I, Scott Picken, lived in London for 9 years and know the market very well. I have invested in many properties there, but I do feel that there are some important components which need to be understood and explained why I am not investing there. Lets look at the positives. Bottom line is that it is the number one international city in the world, there is more demand than there is supply, there are many migrant workers which provide tenant demand and the economy seems to be recovering.
However for me there are more fundamental items which need to be considered. I dedicated and entire chapter our the book to focus on the UK and specifically London. In the book, Property Going Global, which we wrote with Clem Sunter, and is the authority on International Property Investment, we highlighted the fundamental concerns with the market there and why it is in the ‘low return, high risk category’.
The first major concern is that the economy is based more than 70% of the GDP on banking and insurance. These industries are transient and with the British government wanted to tax high net worth individuals more and more, at some point these industries can easily move to better locations to operate from.
Secondly in terms of value, the UK property market and in particular the London property market is the most expensive it has been ever. According to David Brown, commercial director of LSL Property Services, the average prices were up £1,348 in January 2014, setting a new record high for 17 months running. This is fuelled mostly due to much increased activity, with growing demand for property buoyed by low interest rates and Help to Buy, combined with hot competition for homes. Especially in the top end of the market in London, there has been a buying frenzy by foreigners as they have tried to pick up trophy properties in London and the growth has witnessed this. Anyone who is sophisticated in property investment though, will understand that whether you are talking about residential or commercial, all property should be valued based on income. Whenever people go after capital growth it is like betting against winter. No matter what happens the time arrives and the strategy falls apart! You can ask any investor from the mom and pop investors who were investing in the first decade of this century to the most sophisticated property funds – they met the same result – bankruptcy! On top of that it is common sense that when you are buying at the top of the market – whether property or shares, there is a lot more risk should a correction occur – and they do occur.
If you were to compare a London property with an Atlanta property right now this will explain this better. You see I don’t get emotional and I am not attached to one area or one country. It is why we built the *Global Property SystemTM– *Your GPS for Property Investment so that we could make educated and informed decisions based on facts, fundamentals and research. Using this model, we are currently investing our wealth in Atlanta as we are buying property at 40% to 50% below replacement costs. This gives us a great indication of intrinsic value and reduces the risk dramatically. On top of this we can fix our financing at 6% for 15 years and we are getting net yields of 8%.
In comparison, London and UK properties are growing because, again I am going to repeat this because it is so crucially important - According to David Brown, commercial director of LSL Property Services, “…buoyed by low interest rates and Help to Buy.” The numbers only work because the interest rates are low and I am not sure if people are aware but they are the lowest in the over 300 year history of the Bank of England. You don’t need to be a PHD in Economics to know where interest rates are going and yet at best you can only fix them for 3 years. You net yields are 3% to 5% best case, and even a slight adjustment in interest rates will leave many people with negative cash flow situations.
The two opportunities cannot event compare.
On top of that the European economy is aging. As Clem Sunter says, “If you could put a roof over an English village, you would have an old age home.” In comparison the American population is growing and along with Australia is the only first world country with a youthful and productive workforce which is growing. On top of this in Atlanta alone it was voted the number one place in America to live in 2013 because of affordability, weather, job opportunities, lower tax and standard of living. For this reason the population in Atlanta grew by 24% more than the national average for the last 10 years and is expected to grow by another 20% or 1 million people in the next 10 years. It is the fourth biggest city in America, has 75% of the fortune five hundred companies based there offering wide economic employment and is the heart of the South East of America which is the fourth biggest economy in the world.
The fundamentals of supply and demand cannot be compared and there has been zero supply for the last 7 years in America, although I have always like London for this reason as there has always been strong demand, there are just better fundamentals in Atlanta at the moment according the Economist and their research.
The last fundamental is the rule of law. In the UK, the law is in the favour of the tenant. Depending on the quality of your management agent and how much the tenants fight, it can take as long as South Africa to remove a tenant. In Atlanta, the state of Georgia is landlord friendly and therefore if a tenant fights you it takes 30 to 45 days to evict them legally. Now this not the case in every state and you need to know which are the best states in America to invest.
Finally it is also about the returns. We always weight income with a 70% weighting and capital growth with a 30% weighting. We have already spoken about this above, but the bottom line is that Atlanta is outperforming London, but at least 2 to 3 times, just on yields and then another 2 to 3 times on capital growth. The last factor is that people don’t take into account is the net return. From the 1st of April the UK has changed the tax and capital gains tax for non residents is changing from 13% to 28% which is more than doubling and eroding any returns you might have. It is critical that people understand this and the impact it will have on foreign investment which has been one of the major drivers in the London market in the future. On the other hand Atlanta was voted the most tax friendly state in America in 2013 and property is treated very favourably in terms of state taxes. They continue to encourage foreign investment because they understand it is a major driver of the economy.
Offshore Investment is easy – you need the right information and the right partners and if you have these in place then you will be successful. Hopefully we have given you some insight into the type of information you need to know. For more information and to understand 16 other countries, then read the book Property Going Global which can be found at www.propertygoingglobal.com
IPS Founder and Chairman
Wealth Migrate CEO
Who is Scott Picken?
I am the senior managing partner of Wealth Migrate. We specialize in assisting high net worth, sophisticated investors with the acquisition of below market properties in first world countries. What makes us unique is we have helped over 2100 people invest internationally to a value of over R1.8 billion and we have the best of breed relationships with the best partners, to find the best off-market deals and execute of the opportunities. Our philosophy is safety, transparency and only partnering where all parties interests are aligned. We treat our partners money more conservatively than if it was our own, but give them the opportunity to invest hassle free in first world assets, get a first world income and create global wealth.
Scott Picken is passionate about global business, international property, sales and marketing, and teaching people what is possible in life. At the age of 19 he started his first business in South Africa, and has experienced all business cycles from being liquidated to building an international business that has done over R1.8 billion in sales internationally. Today, Scott dominates the business world in each niche he focuses on. He runs four successful companies, including International Property Solutions, Wealth Migrate, Double Your Sales and Business Breakthroughs Africa. He is fascinated by the world going global, glocalisation, crowd funding and the future of the global economy.