The rich the world over are leaving their properties empty, and it’s a phenomenon that already on Australian shores. To understand why, we need to understand one of the key principals of property investing – what I call the twin-assets theory.
I’ve seen some funny things in the property game in my time, but nothing quite like this – ghost mansions haunting one of the wealthiest suburbs of London.
Along Bishop’s Avenue, also know as Billionaire’s Row (it used to be Millionaire’s Row, but inflation gets to everyone) a third of the mansions are empty. Some of them have been vacant for 25 years!
And several of those have fallen into ruin. With no one looking out for them, there’s ferns growing in the stairways, pigeon skeleton’s on the shag-pile carpet, and water running down the ballroom walls.
Check out the photos:
And the locals aren’t loving it. One of them said the area had become “one of the most expensive wastelands in the world”. Poor billionaires. Just can’t catch a break.
It’s easy to understand how some of the mansions have fallen into disrepair. Some are owned by former military strong men from the near and middle east, who now have more pressing problems. When you being tried for war crimes at the Hauge, keeping the rose bushes tidy doesn’t seem like such a priority.
But some owners have no such excuse. Apparently quite a few of them are owned by the Saudi Royal family, who last I saw were still doing pretty well.
So what’s going on? Is this a Saudi thing? Is it a London thing?
Think again. Same story is being played out over in New York.
In the ritzier area of the Big Apple, ghost apartments are haunting the city.
According to Forbes:
Some 30% of apartments from 49th Street on up to 79th Street in Central Park — between Fifth Avenue and Park Avenue — are vacant. They are all owned by foreigners, of which the majority of them are Chinese.
And I’ve heard anecdotal reports (some bloke at the pub) say that many Chinese investors are playing a similar game here in Australia, especially with high-end property.
They’re putting their money down without any intention of occupying or renting their properties out anytime in the near future.
It’s not too hard to see what’s going on here. To the rich, and especially the elite in less advanced countries, property is a store of wealth. Get the money out of the country, and “bank” it in an expensive property.
And the glitz-club know that property markets in mature, international cities like London, New York and Sydney are a sure bet. Prices continue their steady upward rise. Their popular, land-strapped cities already bursting at the seams.
You’ll never have trouble finding a buyer.
So stashing your money in international city property is just good financial sense.
But why leave them empty? Why not rent them out? Probably be a nice little earner – an apartment in New York or on the north shore of Sydney. Some properties on Billionaires Row are renting for 10,000 pounds a week!
To understand why they’re empty we need to understand one of the fundamental features of the property market – a principle that’s at the heart of every successful property investment strategy.
And that principal is what I call the twin-assets theory.
When you buy a property, you’re actually buying two assets at the same time – the land and the dwelling itself.
And even though these two assets are born of the same mother, they have very different qualities, and very different destinies.
Land is constantly appreciating in value. Its supply is fixed while demand increases exponentially with the population. It is a scarce resource and is getting scarcer by the day.
In 50 years time the physical size of inner-Sydney will be exactly the same. The population however will have doubled. That’s the dynamic that drives a constant appreciation in value.
Dwelling’s on the other hand are constantly depreciating. A house starts ageing the day it’s built. Its fittings and feature degrade and wear out with use. Given enough time (and without any reinvestment in upkeep) the house would eventually be worthless.
And so when you buy a property, you’re buying twin assets, each pulling in a different direction. Your ultimate capital gain is the net effect of land appreciation and dwelling depreciation.
And since the land effect is always so much bigger than the house effect, there is a constant upward drive to property prices.
So imagine you offer a wealthy Chinese industrialist to rent his flashy 5th Avenue apartment from him. What’s he going to think? Sure, he’ll get some money off you, but you’re going to leave scuff marks on the floor. There’ll be blu-tack stains on the walls from your posters. One of you trashy mates will break the toilet seat.
That’s one of the things about flashy stuff. It depreciates fast.
So is it worth it? Probably not. Remember he’s not buying the property for the rental return. He’s buying it for the capital gain and the store of value it offers him.
He’s buying it for the land effect.
And our Saudi prince? Apparently they bought ten properties on Bishop’s avenue for an average price of a million and a half pounds back in the 90s. Now they’re selling them for 7-8 million pounds, each.
Is it worth spending a few mill on upkeep?
Bah, barely worth the hassle of organising it. Know how hard it is to find a good plumber in London.
Let them go to ruin. We’ll barely notice it when it comes time to settle up.
I reckon we haven’t seen the end of this. There’ll be more ghosts haunting Australian property, mark my words.
And then what are you going to do about it?
Who you gonna call?