Al Fayed is selling out of the Bling Economy

Mohamed Al Fayed is selling out of the Bling Economy. So, says Matthew Lynn, 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. But that was before Qatar Holdings came along and offered him £1.5bn for it.

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's always been a brilliant street trader and has a street trader's inner sense for when to buy and sell. From 1985 to 2010 he rode the emergence of London as the headquarters of the Bling Economy'. 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, so should you.

Al Fayed's career has been rich fodder for conspiracy theorists. The acquisition of Harrods involved a long, bitter battle with flamboyant tycoon Tiny Rowland. He was immersed in controversy over his application for a UK passport, as well as Princess Diana's death. He made enemies everywhere. But none of that stopped him making money. He paid just over £600m for Harrods in 1985 and has taken out huge dividends in the years he's owned it. He also owns the Ritz in Paris and Fulham football club. Overall, his fortune is estimated at more than £600m.

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Plenty has been written about how he wants to spend less time on business. And a lot has been said about how sovereign wealth funds, such as Qatar Holdings, are snapping up trophy assets at fancy prices. This is true, yet the reality is that a man with as keen a trading eye as Al Fayed wouldn't be getting out now unless he felt it was at the top of the market.

When he bought Harrods in 1985, the London economy was still emerging slowly from the depression of the 1970s. There hadn't been any Big Bang in the City. Barrow boys still sold fruit and vegetables, 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 millionaires by the minute. London became the tax-friendly home of half the Russian oligarchs and Middle Eastern oil sheiks. Everyone was piling up easy credit on their cards, with no meaningful checks on whether their debts were out of control. Harrods, showy, snobby, expensive and tacky, 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, this is 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, non-doms aren't going to be around in the same kind of numbers. As Britain 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 firms that depend on wealthy foreigners. Think of upmarket department store chains, such as Debenhams, Selfridges and Liberty. There are plenty of luxury goods firms, such as Burberry. And there are dozens of retailers who depended on the easy availability of credit. They're all going to find business a lot tougher in the next decade. Sure, there will still be money to made in Britain, but it will be done in a far more down-to-earth way. It will be engineers and exporters who make 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 his lead.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.