Euro refugees advance to Mayfair

Jacquie Hayes

Greeks and Italians are the latest group to target top-end properties in London’s Mayfair. Photo: Bloomberg

As I left Fiji last weekend, I got to thinking how nice it would be to own an island. Passing through Port Denarau, I spoke to a realtor about Honeymoon Island in the Mamanuca group of islands I’d just spent a dozen days in.

Yes, the hectare of private island “set amidst the whitest and finest sand, the cleanest and clearest turquoise waters” and close to live reefs, good diving, surfing and fishing spots was still available for $FJ1,741,000 ($929,423).

A beautiful South Pacific island for under $1 million sounds nice. But as much as I enjoy Fiji, Europe has always held more appeal. If I was going to own an island, ideally it would be the Mediterranean, preferably close to Italy, though a Greek island would do.

Such real estate may not have been readily available in the past but that may be about to change.

Some people are clinging to hopes things won’t go from bad to worse for the euro zone, but wealthy Italians and Greeks are clearly not among them. If their behaviour is anything to go by, there may soon be a fire sale of islands and other assets in those countries. They seem so convinced their countries are going to pull out of the euro that they’re selling their local digs and buying top-end properties in London’s Mayfair.

That helps explain the paradox that Mayfair has recently become in the UK housing downturn. Demand for expensive residences there is strong while movement in the “averaged priced” property in the rest of the country has slid.

I got a sense of why during a conversation last week with a contact working in the thick of it.

As well as being a fascinating tale, it provided some real insights – I don’t know if the players should be criticised for their cynicism or applauded for foresight.

Jeremy Nestel, a Melbourne-based investment consultant to ultra-high-net-worth families, learned of the assault on the Mayfair property market while visiting a London-based client last year.

The family in question got into property development because there was nothing left for them to do.

They own a few hotels around the world and used to be active traders, but the patriarch had gone cold on financial markets because of the current uncertainty.

“He’d never been in this business of refurbishing apartments before, but he was drawn to it like a moth to a light. The guy can smell an oily rag,” Nestel says.

“Once he got wind that prices were starting to shift in Mayfair, he just started buying up. In his view, there will always be demand, but this latest influx was something quite new.”

The family refurbished the apartments to the most exquisite standards – silk carpets, cashmere upholstery, leather wall panelling etc. Then they put them on the market at £7000 ($10, 381) a square foot. At between 2000 sq ft and 3000 sq ft, they command £14 million to £20 million each. Yet they are having absolutely no difficulty selling.

“This family puts a property on the market and within 30 days have two or three competing bidders,” he says.

Buyers are coming from three main markets: the Russians, who’ve been in London for a while, the Chinese, who are starting to become more prevalent, and the latest group, the Greeks and Italians. Why?

“Because if their countries do pull out of the euro, their local currencies will devalue two, three, four times,” Nestel says. “That means something worth $1 today may only be worth 20¢ tomorrow.”

They’re happy to take a haircut on assets in Greece and Italy now if they think they could go to 20¢.Then using that 80¢ they can buy sterling-denominated UK property.

“So they’re getting out of their local asset and out of the euro to protect themselves both from the decline in asset values and a decline in their currency in the hope that, if they get it right and Greece or Italy pull out of the euro, they will have a store of wealth in Sterling,” he says.

They may have bought in the UK at an overvalued price but, if they’re right in their call, they will more than make up for it by going back into Greece and buying privatised assets valued at 50 per cent of what they were, in a currency which is devalued by another 50 per cent.

The only other place investors could make the same play is Switzerland. But the beauty of the UK is that foreigners can buy property through an offshore shelf company, say in Jersey, and avoid capital gains tax when selling by offloading the shares in the Jersey company.

Even if they buy in their own name, they can claim the property as their principal residence and, again, cancel out any CGT liability.

Tax is a large impediment for foreigners looking at Greece, however, where the system is notoriously corrupt and unreliable. Multiple changes in tax law applying to foreign assets each year wouldn’t be unusual.

That point alone might put this European island dream into the too-hard basket for most. Unless you happen to know a local, of course, and then only if he wasn’t headed for Mayfair.

jacquie.hayes@me.com

The Australian Financial Review