By any standards it has been a remarkable few years for the world economy. Steady growth, low interest rates and financial deregulation in the developed countries have coincided with the rapid emergence of a clutch of developing world economies and a boom in commodity prices. It has all tended towards the same result – billionaires and multimillionaires have been created at an astonishing rate, including new cohorts from Russia, India, the Middle East and well beyond. And one thing many of the world’s wealthy seem to have in common is a taste for life in London.
As of late last year, London had 23 resident billionaires, only 12 of them British, according to Forbes magazine. That is fewer than in New York, but there the plutocrats are mainly Americans. London has become the capital of footloose international wealth, personified by its richest residents: Lakshmi Mittal, the Indian steel mogul whose worth is estimated at well over $20bn (£9.7bn), and Roman Abramovich, the Russian oligarch worth approximately $18.2bn. But below this rarefied stratum, there are many more wealthy people in London than ever before.
The 100 or so of the Sunday Times top 1,000 “Rich List” individuals who reside in London are together thought to be worth around £36bn. But Tulip Financial Research estimates that an additional 2,600 households in London have average wealth of just over £14m each. Together, they own at least £37bn and probably far more, perhaps as much as £100bn. “Real wealth lies not just with the billionaires, but with London’s less well-known multimillionaires,” says John Clemens, Tulip’s managing partner. These multimillionaires grew in wealth by 66 per cent between 2002 and 2006 whereas those on the Rich List saw their wealth increase by 88 per cent. As ever, it is the richest who grow richer most quickly, says Clemens.
Earlier this month, the government moved to address the growing clamour for private equity executives to pay more tax, a campaign that had been running in British newspapers for months. Sir Ronald Cohen, City grandee, founder of the large private equity house Apax, and an adviser to Gordon Brown, even warned in a Daily Mail interview that the chasm between rich and poor could lead to unrest. Tatler magazine, the bible of Britain’s old-money aristocracy, raged against the indigenous rich being dislodged from their favourite suburbs by the classless parvenus from Russia and their leopardskin-clad entourage. “The superclass is overtaking you in the race for the best schools, overpaying for the house you presumed was yours and so over you as someone to want as a friend,” wrote Tatler editor Geordie Greig in July.
Even much further down the pile, at the level of the salaried professionals, the past few years have seen rapid growth in Londoners’ incomes. The number of people earning more than £100,000 a year in the UK has more than doubled since 1999 to about 482,000, according to Ledbury Research. Sixty per cent of these high earners live in London and the counties that surround it. This group has expanded at about 10 per cent a year for the past seven years. Ledbury notes that while the tax rate for high earners has declined during the decade in which Labour has been in government, this group are contributing a higher percentage of the national tax take purely by dint of there being more of them. The 0.8 per cent of the population classed as high-earners are expected to pay 26.2 per cent of total income taxes next year. (In 1998, high earners made up 0.4 per cent of the population and paid 19 per cent of total income tax.)
In large part, it is the drive for status – that of premier global city – which has made London what it is today. “There is now a powerful sense of competition between global cities … of which attracting and keeping the super-rich is a part,” says Tony Travers, director of the London School of Economics’ London group. London has gained ground on New York in these stakes and – as implied by a January McKinsey report commissioned by New York mayor Michael Bloomberg – may be surpassing it.
If emerging market billionaires have a cultural preference for the city, it is partly because they prefer its light tax regime and its proximity to Europe, its situation between key timezones and its English- speaking culture. Resident non-domiciled tax status – which allows foreigners who live in London for part of the year to be taxed only on UK earnings, provided that they do not remit their overseas earnings to the UK – is a big draw for the international rich. It is also hugely controversial. The Sunday Times reported that there were fewer than 50,000 “non-doms” when Labour came to power in 1997; there will be an estimated 200,000 this year.
“Certainly the resident non-dom status is … controversial, because the Revenue calculates an enormous amount of money is potentially being lost in tax revenues foregone,” says Ledbury’s James Lawson. “The flipside of that is that the status attracts a huge amount of human capital to London and the UK as a whole, which has definitely been influential in maintaining London’s presence in the top one or two cities in the world.” However, the political pressure to increase the tax take from Britain’s non-dom super-rich has become irresistible. In this month’s pre-Budget report, the chancellor, Alistair Darling, announced plans to start taxing non-doms who have been resident in the UK for seven years.
So, more Londoners have got rich and the super-wealthy have grown wealthier still. Meanwhile, London has become an expensive place. Over the next few paragraphs, we look at some of the main markets that have been propelled to new highs by the influx of money into London – from jewellery, fine wines and restaurants to schools, hotels and houses. We offer a non-scientific view on how frothy these markets appear as the prospect grows of a slowing world economy, and we venture a rating of how readily rising prices in the super-luxury stratosphere feed through to the rest of the market – the barometer of Trickledown Plutonomics.
Jewellery
Alisa Moussaieff is the latest high-end jeweller to unfurl her flag on Bond Street in London’s West End, now the global centre of fine jewellery. After 45 years selling the rarest stones to an exclusive clientele at the London Hilton, the matriarch known as “Mrs M” has converted a Georgian residence to reach a new breed of big-spending consumer.
Anyone visiting Moussaieff is buzzed in off Bond Street through double security doors. Wealth is not ostentatiously displayed here, but it is all around: one VIP room is wallpapered with gold leaf; in the window is a pink 4.23ct diamond ring priced at £2.7m.
Fine diamonds and gems have risen to “phenomenal heights”, according to Moussaieff. A greyish blue diamond was sold at auction in June for $5m. Two years ago, Mrs M would have priced the stone at $1.5m. “I don’t think the bubble will burst, not for the fine pieces,” she says. “This is not speculative buying, this is investment buying.” The new buyers – rich Americans, Russians, Indians – are knowledgeable and price is no object. In a city where being wealthy is more competitive than ever before, rarity is the most desirable commodity.
At her Hilton store, Moussaieff takes a nondescript ring box from the safe. Inside is her prized possession, the 5.11ct Moussaieff Red. “It’s the only one in the world,” she says. Moussaieff won’t say how much it’s worth but others have estimated it at least $20m. No one has ever paid that much for a diamond but many in the industry believe someone soon will.
Martin Rapaport, founder of the Rapaport Diamond Report, which monitors the industry, does not believe high prices for rare stones increase the price of an average engagement ring in a high-street jeweller. And Adam Kay, investor relations manager for H. Samuel and Ernest Jones – the world’s largest diamond retailer – confirms that there has been little change in mid-market prices in the past 12 months.
This is not true at the next level of affluence, where flush City workers – particularly women – are creating a bonanza for jewellers such as Links of London. Sales in the £1,000 to £5,000 range have never been higher, says founder John Ayton. This rise has been fuelled by a new breed of City woman unafraid to buy herself something shiny with her own money. Ayton expects sales to rise by £20m in a year, to £60m this year. “We’ve never known it better,” he says.
Fizz Factor: ★★★★
Trickledown Effect: ★★
Food
The increased wealth that is now so visible on London’s streets has transformed its restaurant business in ways no one could have predicted, writes Nicholas Lander.
Most obvious is the unprecedented demand for tables that, on top of a relatively small agricultural base compared with the US or many European countries, has led to the equally obvious rise in menu prices.
This demand has, more significantly, transformed the business model. Successful restaurateurs and chefs now no longer need to worry about quiet “shoulder periods” at either 6pm or 10.30pm, particularly if they have the added advantage of television coverage. Richard Corrigan, chef/proprietor of Bentley’s and Lindsay House, recently admitted to me that while he hated standing around waiting for the cameras to roll on Great British Menu, the series had removed any concern over even the odd empty table.
Even Sunday evenings, when many West End restaurants never used to open, are now busy with customers who do not have to worry about taking the children to school on a Monday morning. Sunday evenings, in fact, now often see the highest average spend of the week.
This constantly busy model, in the case of the popular restaurants at least, has been recognised by a growing number of wealthy investors. Most notably successful has been businessman Richard Caring, who, on his return from Hong Kong, bought Wentworth Golf Course, then Caprice Holdings (Le Caprice, The Ivy and J. Sheekey restaurants) before making a £84m profit in two years during his ownership of the mid-price Strada pizza chain. These proceeds have gone into creating The Club at The Ivy – a private members’ club due to open in spring 2008 – and the purchase of the late Mark Birley’s clubs: Annabel’s, Mark’s Club, Harry’s Bar and George.
While wealthy investors in restaurants may not be a new development per se – and FT columnist Rowley Leigh’s restaurant Le Cafe Anglais, due to open in early November, was heavily over-subscribed – what does distinguish London at present is the seeming ubiquity of Russian money. Janina Wolkow, daughter of Moscow restaurateur Alexander Wolkow, has opened Sumosan, the successful Mayfair sushi restaurant which, not surprisingly perhaps, often caters at Chelsea Football Club. Igor Segyarin – a partner in Renaissance, a leading M&A consulting firm in Russia – created the good-value Ping Pong dim sum restaurants and Evgeny Lebedev is the principal investor behind Alan Yau’s new sushi restaurant, Sake No Hana, due to open in St James’s Street next month.
And it is rumoured that several other successful Russian restaurateurs are currently looking for sites in London, if not backers.
Fizz Factor: ★★★
Trickledown Effect: ★★
Art
In 21st century London, art is treasure. Or such was the impression created by Damien Hirst’s “For the Love of God”, the grinning, glittering £50m diamond-encrusted skull made by Bentley & Skinner, a Bond Street jeweller. For the first time, the city is running neck and neck with New York in art sales. And the reason is the new crowd of rich internationalists.
“Our traditional client base, who are still wealthy, the people who we thought were our absolutely top clients, have been dwarfed in terms of their wealth by these new guys, especially in London,” says Edward Dolman, chief executive of Christie’s.
The “new guys” are younger as well as richer. Dolman estimates that the average age of Christie’s top clients has dropped from between 55 and 60 years old to nearer 40. “With the deregulation of the financial markets, we’ve seen huge amounts of money now in the hands of private individuals. We’ve never seen anything like it before, and this explosion in wealth has been coupled with a drive to modernism … it is a change of taste driven by this new client base, who see themselves as part of a global society, who look at the new world they’re in – global markets, internet, instant access to huge amounts of information – and the works of art that they want to be associated with are works that [say] something about the society they are in.”
Dolman believes the high prices seen this year in New York and London are largely here to stay. According to Hiscox, a leading art insurer, price rises for contemporary art are gathering pace and have risen by some 55 per cent in the past 12 months.
The boom is even swelling prices for student art. Isobel Beauchamp and Elinor Olisa set up DegreeArt.com in 2003 to deal works by students and recent graduates. Beauchamp says graduate show pieces that would typically sell for between £200 and £250 two years ago can now fetch from £800 to £1,500, as buyers hunt for the next big thing. “The artists are also more business savvy,” she says. “Much more at the graduate shows, artists are asking us about pricing.”
But Mary Hoeveler, managing director of Citigroup’s art consultancy – which advises art investors – describes the prices being paid for contemporary artists as “troubling and unsustainable”. At Christie’s two weeks ago, a painting by Francis Bacon, “Study from the Human Body, Man Turning on the Light”, sold for £8.1m. But other works at the auction failed to attract buyers, leaving pieces by Warhol and Jean-Michel Basquiat unsold. A Hirst “spot” painting failed to sell at Sotheby’s the same weekend.
“That is an area of the market that one should be very very careful in, because those prices have gone up the highest and the fastest in a very short period of time,” says Hoeveler.
Fizz Factor: ★★★★★
Trickledown Effect: ★★★
Wine
As competition for “positional goods” in London reaches a high pitch among the unimaginably wealthy, the merely rich are being forced to scale down their expectations. “It’s the aspirational purchases,” says Lindsay Hamilton, director of fine wine merchants Farr Vintners. “People have heard of Porsche and Rolls-Royce and they’ve heard of Latour and Lafite.” Chateau Latour and Chateau Lafite 1982 now sell for £15,000 and £17,000 a case, up from between £5,000 and £6,000 two years ago. In June, a case of Le Pin 1982 sold for £35,000, almost double the price from two years ago. Hamilton admits to a “slight unease” about how quickly prices have gone up in those two years. “Everyone knows that nothing goes up forever. My view is that people get to a natural point where they feel [the price] no longer reflects the pleasure.”
For the time being, though, price remains no object to a certain kind of buyer. London wine writer Tim Atkin recalls watching four cigar-smoking east Europeans order two bottles of first-growth Bordeaux and one of Chateau Petrus at the Michelin-starred Hakkasan in London one night in June. Two of the men proceeded to dilute their wine with Diet Coke. Hakkasan sells the 1996 Chateau Petrus for £1,560 a bottle. “I’ve heard of it happening in China, but I’d never seen it in this country. I think in China it’s a prestige thing … people like the idea that they are drinking a first growth or, in the case of Petrus, a top Pomerol, but they don’t actually like the taste of it that much, so it’s all about image,” he says.
The demand for status purchases is increasing the price of top wines at high-street retailers as well. But the price of the average table wine has remained more or less steady, as retailers such as Oddbins and Threshers are under pressure to maintain “price points”. Threshers’ spokesman Jonathan Butt said margins have been squeezed somewhat, but costs have not been passed on to consumers. The success of New World wines and the influence of the wine glut in many regions has also kept down wine prices. Oddbins says mid-priced wines have risen less than the rare vintages as the buyers are drinkers, not investors.
Fizz Factor: ★★★★★
Trickledown Effect: ★
Hotels
London hotel prices are up by 10 per cent this year, according to Ledbury Research, compared with regional rises of just 3 per cent. The grand old house of English hospitality, The Dorchester, is enjoying a flood of wealthy visitors, says Christopher Cowdray, its general manager. The hotel’s occupancy rate is up from 76 per cent in 2005 to a forecast 89 per cent this year, and the cost of its suites has jumped by £225 a night from last year, to £1,975 a night. The hotel opened three newly renovated rooftop suites last month to fill the demand – yours for £2,400 to £6,000 a night.
When the FT visited for a preview of the suites, head engineer Ray Pask was still putting in the finishing touches: £3,000 Bang & Olufsen LCD televisions, white Arabescato Oro marble walls in the bathroom, French doors curtained in antique gold silk opening on to the vast terrace, from where the guest can survey the grand panorama of Hyde Park directly below.
It was in the original of the Harlequin suite that Elizabeth Taylor was told she had landed the starring role in Cleopatra, and the refurbishment retains a sense of queenly decadence. From the balcony, the guest can gaze out over the terrace of the neighbouring Royal Penthouse, former private residence of Prince Jefri, brother of the Sultan of Brunei, and now available to other visiting jetsetters, film stars and corporate luminaries. Two floors of the most exclusive hotel accommodation available in London: all for just £15,000 a night.
Fizz Factor: ★★★
Trickledown Effect: ★★
Property
The presence of foreign wealth in London is nowhere more evident – or politically charged – than in the city’s property market. Foreigners bought more than half of the properties sold for more than £2m in London last year, and the capital now has the world’s priciest streets.
But the impact these mega-deals are having on the market is contentious. In the first quarter of 2007, sales of property priced over £4m grew 11.4 per cent, almost twice that of property worth less than £1m. According to estate agency Knight Frank’s estimates, Russians accounted for almost a fifth of sales of properties worth £8m and above. They, along with wealthy Indians and buyers from the Middle East, have pushed up prices in Chelsea, Knightsbridge and Belgravia 40 per cent this year. High-earning City workers can find no entrée on to these streets: their £500,000 bonuses will find them a nice place in Fulham or Wandsworth instead.
“I think they have been priced out, yes. More and more stuff we sell in that super-prime area in Knightsbridge and Belgravia is foreign money – and it’s not necessarily people who work in London, it’s people who buy companies, or restructure them, and have a base in London,” says Liam Bailey, head of residential research at Knight Frank. These super-prime areas have the highest proportion of second homes in the country, and many are left vacant for periods of the year. This raises the question of whether these buyers are aggravating the housing shortage while spending less in the local economy than permanent residents.
Chris Hamnett, professor of human geography at King’s College, is convinced that “displaced demand” at the top of the market is driving up prices at the bottom. He has looked at house prices borough by borough since 1995 and found the biggest relative increases were at the bottom, in Dagenham and Newham. “What you’re getting is geographically displaced demand which ripples out all the way down. I think the push mechanism is demand at the top from high-income earners,” he says.
Savills says one factor in rising prices has been the investment of £10bn a year into prime London property by foreign nationals. But Bailey thinks that, utimately, what makes housing so expensive is that not enough houses are being built. Christine Whitehead, professor of housing economics at the LSE, agrees, saying the number of transactions at the very top is too small to affect prices at the bottom. Foreign investment is definitely playing its part, though, as the expected capital gains from the London buy-to-let market means everyone wants city residential property in their investment portfolio.
Research for the Greater London Authority suggests that up to 70 per cent of all new completions in the London region last year were for investors. Economist Jacob Rigg, from the Society of Trust and Estate Practitioners, has studied the factors driving price rises and says it is too simplistic to blame the rich. The London property market is highly stratified, he says, with prices being driven by different factors in different sectors. “Middle-class people like me who live in Notting Hill complain about house prices when, in reality, we’re part of the problem. It’s just easy to look above you and see rich foreigners buying houses we would have struggled to afford anyway and be jealous.”
Fizz Factor: ★★★★★
Trickledown Effect: ★★★
Service economy
The wealthy are creating a bonanza for many players in London’s service economy, not just estate agents. “Multi-family offices”, which are in most cases businesses set up by the rich to manage their own fortunes, and which have thrown open their doors open to other rich families, began springing up in London about five years ago. They now have combined assets under management of up to $15bn, according to Alex Scott, chairman of one of the four key players in the sector, Sand Aire.
Until recently, Scott – himself fourth-generation wealthy – dealt mainly with the old-style, old-money rich. But his new clients have acquired their fortunes at greater speed. “It is clear that very significant sums have been made more recently, ” he says. From exclusively managing their own family fortune in 1996, Sand Aire now handles 14 clients with combined assets of around $2bn.
John Riches, head of private client services at law firm Withers, says: “If you are talking about a single-family office, the entry-level wealth … is somewhere around £200m.” He adds that, “Five years ago, as a firm, we probably would have seen 20 or 30 families in that sort of bracket. Whereas now, we’re probably talking two to three times that number, easily, who have got some sort of office in London and consult with us on a regular basis.”
The big growth has been from first-generation wealthy – from Russia, Asia and the Middle East – who have turned London into a global centre for private client legal advice.
This new wealth throws up legal issues that seem exotic compared with traditional problems of intergenerational planning: what legal structure is needed to own and operate your own private jet, for example. “You have families who, although they have a home base, are global citizens with homes in different jurisdictions,” says Riches. “It’s like looking after a multinational company.”
Riches does not believe the growth of private legal services to the very rich is pricing less wealthy clients out of legal services. While up to 60 per cent of Withers’ business is in this area, “in the overall context of the London legal market, it wouldn’t be sufficiently big to make a material difference”.
Fizz Factor: ★★★
Trickledown Effect: ★
School fees
When it comes to education, the rich are pushing everyone else further down the pile. Private school fees in London have risen at twice the rate of inflation – up by 41 per cent since 2002, according to Halifax Financial Services.
Five years ago, scientists, police officers, engineers and computer programmers were among those who could afford to send their children to public schools. But HFS chief economist Martin Ellis says they no longer have sufficient funds. Still, enrolments are up 6 per cent this year, so there is no shortage of parents willing to pay the £10,587 average annual fee for Greater London.
The Independent Schools Council’s 2007 census found that private school fees in London had risen by 6.4 per cent compared with 2006, bringing the average termly fee to £3,631 (£7,750 for boarders). But it is keen to stress that the fee increases are more or less in line with service inflation.
The UK market in private education remains robust, particularly for non-British pupils whose parents live overseas, a group that accounts for 20,852 of ISC pupils, 40 per cent of whom come from Hong Kong and China.
Fizz Factor: ★★★★
Trickledown Effect: ★★★
