In a quiet cul-de-sac in London's exclusive Kensington area, there's an imposing Victorian town house that has an air of the Empire about it, even though its owners do not. The house which has eight bedrooms and six bathrooms spread over six floors, an elevator and a garden belongs to a Swiss family who, according to Tom Tangney, estate agent for realtor Knight Frank, make their money in finance. Tired of paying the upkeep on a place they hardly use, they've put it on the market for $18.5 million. And at that price, "I expect the buyer will also be non-British," says Tangney.
If he's correct, they'll fit right in. Many of the homes in this neighborhood are owned by foreigners who paid more for them than most people make over five lifetimes. The house next door, which has a pool under the driveway, is owned by an Arab family who bought it for $20.5 million. And a few minutes' walk away, in Kensington Palace Gardens, Indian steel magnate and Britain's richest man Lakshmi Mittal owns a manse that's reportedly worth about $112 million.
Britain has always been a popular place for entrepreneurs and industry tycoons to live, thanks to its proximity to Europe and the U.S. and its foreigner-friendly tax regime. But over the past 10 years, the flow of superrich into the capital has surged. Emerging economies and the opening up of the E.U. mean there are more people in the world with big money to spend. And the rise of London as a leading financial center, along with the strengthening of the British pound, have made the U.K. the place to spend it. These days, wealthy Middle Easterners and Western Europeans have been joined by Russians, Chinese, Indians and Eastern Europeans whose wallets have grown along with their countries' GDPs. Now Bentleys and Mercedes roll through London's streets, past the luxury stores, expensive restaurants and exclusive nightclubs that have sprouted to cater to the new élite. With their billions and their brain power, wealthy foreigners help keep London plugged into the world economy as their presence transforms the city into a preserve for the extremely well-to-do.
Keeping up with the Abramoviches
It's not hard to spot the influence of this aristocracy. At London's famed Harrods department store a mecca for the moneyed international community a personal shopping service allows globe-trotting customers to order a six-figure wardrobe with one phone call or arrange to have their yacht spruced up in 24 hours with a single e-mail. At Selfridges department store, a new one-stop luxury section called the Wonder Room brings together the classics Chanel watches, Tiffany silverware, Hermès scarves with more audacious items like the gold-plated, diamond-encrusted Vertu phone decorated with a ruby snake and costing $370,000, the price of a one-bedroom apartment in South London. Catering to foreign tastes, exclusive wine bars are serving more sake, while the city's best butchers offer halal meats. Restaurants and members' clubs that used to be the domain of the old-money English are now mini-Babels, buzzing with the sounds of dozens of different languages.
Various studies estimate the very wealthy contribute from $10 billion to more than $30 billion a year to the U.K. economy. That's a big impact from a small segment of the population. It's estimated that the top 0.1% of earners in Britain control as much as 4% of the nation's wealth and over half of them are from somewhere else. According to the latest Forbes list of the world's billionaires, 17 of Britain's 41 billionaires are foreigners. They're drawn to the country in part by a tax break that exempts anyone born outside Britain from paying a 40% income tax on their overseas earnings. Few countries are as generous toward their foreign rich, and figures from the Treasury show that the number of people claiming tax-exempt status in the 2005-06 tax year was 114,000, almost double what it was 10 years ago.
But this love affair between the global rich and London isn't just about saving a few thousand bucks after all, the weather's better in Monaco. When Scorpio Partnership, a wealth management-strategy think tank, asked affluent clients why they chose London over, say, New York City, Paris or Munich, the good reputation of Britain's schools, the country's political stability, the growing pool of talent in the financial-services sector and historical ties to Britain were frequently offered reasons. "Another thing is the legitimacy, particularly for foreigners coming from emerging markets like Russia," says managing partner Sebastian Dovey. "They might pay less tax in Russia, but they don't know where the country's economy or politics are going. So many clients prefer to come to Britain to, in a sense, buy security and legitimacy."
Whether they come from Russia, India, Asia or America, wealthy foreigners head for just a clutch of the city's most prestigious addresses. The U.K.'s housing market is slowing, but so far sales of premier homes have been unaffected, realtors say. According to Knight Frank, demand for homes in neighborhoods such as Belgravia, where Russian billionaire Roman Abramovich lives, Knightsbridge, the home of Harrods, and Mayfair, where the black-Amex set get their suits made at Savile Row, pushed the prices of prime real estate up by almost 40% between the summer of 2006 and summer 2007. In 2006, almost a quarter of properties costing $16 million or more sold through Knight Frank went to Russians; Middle Easterners bought 16%. "If somebody wants to live on Belgravia's Eaton Square, there are only a handful of properties available, so they'll bid whatever it takes to get one," says Liam Bailey, head of residential research for Knight Frank. "We've heard extraordinary stories of properties that had doubled in value over two years or houses that were going for 50% more than the asking price."
This wealth-driven inflation has hit liquid assets as well. At the London International Vintners Exchange, an online marketplace for fine wines, managing director James Miles has watched prices for the top Bordeaux double over the past two years, driven in part by wealthy foreigners. "These guys all aspire for the rich man's toys, which doesn't just mean having boats and fast cars, but also having a great cellar," he says. A 12-bottle case of 2000 Chateau Lafite Rothschild that sold for $8,800 in 2005 cost $20,000 last year, while a case of Chateau Petrus that went for $23,000 two years ago sells for $47,000 now. Most foreign clients buy fine wine as an investment, but some aren't thinking quite so long-term. Miles remembers once getting an urgent order for a case of $2,000 half bottles of 1982 Lafite Rothschild "because some Russian oligarch wanted it delivered to his private jet and a half-bottle was all he could handle on his flight back to Moscow."
While upscale businesses have unquestionably benefited from the influx of rich foreigners, it's less clear that their money trickles into the larger economy, helping lift living standards for less-wealthy Londoners. Paul Knox, head of U.K. wealth advisory services at JP Morgan, says rich expats "have tremendous spending power. Interior designers, domestic staff, schooling for their children, bars, restaurants, taxis, and more." On the other hand, "If a rich person brings $1 million into the economy, not all of that $1 million is going to filter into the wider economy," says Jonathan Said, senior economist at the Centre for Economic and Business Research. "A relatively small proportion of what they spend would feed through, compared to a middle-class person." The tabloid headlines scream out FAT CATS GETTING FATTER, but some argue that their contribution to the local economy doesn't matter, saying that the most valuable thing the global rich bring to Britain isn't their cash. Tony Travers, head of the Greater London Group at the London School of Economics, says that visible groups of powerful people from other countries living and working in London is a priceless form of "soft diplomacy," advertising Britain as the place to be for the world's best and brightest. "For other people in those countries thinking of where they should invest when they go to open a new business or expand an existing one, the fact that there is a group from their own country happily living without worry in London makes it that much more attractive," he says.
And with the world's rich come their kids, future soft diplomats who either grow up to study, live and work in London or go back home with lifelong links to the city. "You go to Hong Kong now, and half the top businessmen you talk to were educated in Britain," says Barnaby Lenon, headmaster of Harrow, a top boarding school for boys where 10% of the students are foreigners. "Even if our students don't stay in London, if they're involved in the world of finance, it's going to be indirectly a great help to British business. And, in a sense, for British foreign policy."
But others say that's not enough. A growing number of critics are crying foul over the tax-exempt status of London's wealthy expatriates. "As a foreigner in this country you can make an enormous amount of money, but the numbers who put anything back into this country are trivial," says economist Will Hutton, CEO of consultancy the Work Foundation. There are a handful of foreigners at the top of the Sunday Times Giving List, a record of charitable donations by the rich and powerful, but Hutton wants to see more. "I would like to see people endowing universities, backing social entrepreneurs, helping to restore our galleries and our museums. To the question 'What is a life well-lived?' I don't think 'To be as greedy as possible' is the right answer."
Concerns that a small group of foreigners are controlling much of Britain's wealth has moved the government to change the rules. In October, Chancellor of the Exchequer Alistair Darling announced a proposal to charge foreign residents an annual $60,000 fee beginning in the eighth year of their stay in Britain. The question is, if London's foreign rich follow the money right out of town as a result, can London afford to lose them? Scorpio Partnership's Dovey fears the worst. "They don't have any deep ingrained ties to Britain," he says. "If the economic climate changes, they'll go somewhere else. I say let them do what they do. Because you'll be sorry if they're not there." Unless, of course, you have your eye on an eight-bedroom town house in Kensington.
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