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  1. Property
February 25, 2009

Low Interest Rate

By Spear's

Ignore the estate-agent guff about troops of foreign buyers beating a path to their doors — they’re not. The London property market is tanking and hasn’t hit the bottom yet, says Ross Clark

The advice of Jim Rogers, co-founder of the Quantum Hedge Fund, couldn’t have been clearer: not only don’t buy a house in London, don’t even get on the plane. In fact, if you’ve got a pound in your pocket, get rid of it now.

‘I would urge you to sell any sterling you might have,’ he said in mid-January, in the midst of another banking crisis. ‘It’s finished. I hate to say it, but I would not put money into the UK.’

Many investors appeared to agree. Within hours sterling had plunged yet further into the abyss. How, then, do you square that with the assertion by some estate agents that they have started answering the phone once more to foreign investors? ‘International investors snap up UK properties as pound weakens,’ trumpeted one agent recently.

Estate agents, of course, are people for whom you don’t even need two swallows in order to declare a summer: the merest suggestion of an unidentified swallow-shaped flying object will get them into their shorts.

Yes, it is true that sterling is weak and that, combined with sinking property prices, the average London home in dollar or euro terms is now around 40 per cent cheaper than it was in December 2007.

But then sterling is not low without a reason. It is low because foreign investors have looked at Britain’s finances and do not like what they see. It would be strange indeed if they shunned our shares, our gilts and our bonds but started piling into flats in Belgravia instead.

In any case, so expensive was London property at the height of the boom that even an effective 40 per cent reduction in prices does not make it a cheap place to live.

Ed Mead of estate agents Douglas & Gordon puts the ‘boom’ in foreign investors into perspective. Yes, he says, there has been an increase in foreign buyers registering with him; especially, he says, Italians.

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‘We have an Italian in our office and he is speaking Italian all day. We haven’t had such interest from Italy since there was a tax change in Italy some time in the early to mid-’80s and we kept getting Italians walking in with suitcases full of money, wanting to buy something for their “daughters”. Italians make up 60 per cent of our foreign buyers at the moment.’

And how many would that be? ‘Er, three out of five.’

More significant are the Britons starting to look for property for their children. ‘We haven’t seen them for ten years,’ he says, ‘which suggests that prices are beginning to get to the level at which some people regard as cheap.’

As for the Italians, he says, there has been a lot in the Italian press talking up the London property market. Then again, given the state of the newspaper industry, it might just be the London correspondents of Italian newspapers trying to sell their homes.

What nobody is saying is that enquiries from foreign buyers are translating into sufficient sales to turn around a property market which is still sinking rapidly. According to Knight Frank, prices of London properties between £1 million and £2.5 million are down 22 per cent from their peak. The agency is expecting prices to carry on falling until they are 30 per cent down from their peak level in 2007.

For international property investors the question at the moment is: where would you most like to lose your money? Of 29 property indices quoted on, only eight were still showing year-on-year rises in real terms by the end of last year, and only four of those — China (Shanghai), Cyprus, Switzerland and Bulgaria — were still showing quarter-on-quarter rises.

Britain’s Nationwide index was second from bottom, just above the US Case-Shiller index. In China, there is some doubt over the official figures. In Shanghai, reports of an 18 per cent year-on-year rise stand in stark contrast to newspaper reports of large discounts on flats in the city.

As regards Bulgaria, again the official figures stand in contrast to the experience of foreign investors — large numbers of them British — who have been struggling to sell their coastal apartments or ski chalets at any price.

The global bear market in property is unlikely to turn around on a few bullish newspaper reports in Italy or anywhere else. Not only does credit remain extremely difficult to come by, much of the cash which might have gone into the property market has simply disappeared.

Until the middle of 2008 there were still Russians cashing in shares in booming oil companies in order to buy property in London. Anyone attempting to do so now will find themselves less able to afford a mansion in Highgate than a small flat in Kensington.

There is just one more shock awaiting any Italian who turns up in a London estate agent’s office with suitcases full of cash. He will find a somewhat cooler reception than he did 25 years ago. ‘We would now have to turn him away thanks to money-laundering regulations,’ says Ed Mead.

The irony is that a suitcase full of euros is just about the best investment anyone in Britain could have made over the past year. In sterling terms it will have appreciated by 30 per cent, and unlike our shaky banks there is no danger of it going down the tube.

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