Monday, 17 May 2010

The Demise of London's Bling Economy....

In my Money Week column this week, I've been writing about how the sale of Harrods marks the deminse of London's bling economy. Here's a taster....

Money Week: Mohamed Al-Fayed Is Selling Out of Bling London. So Should You.

Mohamed Al-Fayed always said he’d never sell Harrods. It was the prize in his portfolio, the one asset he’d take to the grave with him. That, however, was before Qatar Holdings came along and offered him £1.5 billion for one of the world’s most famous shops. There aren’t many people who wouldn’t change their mind when that kind of money was on the table - and al-Fayed is not among them.
The Egyptian-born grocer has never been a popular figure in his adopted country. His brash, money-drenched lifestyle endeared him to no one. Turning a traditional British department store into something about as classy as a Dubai gift shop didn’t do his reputation any good. Nor did encouraging conspiracy theorists to focus on the Royal Family after his son Dodi died alongside Princess Diana.
But he has always been a brilliant street trader – and he has a street traders’ inner sense for when to buy and sell. From 1985 to 2010 he brilliantly rode the emergence of London as the headquarters of the ‘Bling Economy’. He knew how to mint a fortune from that more than almost any other entrepreneur. But now he almost certainly senses that era is coming to a close. There are plenty of bling assets on the London market. If al-Fayed is selling out, then so should you.
Fayed’s colourful career has always been rich fodder for conspiracy theorists. The acquisition of Harrods involved a long and bitter battle with another flamboyant tycoon, Tiny Rowland. He was immersed in controversy over his application for a British passport, as well as Princess Diana’s death. He made enemies everywhere.
None of that stopped him making money. He paid just over £600 million for Harrods back in 1985, and had taken out huge dividends in the years he has owned it. He owns the Ritz in Paris, as well as Fulham football club. Overall, his fortune is estimated at more than £600 million.
Plenty has been written about how he wants to spend less time on the business. And a lot has been said about how sovereign wealth funds such as Qatar Holdings are snapping up trophy assets at fancy prices. And while there is no doubt truth in both those points, the reality is that a man as smart as Al-Fayed, and with as keen an eye for what was cheap and what was expensive, wouldn’t be getting out now unless he felt it was the top of the market.
His talent was to see how London was changing. When he bought Harrods in 1985, the London economy was still emerging slowly from the gloom and depression of the 1970s. There hadn’t been any Big Bang in the City. Barrow boys still sold fruit and veg, not credit swaps and derivatives. The word non-dom didn’t mean anything. There weren’t any Russian billionaires – anyone in Russia interested in making money was more likely to end up in Siberia than the King’s Road. Getting credit still meant knowing your bank manager, and convincing him you wouldn’t fritter away any money he lent you.
Over the next quarter century, that changed dramatically. The ‘Bling Economy’ emerged, and London was its epicentre. The deregulated financial markets were minting millionaire by the minute. London became the tax-friendly home of half the Russian oligarchs and Middle Eastern oil sheiks. Everybody was piling up easy credit on their cards, with no meaningful checks on whether they were allowing their debts to spiral out of control.
Harrods was precisely the place to spend all that easy money. It was showy, snobby, expensive and tacky. In short, it was ‘Bling Central’ - a place to spend the money you hadn’t really earned, and didn’t mind wasting.
But in the next decade all those trends are likely to go into reverse.
First, there isn’t going to be nearly so much easy money around. The City may have returned to paying itself big bonuses. But, to use the markets own phase, it’s a dead-cat bounce. Over time, heavier regulation is gradually going to chip away at the fantastic way the financial markets pay themselves. On top of that, credit is going to be tighter across the whole of the developed world. People won’t be bashing the plastic the way they were. That is going to impact most heavily on companies selling luxuries and indulgences – such as Harrods.
Next, the non-doms are not going to be around in the same kind of numbers. As the UK goes though a massive fiscal crunch, a lot of extra tax revenue will have to be raised from somewhere. Rich foreigners are always going to be an easy target. Expect them to face higher and higher levies – which will prompt many of them to base themselves somewhere else.
Finally, the centre of economic gravity is moving east. Most of the Europe – and the UK is no exception – faces a decade of retrenchment as it tries to make its economy competitive once again. The money is moving to different centres – Mumbai, Shanghai, Hong Kong and Singapore. London isn’t going to be the centre of anything very much – and there won’t be a lot of money to be made from servicing its rich.
Harrods is just one example of the ‘Bling Economy’, although an emblematic one. The London market is full of companies that depend on wealthy foreigners. Think of upmarket department store chains such as Debenhams, Selfridges and Liberty. There are plenty of luxury goods companies such as Burberry. And there are dozens of retailers that depended on the easy availability of credit. They are all going to find business a lot tougher in the next decade.
There will still be money to made in the UK. But it will be done in a far more down-to-earth way. It will be engineers and exporters who make the fortunes – not retailers courting celebrities and the super-rich. Al-Fayed was smart enough to see that he’d had a good innings, but that the game had changed, and that now was the time to depart. Investors should follow that lead.

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