Arab spring may bring unseasonal cheer to London property market, but do fools rush in?

5 July 2011

The turmoil in the Middle East seems to be having a silver lining for at least one group of people – London Estate Agents. Anecdotal stories abound of residents in the leafier boroughs such as Chelsea being approached by their local estate agent with a ‘once in a lifetime offer’. Apparently, some estate agents are even offering homeowners a premium of up to 20% to complete on the sale of their property quickly. The rumour floating around Chelsea recently was that one particular offer was being conducted on behalf of a significant Middle Eastern figure who was looking to export at least some of his assets to the premium end of the London prime property market.

West London agents Kay and Co would appear to concur, Martin Bikhit comments, 'We are seeing prime markets being boosted by strong overseas demand. As political turbulence intensifies overseas, it is reinforcing once again that residential property in central London is a safe haven for international wealth. Over the last few months the number of Middle Eastern buyers has significantly increased following the Egyptian crisis and the subsequent wider unrest in the region. We have seen the proportion of Middle Eastern applicants double compared with the same time last year.”

The political and social turmoil has undoubtedly created genuine discomfort and uncertainty for many respectable Middle Eastern families with assets in the region.  It is an entirely rational reaction against such a backdrop to want to diversify risk by moving assets into less volatile areas and the interest in London property and other high quality assets is not unexpected. However, such investors must be careful not to rush in to transactions without the appropriate long term consideration being given both to the style of the assets and the ownership structure used to hold it.

Families wishing to restructure assets out of the Middle East and into western markets, whether  London property or other investments  should bear in mind a number of considerations if transactions are to be successful and achieve a meaningful and long term reduction of risk and increase in portfolio stability.

Situs of the assets

Where assets are located can often determine the reality of how they are treated. Immovable assets such as property will be always vulnerable to external influences, so investors would be well advised to ensure portfolios are built up in jurisdictions that offer political and social stability, security, a good legal framework, and genuine expertise for handling them.

Diversification of assets

Spreading risk across a variety of asset classes is generally regarded as sensible for most families. This requires careful consideration of a number of factors, such as appetite for risk, country specific and political risk, currency risk, assets concentrations, asset return correlations and liquidity requirements, both today and in the future.

Tax

Effective tax planning needs to be taken into consideration regarding the transfer of assets or acquisition of new assets into a new jurisdiction. Many of the tax advantages that come into play in the Middle East are simply not available in the UK or Europe, where the tax regimes are more complex. Thus capital gains tax, inheritance tax, and income tax are all variables that may need to be taken account of by the Middle Eastern family moving assets into Western Europe and the UK, unless care is taken to structure such assets into tax efficient holding vehicles.

Structuring

Proper structuring of assets is vital. For Middle Eastern investors considering Europe as a home for assets, different vehicles may be required, depending upon the local legal and taxation system. Foundations, Private Trust Companies and Trusts are widely used in this respect, with an important driver for selection being whether the local legal environment recognises trust structures or not. There are many trust and foundation structures that would be suitable for most Middle Eastern families which offer protection, whilst retaining an element of control over the assets.

• Foundations - are familiar in the Middle East and allow a lot of flexibility to family members, as they can make up the majority of the council members. The foundation’s council is the body that administers the foundation’s assets. In Jersey, foundations have a guardian type role, which is akin to that of a protector, and that too can be occupied either by a family friend or family member. The guardian’s role is to ensure that the council carries out its functions in relation to the charter and the beneficiaries. However the guardian cannot both be a guardian and a council member (unless they are founder or a licensed service provider like Vistra).


• Private Trust Companies (PTCs) – are becoming increasingly popular amongst Middle Eastern families due to the control that they give the family over the underlying trusts that invariably hold the family’s assets. PTCs can be established in off-shore jurisdictions to provide families with the ultimate level of control, and, subject to tax considerations, the family can provide the majority of the board of directors required to run the trusts underlying the PTC, alongside advisors and fiduciaries. The family are usually closely involved with the trust company, and can influence the underlying structures.


• Trusts - many International Business Centres have now introduced amendments to their trust laws that allow the role of protector to be implemented. Whilst it is common for corporate protectors to be used, there is absolutely no reason why a close family friend or a non beneficial family member cannot be used to steer the trustees in the best interests of the beneficiaries. This can be extremely helpful when considering Sharia law and its application to the beneficiaries.

For the Middle Eastern family who, following the onset of the Arab Spring, mays now be reconsidering the concentration of their assets locally, there is therefore a wide choice of options. However, in reality the process of moving or acquiring new holdings can prove time consuming and require detailed planning, if a viable long term investment strategy is to be built.

Vistra (Jersey) Limited has a long track record of working with clients from the Middle East and providing for their structuring and asset protection needs. Vistra regularly works closely with and coordinates the input of other professional services providers to ensure an optimum single family solution. This flexibility and attention to detail are essential, if any wealth planning solution is to stand scrutiny both now and in the long term future.

Useful contacts: www.vistra.com, telephone +44 (0)1534 504753.