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The Draw of the City

A 545 Acre Highland estate in Scotland on a private island is coming up in the next Savills Auction guided around £3m. It was originally out on the market at £15m in 2012. The property consists of 28,000 sq. ft., took six years to build and was completed in 2007.

This means the property is selling for only 20% of what it did in 2007. The pounds per sq. ft. equates to only £107 per sq. ft.; I’m pretty sure the refurbishment cost would have been a lot lower taking into account the cheaper Scottish labour force. This figure takes no account of the extensive landscaping which has gone on in the 545 acres surrounding this property. It has been estimated the owner has spent over £20m on developing this property over the six year period. It clearly was a labour of love, and not a development project. The mansion dates back to the 1830’s and has had many esteemed visitors over the years including Sir Robert Peel, the Conservative Prime Minister, who used the island as his summer retreat.

The reason for the sale was due in part to the compulsory purchase order from a power company which the owner had unsuccessfully campaigned against. The order means pylons will be erected on a strip of land in near proximity to the estate.

Savills, says the property is “arguably the finest country house to be built in Scotland this century” which boasts of a “high standard of craftsmanship” and a “breath-taking location”.

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At a similar price we exchanged on a property last week where the price was just a touch over £3m at £3.07m, however this property was only 1,400 sq. ft. in size which represent only 5% of the size of the mansion in Scotland equating to £2,200 per sq. ft., about 20 times the one in Scotland, not even taking into account the vast surrounding lands.

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So why the massive difference? Why is a piece of property 20 times more expensive?

The price boils down to simple supply and demand. In London, supply is constrained, there is no land to build upon, and the properties which exist cannot be extended due to strict planning constraints.

The process of urbanisation which means a population shift from rural to urban areas is responsible for the increase in demand in cities like London. The glare of the bright lights is too bright to resist and the population has gone from the country sides to the cities in pursuit of economic prosperity. In a nut shell this is what makes one piece of land more expensive than another even though they are both on the same small island of the UK. This same phenomena is occurring the world over as countries develop.

The ever increasing population gets drawn in by the city lights. This means the demand increases, and there is very little increase, if any, in supply.

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In a city like London the demand is not only domestic, it is further compounded by an international demand who see the appeal of London real estate purely as an investment and a safe haven.

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Another island which has been in the press recently is Java one of 13,000 islands which make up the archipelago of Indonesia. An island I have visited several times. I have seen the same process of urbanisation occurring in Jakarta, the capital, consequently the roads start to get congested to the point of gridlock, and new shopping malls start springing up to absorb the new found wealth. The prices of the designer goods in some of these malls would make a Londoner think twice before purchasing. We at least have Bicester Village and outlet centres for our designer goods.

Make no mistake the capital of Java is rising fast, it is predicted to be one of five largest economies by 2030 according to PwC. The middle class is set to double in the next five years. Multinationals are reporting massive year on year increase in profits. Properties prices here have been increasing, having more than doubled since 2009.

Its first Metro line is due to open in 2018. Since the ‘global’ financial crisis property prices have increased 300-400% driven up by speculators and investors, as well as genuine domestic demand. After recent elections property prices have slowed down and stabilised.

The issue here is foreigners cannot purchase homes, they can purchase office space only; homes are reserved for domestic buyers. The city is so highly rated that PwC have rated it as second in their city investment rankings, higher than Singapore and Shanghai.

There is talk of opening residential investment up to foreigners, this will of course increase demand further. Given the buzz in their own city, and with good reason, why then is London still favourite for wealthy Indonesians?

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Both the Indonesians and Chinese have been earmarked as potentially the biggest foreign investors in the London property market, what drives them to invest over here given there is money to be made in their own back yard?

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First and foremost, London is perceived to be a safe haven location. London has a transparent property market. Property tenure is clear cut and underpinned by the legal system.

Given that it is such an established market, there are also good liquidity levels in most price sectors. London is also physically and politically safe. There is a clear rule of law and transparency in the political system that is not replicated in some emerging economies.

UK investment also offers a chance to diversify into another currency, the Eurozone crisis and problems in Africa and the Middle East have seen funds flow in from these regions as a flight to safety during times of crisis in these regions. Conversely a weak pound also is a big draw for inward property investment.

Education, the lure of world renowned schools and universities in and around London cannot be overstated. It is estimated a third of buyers of off-plan new-build properties do so with their children’s education in mind. In many cases, the property or properties will be used by their offspring while they study at university, and then rented out once the child or children move elsewhere.

London is among the top cities when it comes to tertiary education – it boasts of twelve universities ranked in the top 700 world institutions, rivalled only by Paris with sixteen.

For these reasons Indonesians and other overseas investors choose London as a place to invest their wealth, consequently the market is getting very heated. And the question which arises in the property market every few years is how long can it carry on for?

The Real Deal

Knightsbridge, London, SW1 Purchase Price: £2.1m

  • A large and beautiful two bedroom flat with excellent finish
  • Overlooking Pont Street Mews
  • Long lease
  • High ceilings
  • Properties in this location are being sold for around £2,250 per sq. ft. while this property is coming at around £2,000 per sq. ft.
  • We believe the value of this property to be around £2.3m
  • This property is located within easy reach of Sloane Street, Harrods and Sloane Square

Call us now to secure this deal!

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

The more desirable features a property has such as high ceilings, facing a square etc the more it will appeal to tenants and buyers alike, and the more it will increase in price.

Know the type of return you would like from property; for example there is no point going for a high income property when you will be paying 50% tax on the income. It may be better to aim for capital gains instead where you can enjoy the capital gains allowance each tax year.

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