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Investment Analysis

Western European bull market surges on

by MATTHEW MONTAGU-POLLOCK

Jan 06, 2008


The forward surge of London shows no sign of slowing. Knight Frank estimates that in Central London, supply (selling instructions) are down 21% on last year, while demand (applicants registering with them) are up 43%.

Properties in areas such as Mayfair, Eaton Square, and High Street Kensington can cost L5 million to L15 million. A small 3-bedroom Chelsea house might now fetch L2 million, a largish Notting Hill Gate house, L5 million. At the top of the market, a 6 sq. m. hallway 15,000 per sq. m. is common.

For the truly rich, some of the eye-watering prices being paid in London and nearby are not that significant in the larger scheme of things when you compare them with the cost of a yacht (or a Picasso), notes Charlie Ellingworth of HSBC Private Bank. Paying 3500 per square foot for an exceptional property, which has happened a few times this year, needs to be seen in this context. These are not people who depend on a (rear-view mirror) bank valuation to buy what they want.

While London yields are generally unenticing, there are strangely high yields for very expensive, very small properties in central London's most exclusive areas (see UK Yields Table).

WHICH EUROPEAN COUNTRIES ARE THE MOST EXPENSIVE

COUNTRY M2 PRICE CITY CENTRE GDP PER CAPITA RENTAL YIELD
United Kingdom 27,400.00 36,874.65 4.90%
Monaco 24,900.00 2.43%
Russia 10,000.00 6,330.85 5.48%
Netherlands 6,667.00 38,232.16 8.25%
France 6,666.67 33,386.59 8.25%
Lichtenstein 6,333.33 3.29%
Italy 6,083.33 30,143.95 4.27%
Switzerland 5,933.50 49,485.19 5.87%
Norway 5,116.67 65,785.07 4.22%
Ireland 5,000.00 49,533.28 4.00%
Spain 4,000.00 27,814.77 3.15%
Luxembourg 3,933.50 76,224.15 4.88%
Denmark 3,783.50 48,529.85 4.88%
Finland 3,333.33 36,928.23 5.00%
Germany 3,166.67 33,355.82 4.42%
Sweden 3,166.67 39,562.37 6.00%
Austria 3,000.00 37,378.16 4.40%
Andorra 2,583.33 6.19%
Portugal 2,516.67 17,224.47 5.72%
Turkey 2,466.67 5,691.79 7.54%
Slovenia 2,466.67 17,534.61 6.81%
Czech Republic 2,366.50 12.587.40 6.93%
Cyprus 2,083.50 20,500.04 3.96%
Belgium 1,983.50 35,843.32 7.74%
Malta 1,966.67 13,846.82 6.94%
Greece 1,833.33 20,544.77 5.45%
Hungary 1,733.33 11,374.67 5.34%
Lithuania 1,666.67 8,309.78 6.60%
Croatia 1,500.00 8,710.35 9.33%
Estonia 1,466.67 10,342.36 7.74%
Macedonia 1,177.00 2,563.85 7.06%
Poland 1,175.00 8,409.70 13.28%
Romania 1,166.67 5,254.08 12.86%
Latvia 1,083.33 8,401.05 8.17%
Slovak Republic 1,041.67 9,471.39 12.48%
Bulgaria 1,000.00 3,685.81 10.00%
Moldova 566.67 917.41 11.12%

Monaco is another very special case, a very small and crowded city-state which specializes in attracting the rich. In Russia prices are also eye-popping, obviously being pushed up by the still-limited of quality housing.

What to make of all this? If you follow the strategy of buying for a combination of yield and capital gains, London does not attract (except at the very top of the market).

High yields in Amsterdam, and Paris, too

Amsterdam and Paris don't seem overvalued. Yields in those two capitals are very good at 8.25% (at least for part of the yields range). However, these countries are highly taxed.

Further down the table, there is a capital whose housing seems arguably undervalued. Brussels in Belgium. Belgium's per capita GDP is at much the same level as that of the UK. Yet property in Brussels is a fraction of the cost. Average sq. m. costs are 1,983, in contrast to London's 27,400, and Amsterdam and Paris' 6,667.

What explains Brussels' undervaluation? Brussels' yields are healthy at around 7.5%. Income and other taxes can be burdensome in Belgium, but capital gains tax on property held more than eight years is zero. The law is quite pro-tenant, but not severely so. Yet these considerations are all as nothing compared with the fundamental factor which in our view explains Brussels' undervaluation: round-trip transaction costs in Belgium are extraordinarily high at 29.6% - 39.10%. It takes courage to invest with such costs.

In conclusion, the investment choices in Europe are clear. It's a choice between high risk/high return, or low risk/low return:

  • Buy in Eastern Europe and you'll get ownership risks, but compensated for by high yields, high GDP growth, and much lower transaction and tax costs
  • Western Buy in Europe and you'll face lower ownership risks, but earn generally lower yields, in much lower GDP growth economies, with higher costs and much higher taxes

The choice is yours.

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