Inside The World Of Super-Prime Real Estate

London can proudly boast the most expensive house in the world.  Valued at £1.2 billion, Buckingham Palace, which is technically Crown property, is not only the costliest home on the planet but, with 775 rooms, it is also one of the most spacious.

India’s richest man, Mukesh Ambani, holds the title to the world’s second most expensive home, Antilia.  Comprising of 40 stories, six of which are dedicated for parking space for the family’s 168 cars, the £1 billion-plus property can withstand a magnitude 8 earthquake.  This comes as a disappointment to many, as it is deemed to be one of the ugliest buildings in the world.

The world of luxury real estate is indeed one of fantasy.  How is it possible to put an accurate valuation on an asset which is priceless in terms of status?  And in a market where cash is king, it is little wonder the world’s most beautiful homes are often acquired by the dirtiest of money.

Valuing the priceless

Ken Griffin, the founder of hedge fund Citadel, recently bought a home in London.  Developers of a neo-classical mansion near Buckingham Palace banked on achieving £145 million for the property.  However, the home was marketed at £125 million, and its final sale price was rumoured at £95 million.  As pointed out in the Financial Times, the £30 million difference “is the price of a David Hockney painting, a gold mine in Russia or the League One football club Charlton Athletic.”

Not exactly small change.

Us ‘normal’ folk feel we have done well if we manage to haggle £5-10K off a property’s asking price.  But £30-50 million?  How can a valuation go so wrong?

Accurate valuations of luxury property are notoriously difficult to achieve.  Normal valuation metrics such as rental yields and comparisons with similar properties simply don’t apply at this level.  After all, there are only so many properties sitting in the luxury home market, and they do not tend to change hands frequently.

Neal Hudson, the Founder of the consultancy Residential Analysts, told the Financial Times that the value of super-prime residential property is “a bit like the art market: some things are only worth what the next person is willing to pay for it. There’s not an underlying economic value there that it’s rationally based on, like the percentage yield from an office block in the City.”

Experts comment that although prices of luxury property are falling in London, New York and other major global centres, the super-prime market is diverging from the domain of mere ‘expensive’ property.  Basically, if you are buying something for £30 million plus, the normal rules of valuation become rather hazy.

Rarity is a key factor in valuing super-prime real estate.  For example, there are only so many apartments which can have an unobstructed view of Central Park.  And Jacqueline Kennedy Onassis’s childhood home, Merrywood, recently sold for $43 million (£33.7 million) in 2018, smashing local sales records.  The buyer was recorded as the Embassy of the Kingdom of Saudi Arabia.

Although valuing super-prime property is difficult, it pales in comparison to the herculean task of trying to keep laundered money out of the UK real estate market.

The battle against dirty money

In May 2019, a set of Unexplained Wealth Orders (UWOs) was issued against an un-named owner of £80 million worth of London property.  The owner is believed to be a politically exposed person involved in serious crime.

UWO is the newest weapon in the on-going battle to stem the flow of laundered money through the UK property market.  It is estimated a whopping £90 billion of dirty money passes through the UK every year and illicit funds have helped sustain London’s over-inflated property market.

To further combat the problem, a register of overseas property Bill  has been introduced.  Lord Faulks QC, the Conservative Chair of the Draft Bill Committee and a former Justice Minister, welcomed the “much-needed legislation”.  He told the Guardian it was

“well drafted, but there are still some loopholes in the draft Bill which, if unaddressed, could jeopardise the effectiveness of this important piece of legislation.

“In the current political climate, anti-money-laundering may not seem an immediate priority. But the evidence we took shows there is a huge problem, and it’s not going away. Time is of the essence: the government must get on with improving this bill and making it law.”

Lord Faulks went on to say:

“It’s pretty outrageous that great chunks of our country are owned by people whose identity we are uncertain of and that the source of their funds remains a mystery.”

As the gap between rich and poor widens, it is inevitable that the gap between luxury homes and super-prime real estate will also grow.  As Mark Twain said, “buy land, they’re not making any more of it”.  The super-rich seems to be taking this to heart, ensuring the world of the extraordinarily wealthy and the properties they buy continue to fascinate us.

Today's Conveyancer