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Why London Has Pulling Power

Over the weekend I met an Israeli who was working in London, though he had his roots in his homeland. We got talking about property and he mentioned his father in law had made a sizable fortune in Uzbekistan.

He also informed me his father in law had distributed some of his wealth already to his children. He had been the recipient of some of these funds and these were currently sitting in his account not doing very much.

He wanted to invest in property, prices were rising in Israel and Uzbekistan, however with good reason he did not feel comfortable in either of the two countries, unsurprisingly.

Though prices may be rising these countries do not have                                                                                                                                 much stability. Therefore his choice was to invest in London.

How to invest? He presumed he should simply go out and purchase a buy to let property and sit on it, waiting for it to rise. This is certainly one way and the most common way.

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I asked him what he wished to gain from the investment, capital gain or regular income, he predictably replied both. Nine t imes out of ten when I ask this question to investors this is inevitably the answer I get back. It seems they are scared if they say just one of these they may not get the other one at all . To cover themselves they answer both.

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However this may not be the best way to get return out of a property. For example, a group of businessmen decided to invest in property, they all had high incomes as business was doing good. They went out and purchased a high yielding HMO property because the yield was unusually high. I asked them why they purchased such a property if they did not need the income, they had no answer. They were all on high income tax brackets therefore half the income was going straight to the tax man. This kind of property did not suit their circumstances. Furthermore the rise of an HMO property will only be a fraction of other properties in the area for various reasons.

I proposed to him another way, by trading property through our consortiums. This will give him regular cash lump sums throughout the year, ensuring his money is working harder for him than being stuck in one property. At a later stage of course it may be wise to keep a property on the side as a long term investment. This way has advantages, he is able to remain fluid yet his money is working for him.

This week the FT did an exposé on the property market in Jakarta, Indonesia. A city I have some familiarity with having visited it several times in the last couple of decades. I have seen the traffic jams get heavier and heavier to the point it seems like there’s a permanent jam. The island is surrounded by putrid waters and is at risk from floods. Prices have increased as much as 40% per annum in some places leaving many aspiring Indonesians without a roof over their heads.

Very expensive shopping malls have risen, shopping malls which the common Londoner would find expensive.

The prices are now facing some threat, with the upcoming presidential elections and the interest rates going higher.

This real estate market has been described as one of the strongest in the world by one of the leading real estate brokers Cushman & Wakefield.

This is typically what happens when economies grow too fast, the local infrastructure cannot keep pace. And so the growth becomes lop sided, like a lame animal trying to run. An exception to this seems to be China, a country wherein the government is the entrepreneur, so you have a guided and well thought out development.

This is a traditional market where speculators and developers are still averse to taking loans. Developers depend upon pre sales to fund their developments rather than going for bank finance.

Despite the hike in property prices, much of the Indonesian money is finding its way to the UK property market.

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Someone I know in Jakarta who has a family based there is keen to invest in London for two reasons. The primary reason is his children will want to go to university here in the UK, Indonesia doesn’t have the mature education system which the UK has therefore he sees the need to build a foundation in the UK. The second is he knows this is a good and stable investment, meaning medium to long term the prices will rise by a sensible level.

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A recent survey done by Knight Frank asking respondents to rank the most important global and regional cities resulted in London taking the pole position in almost every category.

Demand for central London comes from 63 countries around the world, with Indonesia steadily increasing its share.

It is not difficult to see why London is an attractive city to invest in from an international point of view, with good sensible reasons.

Even if we take the price rising completely out of the equation, we are still left with two main factors. One is it is a stable country politically and investors trust the system here. On the whole if you purchase a property here no one would question whether you have a clear title of ownership. When renting no one can claim ownership of the property and if rent isn’t paid there are systems in place which will evict the tenant.

Secondly this is one of the leading countries for secondary education, which has taken many years for maturity; not something which another country can replicate in a hurry.

A large reason why international investors are investing is due to wealth preservation. They see the importance of keeping their funds out of unstable countries, where though they made their money there they do not wish to keep funds there.

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The price of anything is determined by supply and demand. We have a situation where the demand comes from a wide variety of sources for central London property, yet supply is very constrained.

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This is further fueled by the intrinsic demand for property. It is easy to see why prices will be rising. My predication is in the coming two years you will see historic records being broken.

The Real Deal

Kilburn High Road, London, NW6

Purchase Price: £725k

  • A rarely available freehold building in this prominent location
  • Commercial on the ground floor and residential on the above
  • Moments away from the station
  • Excellent buy and hold opportunity
  • There could be a grant available for the works in the property

Call us not to reserve!

Suresh Vagjiani

Sow & Reap

Property Investment Company

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!Tips of the Week

As with any business venture it is always wise to have more than one exit strategy; property has this naturally, instead of reselling you can refinance and get all or most of the money invested back if the price has risen, and continue enjoying the rental income.

Don’t buy property blindly, do your research. Not on the property as most do, but on yourself and your situation, some considerations are tax, lifestyle and retirement.

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