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Diamonds In The Rough

We have just completed a presentation in Mumbai and Bangalore. The response was interesting, although people are already making money from property in Mumbai there is a thirst to expand their empires to overseas markets. London is seen more as a trophy, a new territory to capture, an extension to their business activities.

A lot of interest came from already wealthy families who want to diversify their portfolio and see London property as a viable bolt-on to their portfolios. There exist two different and perhaps contrasting mindsets between that required to generate wealth and that required to maintain it.

The first is generated from the ‘entrepreneur’ which requires risk taking and more of an intuitive approach and the latter which is required to preserve wealth once earned requires a more sensible head. This task is usually entrusted to another more qualified party once it has been generated. The target becomes more wealth preservation rather than generation, where wealth is growing at a steadier pace.

The contrast between the two cities was also very interesting. My colleague hit the nail on the head when he commented Mumbai is for execution and Bangalore for knowledge and talent. This certainly seemed the case. We had one prominent developer who came to us straight to do the deal, they cut through the small talk and went straight for the jugular, they wanted to examine a deal which was on the table. It actually doesn’t need much talk to explain a deal, but this was foreign territory and hence the background layers had to be explained. Being from a property background the framework was already in place and so they understood the concepts easily.

Property the world over, is based on only three factors, Location, Location and Location. This overrides all other factors.

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One of the highlights of the Bangalore conference was the attendance of the former CFO of Infosys. He was the only one in the conference who was dressed casually. I was unaware of the respect and following he commanded within India. Outside was a queue of Indians waiting to hand their cards to him which they held in reverence with two hands and wanted their pictures taken with him. Though he is a business industrialist, he commanded respect and reverence of that of a rock star.

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It was interesting to see that though the attendees were making money locally and plenty of it, they still desired to invest in London. This is something which is overlooked by those actually living in London. The international pull this country’s property has is immense.

The recent stamp duty rises will in my opinion do little to dampen the enthusiasm overseas for London property. The reaction from most property commentators has been predictably been one of doom and gloom. However this is a knee jerk reaction to what has been a swift implementation of government tax.

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The tax is not as bad as it first seems because it uses a graduated application of stamp duty as opposed to a slab system. For example under the old system it would be very difficult to sell a property for £255,000 as the stamp duty will jump up from 1% for below £250k to 3% for above £250k. The percentage applies to the whole amount, not just to the bit above £250k. This is an illogical way to apply the tax, as it makes it very difficult to sell properties around this mark and causes a kink in the market. Any properties slightly above the £250k mark will be difficult to find a buyer at the correct price and will lead to negotiations around allocating the excess money as payment for fixtures and fittings or agents’ fees.

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So the new tax allows the stamp duty to be applied on only the excess amounts. This too will of course cause some kinks but not to the degree the old system did.

Of course any tax on property is an unwelcome one, especially as property is one of the few attractive investments the UK has to offer. Too much will end up killing the golden goose which attracts money worldwide. Off the back of foreigners owning property in London means income for agents, interior designers etc. is increased as well as many indirect fees such as the shopping for goods which goes along with a trip to London which is a big attraction.

The market also holds its breath for the awaited mansion tax which threatens to further dampen the property market.

The possible double punch to the property market is making people nervous together with the impact of the rate rise.

Is this a time to sit and wait to see what happens? No. This is what most people will do. Fear makes people nervous and impotent leading to inaction.

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There is a fundamental need for properties highlighted in the Barker report commissioned by the government in 2004 which shows the fundamental demand for property in the UK will not be satiated by the projected supply. Little has changed on this front and this is compounded in London where demand has been boughed by overseas interest, this demand is also not based on investment return. It is at times based on emotion generated by owning a trophy asset. The other component comes from the desire to protect ones’ wealth.

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There is much interest coming from China where interest has increased by 400% from 2010 to 2013 for properties between £1m to £2m range. And they have just started to dip their toe in the London property market. This is a snowball which has just started rolling and is set grow in size rapidly.

Indonesia is another rich country from where I currently write, where the demand for London property is set to increase. One way of assessing this demand is by studying where the internet searches are coming from in the world. Interest from Indonesia has been increasing year on year. Money is being made here. One way this can be seen is the disparity in prices, and lack of information, this means the economy is not transparent and therefore where there is a lack of clear information there is opportunity to exploit by the astute few. This can be noted from the simple acts of charging your mobile phones to booking cars.

There is a lot of new wealth being generated here and it needs a home, this may be a good country to generate money but perhaps not the best place to preserve it. The location itself is unstable, prone to earthquakes and volcanic eruptions, which I experienced on one of my earlier visits where several people died, not from the eruption but from the fear generated by it.

The new wealthy here want their children to study abroad, UK offers some of the best education in the world. This type of demand will not be swayed by either of the taxes.

This is not a time to be purchasing overpriced off plan developments or top end penthouses, but amongst the fear and uncertainty there will be diamond deals which will float to the surface.

The Real Deal 

St John’s Wood, London, NW8 Purchase Price: £2.625m

  • A large block in a beautiful and sought after location, currently used as two flats
  • Freehold
  • Garden
  • Approx 3,100 sq. ft. area
  • Planning in place to create a new mansard floor
  • After the extension the area will be around 3,350 sq. ft.
  • Application has been made to convert this into one house
  • A nearby and smaller property was sold a couple of months back for £3.9m, developed
  • We expect the value of this property after conversion to be around £4.2m

Call us now if you would like to have a piece of the pie!

Suresh Vagjiani

A Property Investment Company

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! Tips of the Week

Proof of your deposit and Mortgage In Principle can give you a big advantage when putting in an offer.

When buying a new property it is usually better to remortgage your existing residential property rather than taking a new BTL/Bridging mortgage as many a times you get a lower rate of interest on remortgaging your residential property and also you may get a waiver on valuation and legal fees.

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