Refuge in the sanctuary of London’s Property
I have had a number of meetings in Georgia with clients who are interested in investing in the Central London property market. From art dealers and night club owners to those who are into property already as their main business in Georgia. A few of those I had meetings with did not speak English and therefore required a translator.
Interestingly one investor who has a large portfolio in Georgia has several million pounds of commercial property and it is already rented in a strong area of Georgia. The tenants are blue chip companies like Puma.
During the meeting he stated his preference was to liquidate all his assets and start in investing in London property, which was a bold statement. It was me who made the suggestion he should move one step at a time. After all there is a teething time to understand everything and this takes time. So better to get the formula right.
Here was a savvy property man who instantly saw the value in our proposal to invest in Central London property.
So why would a property man who has substantial assets want to enter into an unknown market, after all isn’t it better to grow your flowers where you can water them?
There are a couple of reasons why he came to this conclusion. One, if he wanted to sell his properties in Georgia in the future the market hasn’t strong enough demand to offload several million pounds of commercial property in a hurry.
The exit is not strong to the degree it exists in a market like Central London. This means if the demand is not strong the price is not likely to escalate as much as another market which has the appetite for these levels of investments, from both individual investors and institutional investors like pension funds. One of the main driving factors of this is the credit available in mature financial markets like London. Though we complain regarding this, it is a comparative complaint to pre credit crunch times. When you consider even in this market you can still get 75% lending on a Buy to Let property with pretty much no proof of income, we still have it good. Georgians are crying out for a simpler and smoother form of credit approval.
One money lender I met makes his money by lending out funds at 5% per month and his security every time is property and he only gives up to 65% Loan to Value.
He has no lack of customers, thanks to the bureaucracy of getting approval for lending from Georgian banks. Even bridging companies in the UK will lend at around 1.5% per month and everyone tries to avoid them in favour of a plain vanilla mortgage.
Secondly the political situation is not so stable in Georgia, and trouble can kick off any time. It was only in August 2008 that Russia launched a full scale military invasion of Georgia, they still occupy two disputed regions within Georgia.
Currently the government needs money to fund the coming elections in October this year. This is important considering the opposition’s net worth, officially at least, is worth half of Georgia’s GDP. Unofficially it is even more.
One of the clients I met recently who owns a nightclub had to pay equivalent of £100,000 to government officials to keep them off his back. I was told he just got milked!
Very simply the property investor saw that demand for London is international and the supply limited. This coupled with the transparency of the London market means it’s a solid place to park funds. When comparing to the likely growth in Georgia it was no comparison. Hence it was actually a well thought out and inevitable conclusion.
Interestingly the FT had an article this week titled ‘Euro’s Zone in on London’, describing how rich Europeans are seeking refuge in the prime postcodes of London.
The article points out the direct and almost instantaneous correlation with issues in countries in Europe and the interest this generates to purchase prime property.
It seems the growth rates are not the main aim. The market is being driven by fear of losing what they already have, which is a stronger emotion than the need to gain more wealth than one has. The article quotes Charlie Bubear of Savills who says “The market is being driven by weakness in the eurozone, around 50 per cent of our buyers in the year to date have been driven by eurozone fears, seeking sanctuary for their money.”
Further proof of this is, as Spain’s debt crisis worsened in April and May, web searches by prospective Spanish buyers increased the most out of all European countries, rising 40 per cent from March.
Similarly when Greece was threatened with a dramatic exit from the eurozone, rich Greeks wanted to protect their wealth, interest from Greek buyers rose 34 per cent From March to May, compared with a 13 per cent rise since January.
Figures from Savills paint a similar picture. In the past four weeks, they have experienced a 50 per cent uplift in searches for expensive London homes from Greek buyers.
Some have even rushed and purchased blind, such is their faith in the sanctury of this holy market.
A manager at a Hamptons branch was quoted saying “After the announcement of a possible Greek default, we had a Greek buyer exchange blind 48 hours after having his offer accepted on a £1m purchase, which was full asking price.”
Though the factors between the current economic crisis in Europe and the political uncertainty in Georgia are different, the motivation is the same: To seek financial refuge in the sanctury of prime London property, in order to preserve what they already have.
Knight Frank’s index of prime property prices also shows a rise of11.4 per cent across all prime Central London in the year ending April this year. It seems this rate of growth is secondary to the primary need of preservation of wealth.
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