfall in newbuilds numbers.
It is advisable to use the services of a mortgage broker to open up the wider Channel Islands mortgage market which also includes an array of private banks, family trusts and other niche lenders. As a consequence, there is the opportunity to inject a greater degree of competition when looking to secure funding as well as utilising assets under management and extending financial arrangements to other connected services.
Since the summer of 2016, the ongoing Brexit negotiations have gnawed away at the confidence of investors looking to the UK and the likes of Jersey/Guernsey. The political impasse we saw in late 2019 turned out to be the nadir of the whole Brexit process prompting Boris Johnson to call an election and subsequently secure a huge majority. While there is still some debate regarding the detail of Brexit and the U.K.’s long-term trading relationship with the EU, many investors are just happy to see some movement. It is also interesting to see a further strengthening of the financial sectors in Jersey/Guernsey which while not part of the UK are heavily associated with the City of London’s financial services industry.
Guernsey and Jersey property markets appear well-positioned for the future with Guernsey enjoying a return to former transaction numbers and Jersey set to benefit from a growing population. Many people overlook the extremely proactive strategies pursued by both the Guernsey and Jersey governments in order to attract high net worth individuals to the region. There is no doubt this strategy has played a major part in historic economic and population growth and expectations for the future.
It is obvious that Brexit has had a short-term impact on economic growth across the Channel Islands of Guernsey and Jersey. This has limited demand for property as well as non-financial sector economic growth. Thankfully, Boris Johnson has now secured a healthy majority in the House of Parliament and is able to pursue Brexit with more vigour. The UK left the European Union at which point focus switched towards trade negotiations and the future relationship between the European Union and the UK.
Many people fail to realise that while Guernsey and Jersey are dependencies of the Crown they also have regulations which are very much aligned with the UK. This is even more prominent when it comes to financial services such as mortgages. The fact that Guernsey/Jersey mortgages are also valued in sterling takes away the currency exchange risk for many international investors. Jersey property will benefit from a significant increase in the population going forward while Guernsey seems to be returning to previous transaction numbers as demand continues to grow. Both appear well-positioned for the future and their central business hubs of financial services are set for further growth.