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?
Susanna says
Hi Jon….always find your comments both insightful and ever so entertaining…you are a hoot! Looking forward to your next instalment!
Rudolf Ruyter says
Hi Jon
Unfortunately that is what happens when wealth & fortune are so great that it looses all meaning.
What you and I value highly becomes trash for those with wealth beyond our imagination.
What we consider an asset, they consider………do they actually consider???? or do they actually remember they own such asset???? Of course not, its just another minor insignificant spot in their wealth register.
Pity human greed has come to this type of needless posession.
Regards
Rudolf
Paul Wilkinson says
well I dont know the answer to either of those two questions.
Im not sure what your point is either.
gerald says
I think the answer might be “GhostBusters!”
(or maybe it’s “Foreign Investment Review Board!”)
Michelle Dale says
When it comes time to sell such land it will be easy enough to knock down a trashed house and turn it into multi story apartment in our land strapped cities!!!!
richard osborne says
Top article.
You buy hard assets to protect and grow your wealth. If you dont need the income why put up with the hassle.The property is going to generate wealth[isnt that why you purchased in the first place] A couple of my purchases were made with this in mind,however in the now the income is very handy.You cannot beat property, winning coming or going.
David Tioko says
ch9s THE BLOCK is a great show for those investors looking to renovate properties , if a wealthy overseas investor who owned these abandoned mansions were to give Contestant Renovators from THE BlOCK the opportunity to completely REFURBISH the abandoned property there would ultimately be 3 winners # 1 The Owner – #2 THE BLOCK Show Creators #3 Contestant Renovators who could stand to make a tidy commission on completion of the project , for the Owner his participation could easily be seen as a bonus not only personally , but also for his/her immediate family from a community view point , for the Show Creators of THE BLOCK the series gets stronger to the point where there own CHANNEL/REALITY TV show is only just the beginning – Cheers
George says
There should be laws against absentee landlords. There should be premium levies on these properties as they are sometimes eyesores and an insult to the nation. It is a waste/misuse of scarce resources.
Eileen says
George, I agree with you about absentee landlords. You could put all your money into a property, only to find your neighbour sells and the new owner lets next door crumble to the ground.
Jon, if the object of the exercise is to make money, get an agent to handle the property completely and when it’s time to sell you can ask more for the place if the home’s in good condition. You also collect the rent in the interim!
Ashley says
Mmm, food for thought!
Have you got strong thoughts on the Irish property market? Seems to be not so dissimilar to the US at the minute or am I missing something?
Janette says
In Pudong Shanghai the wealthy buy mansions in sub divisions, they are never lived in as the Chinese believe it to be bad luck to sell a second hand house.
yleesMer says
I am sure that that there is Government legislation in London that prevents property lying vacant for extended periods and that they can force the sale, this is directly aimed at the property owners that you refer to and due to the fact that London is vastly under supplied.
Can anyone verify that?
Rob.
Evie says
Jon great story, and I’m pretty sure SQUATTERS RITE still applies in tis country, one year and one day or something like that and if you can prove you occupied it for that amount of time without the owner knowing good luck you got your self a house. No I’m not sure about the law but someone assured me the other day that it was still active. Cheers Evie
Brent says
For simple evidence of the Ghost effect of offshore property owners, you only need to go to Ephraim Island on the Gold Coast. I have a relative that lives in a sub-penthouse and when we visit he talks about all of the various unit owners that he hasn’t seen in years. Porches and Ferrari’s sit in the basement car parks and they have the run of their building as less than 25% of the units are actually occupied.
Glenn Jackson says
Land Banking has been round for years, “Land appreciates & Houses depreciate”, principal has been round for years. Greater returns would be acheived if the houses were rented though over the years. But when you have that much money in the first place, a few phone calls here & there every year & the paperwork involved might be considered a bit of an inconvenience.
Another saying that I have heard also which sums up the principal is “God ain’t creating anymore land”!
Cheers.
KatM says
Progressive land tax on unoccupied property may force some landlords to clean up their disappearing act. Increased stamp duties on properties sold to foreigners to encourage estate agents to sell to locals. Alternative is to reduce our massive foreign debt so we are not so reliant on foreign capital that will be cause of future furore and revolution.
Eileen says
KatM, I must haved missed something here……………why would an estate agent care how much stamp duty anyone pays?????
Jayde says
I think the answer is there should be a Tax placed on all properties left to go to ruin, especially if they affect the price of other properties in the area… think of how much money the local council could rake in if they started to charge huge taxes on those who leave their properties to rot? i think that would grab some owners attention who would then either sell up, rent it out or at least make an effort to keep the exterior presentable….