Rose tinted spectacles or optimism returning?

By Martin Skinner

I’d been building up to my blog last week on the assumption that more Quantitative Easing would be implemented and support for the banks would be effectively unlimited.  With these now in place it seems to me unlikely that we will suffer the severe double-dip that many are worrying about.  As last weeks’ comments show this isn’t a view shared by all – and it shouldn’t be expected to be; it is just my opinion based on information currently available and forecasting can be a mugs game these days.

Regardless, the news in the financial press is undeniably better now than it was 9 months ago and either my finding out I’m going to be a dad has given me rose tinted spectacles or optimism is returning to the City.

Looking back
Anatole Kaletsky used the example of the irresistible force and the immoveable object at the height of the crisis and argued that the willingness of governments and central bankers to use unlimited guarantees and in theory at least inject unlimited capital (£200bn so far) into the economy was the only way to reverse a classic run on the banks.  This was necessary because banks will rarely have enough money to pay all of their depositors out if confidence goes completely and they all want their money at the same time.

My argument now is that this tactic has succeeded – however it takes a while for markets to shift from ‘batten down the hatches’ to risking capital reserves on growth.  Understandable when you consider just how close we came to utter economic collapse.

Bosses optimism
In the Sunday Times last week John Waples reported on three top chief execs calling an end to the recession in the last week or so – Sir Stuart Rose at Marks & Spencer, Stephen Hester at RBS and Eric Daniels of Lloyds.

Tonight I went to a presentation by St James’s Place Wealth Management and the theme was very much that the returns offered by ‘riskier’ assets like equities, corporate bonds and property greatly outweighed the minimal returns offered by cash at 0.5% – and the expectation was that economic growth was likely to outperform expectations.  I agree.

What do you think is going to happen next year? And what do you think will be the 2010’s top performing asset classes?

In Other News
Some other great articles from the weekend press included:

• David Smith – Are the central banks blowing new bubbles?
• Irwin Stelzer – Barack Obama’s policy errors will stymie the US recovery

The Blogfather – Lesson Number 1

By Martin Skinner

On request & dedicated to our new godson Archie Campbell.

Lesson Number 1 – Just add FUN

Firstly what I don’t mean:

• I don’t mean just do exactly what you want when you want – other people are important and you should always try to be considerate.
• I don’t mean just do the easy fun things (consume) before you do the hard things (contribute) – you should do the quite the reverse, contribute first then reap the rewards.  It tastes better that way.

Now what I do mean:

• Don’t take yourself too seriously – the sooner you learn to laugh at yourself the less life’s critics can get you down.
• Savour the funnier moments (“always look on the light side of life”), particularly at tough times, and people will greatly appreciate you for it.  Life can be boring and worse at times – but only if you allow it to be.
• Dare to be different.  It’s easy to want to fit in, particularly when you’re young.  But if you want to be special you need to think about how to stand out.
• Take risks – consider your options then get out there and test them out.   “You have to be in it to win it.”
• Get a shark hat !  You’ll just have to trust me on this one.

UK Property – Are we really doomed to a double dip?

By Martin Skinner

After a rebound in property values and a surge in listed property equities in the spring/summer much of the early autumn discussion has been around the risk of renewed downward pressure on values in 2010.  Is this just irrational pessimism or is it a real probability?

I will focus my discussion on the London Residential Property market where I have most of my experience.

The job market tends to lag the broader economy because understandably after a shock like the one we’ve had companies tend to want to bolster their balance sheets and deliver good profits before they take on new staff.  This inevitably weighs heavily on sentiment.

In recent weeks transactions have actually been very good, particularly in the best London locations.  Noticeable trends have included:

• The London residential lettings market tightening dramatically as accidental landlords have ceased depressing prices.  We have just been through the peak lettings season and the excess supply has been soaked up.  Lettings agents I know in both West and East London are either fully let or very short on stock and asking prices are heading up.
• Opportunistic  home buyers and renters are finding the market a lot more competitive – they are having to adjust their expectations in order to secure their dream pads.
• Residential sales agents in prime West London talking about being run off their feet.  With the Sterling exchange rate being so low foreign investors are competing for glamorous properties as if we were back into boom territory.
• Supply remaining near record lows.  Without development finance practically impossible to secure and with developers still reeling from the crunch it will take a long time to increase substantially.  And remember we were in a ‘housing crisis’ before the crunch.
• I even see from a Property Week article that London office lettings have also increased considerably and some commentators have quietly whispered about future undersupply – remarkable considering where we were 12 months ago.

And yet property and banking stocks have dipped noticeably and bank lending is still very tight indeed.  Why is that?

The answer is likely to lie in a couple of key places:

• Price increases moderating – value drops were exaggerated on thin trading on the way down and when the dreaded depression was averted they jumped back (like a rubber band).  This had to slow once the initial jump had occurred.
• Surprisingly bad Q3 GDP figures – the 0.4% drop was contrary to expectations of a return to slow growth.

Taken together and compounded by continuing increases in unemployment people have understandably been worrying about their futures.  Reassurance is needed.

Since I began writing this article two key announcements have been made so I’ll just cover them briefly:

• The Bank of England (BoE) has kept rates at 0.5% and committed to a further £25bn of Quantitative Easing (QE).  If you read my news review two weeks ago (and the links from it) you’ll have seen that the hope was for £25/30bn.  So this is good news, as expected, and will keep the foot on the accelerator until the recovery is expected to have achieved broader traction.
• The Nationwide building society, who are broadly considered to have the most accurate report, released their house price inflation figures for October – up 0.4% for the month which takes the annual figure into positive territory for the first time since March 2008 at 2.0%.

As I commented just last week economists are having to look at entirely new models for their forecasting so it’s harder than ever to get any form of consensus on where the market is going for the next few years.  Luck supposedly favours the bold  however so I will endeavour to give you a property investors view on where the market is heading.

I believe:

• In London residential both rents & prices will steadily rise.  The wealthier areas will rise faster – cash buyers will continue to dominate until debt becomes more accessible.
• The additional QE and sterling weakness, ironically as a result of weaker than expected (and probably incorrect) Q3 GDP figures, will boost the economy and although next year will still be nervy and mixed there will be growth, sentiment will improve and property values will rise.
• Unemployment will not rise above 3m as the UK’s relatively flexible labour market allows workers to change jobs and/or become self employed reasonably easily – the rise of the ‘Individual Capitalist’ as Penny puts it in her book will help a great deal.

This may seem surprisingly upbeat to many so I will balance it with some thoughts on  areas where real dangers still lie ahead:

• Shopping centres – have been overbuilt and in some cases will be knocked down before they are ever occupied.  The trend towards shopping online will continue and only those that provide a great experience as well as product will attract.
• Secondary locations – will always suffer more than primary locations if anything goes wrong.  Government spending cuts are very likely if as expected the Tories win the general election next year.  These will hit regional areas, particularly in the North, hardest where the economy is most dependent on the government for support.  The North-South divide will become very evident.
• Longer term interest rates – will have to go up at some point.  Anything below 5% is considered to be expansive (encouraging both growth and inflation).  This is likely to take a quite a while however when it does come it will hurt those that have weak incomes.

I’ve always focussed on higher income variants of property in the best almost prime locations (i.e. Zone 2 in London) because I believe it enables you to benefit from the outperformance scarcity brings while still generating a high enough yield to buffer you against potential future cash flow challenges (like rising interest rates).  And I still do.

If you are looking to buy now also consider sticking to the locations you know best i.e. within a maximum 30 mile radius of your home.  It’s easier to manage when things go wrong and you have a much better chance of buying well & developing well.  And don’t rush – select your purchases carefully after researching them well.  There will continue to be good opportunities to buy next year so don’t go off half-cocked.

Do look to increase your exposure to London residential over the next 12 months however if you are in a position to do so – we aren’t doomed as some may have us believe.

Return of the private investor

By Nick Duxbury

Frustrated with low interest rates and hungry for income, investors cramming themselves back into the country’s auction rooms have sparked a mini-boom. Retail funds, too, are showing signs of life

Andrew Derrington is an 83-year-old private investor from Hackney, east London. With his straggly white beard, faded pink backpack and crutches, little about him would appear typical of the average auction buyer. But his reasons for bidding at Cushman & Wakefield’s commercial sale last Thursday — the first he has attended in three years — could not be more typical.

“I am earning bugger-all interest on my cash in the bank, so I thought I would get some income through decent property yields,” he explains.

Having just lost out on buying a dental surgery in Norfolk, Derrington is still sitting on around £350,000 of cash which, like millions of other savers, was earning 5% interest in the bank just over a year ago. This all changed after the collapse of Lehman Brothers. Between 8 October and 8 March, interest rates were slashed to a record low of 0.5%. It is no coincidence then, that March also marked the recovery of the auctions market.

Desperate times
While the rest of the investment market was paralysed by a lack of debt finance, desperation for income — combined with a perception that the bottom of the market had been reached — pushed average yields in the auction room down. Auctions Results Analysis Service (ARAS) and Investment Property Databank (IPD) figures show they fell 17 basis points in the first quarter of this year. Since then, the private investor market has gathered momentum. Even those worst-hit investors, the retail funds, are now back in the game (see box).

A glance in the auction room reveals just how hungry investors are. Last Wednesday, Jones Lang LaSalle experienced what auctioneer Richard Auterac says was “the best demand we have seen in years” at its sale at London’s Cumberland Hotel. The auction achieved a sale rate of 82% and raised £34.8m from 32 lots. Most significantly, the average yield on the day reached 6.75%, compared with the IPD all-property average of 7.72%.

A similar 100-basis point difference was evident at Allsop’s bumper £83.2m sale — its largest in 20 months — the previous week. It scored a 92% sale rate and the average yield was 6.7%. Noble analyst Michael Burt described the sale as “first-hand evidence of returning liquidity from cash-backed buyers competing yields downwards”.

Third-quarter ARAS figures from IPD and JLL reveal that the weight of money coming through the auction room has doubled since this time last year.

“The first and second quarters experienced a big bounceback and, based on last week’s sale, I am not convinced that the foot is going to come off the pedal anytime soon,” observes Auterac. “After that we should see a stabilising of prime yields. A few months ago we were seeing a new breed of opportunistic buyers — but now it is mostly those from the last cycle with surplus cash and looking to protect their income.”

One such buyer is Richard Liddiard, a partner at Carter Jonas, who is acting on behalf of a 25-year-old family trust. Bidding at Cushman & Wakefield’s sale last week he won lot 21, Prospect House in Leicester, which is let to the University of Leicester until 2019 at £124,623 a year.

“There were some ludicrously low yields in the room today — but I was happy with what we paid,” he says.

The trust, which did not want to be named, bought the property at a 6.54% yield for £1.79m — without debt. It was an income play that will be used to rebalance the trust’s £13m portfolio — 60% of which comprises commercial property, away from equities and cash — which the trustees say have both failed to provide consistent income.

“We have some nervousness about property still,” a trustee explained after the sale. “But that concern is tempered by the need for income to rebalance the portfolio. For us, the return is income protection.”

While the private investor buyer profile might be consistent, the selling profile has changed. No longer is it distressed private property companies and retail funds. Big names that were covertly buying up until the summer are now taking advantage of what they regard as a pricing window. At Allsop’s sale, private investor Tony Khalastchi sold eight properties — most of which were in London — at prices he says he could not have fetched two years ago.

“In all my years in property I have never seen anything like this,” he says. “The last few weeks have been crazy. I can get more than my money back on the well-let, well-located London properties and banks I bought at auction at the height of the market.

“As far as buying goes, I think the risk outweighs the rewards right now — everyone is going for quality.”

Encouraged by the prices being achieved for well-let London property and the influx of overseas buyers — one family flew in from Pakistan for the Allsop sale — Khalastchi plans to sell some bank lots at the next auctions.

Property Week columnist and chairman of Structadene David Pearl was also selling four central London properties and was “astonished” with the “top of the market” prices he achieved on the day.

Far too demanding
“In all my years in property I have never seen anything like this. The last few weeks have been crazy”
Tony Khalastchi, private investor

In the private treaty market, a surge in demand has left many buyers unable or unwilling to compete, forcing them to look outside the UK to find “value”.

One such investor is Aprirose, the Mayfair-based investment manager. Since September last year it has spent more than £160m on behalf of wealthy individuals — many of whom are based in Africa.

But managing director Manish Gudka concedes it now faces a drop-off in purchases of sub-£10m lots as it struggles to compete with cash buyers.

“In 2006/07 we were being outbid on most of what we looked at. Now, it is starting to head that way again. We are looking to countries like Germany as we think they offer better value. As long as the private cash buyers are paying the current prices, we won’t be able to compete — in the auction room the private investor is paying more for the same type of property.”

As a result of the growing competition, Gudka says Aprirose will move up the risk spectrum and target larger lot sizes that require debt funding. The investment manager is also avoiding the open market and buying instead from receivers off market. For example, last week it bought a portfolio of 11 JD Wetherspoon pubs from receiver Ernst & Young. It co-invested in the pubs with three investors, paying £65m on 25-year leases at a yield of around 7.35%. Gudka notes that this is more than 100 basis points lower that the 6.12% average yield of five Enterprise Inns pubs sold at Allsop’s auction.

Deals like this will only get harder to source, especially given the resurgence of other private investor vehicles such as syndicates. Mayfair-based Hotbed’s 778-strong membership increased by 71 in the last six months — 55 of whom have signed up to property syndicates rather than private equity.

“In the last four months, private investor appetite has definitely grown,” says Ed Henson, investment director at Hotbed. “But we target the sub-£10m market and have found sourcing deals increasingly hard. There is a growing membership, but not the opportunities to meet the demand.”

One of its syndicates, which has placed a West End ground rent under offer, has been oversubscribed, thanks to the bond-like security offered by the transaction.

Bet on the syndicates
The buying power of private investor syndicates has already been proven by companies such as Tritax Securities. The fund manager bought the 97,000 sq ft headquarters of the Intercontinental Hotels Group in Broadwater Park, Denham ,from Invista Real Estate Investment Management in June, after raising £28m from private investors in less than four weeks.

Furthermore, Khalastchi, who has invested in joint ventures with LaSalle Investment Management, says institutions are also moving in on the £2m-£20m market, which until recently was dominated by private investors.

“They have learned that there is more flexibility in the smaller lots and demand from cash-rich investors if they need to sell,” he explains.

So, if the auction rooms are one of the last sanctuaries for the cash buyer, is there a danger that private investors like Derrington will be overpaying?

“For a private investor who would otherwise be earning 0.5% in the bank, these yields are still attractive and rational,” argues Auterac.

“I am unlikely to live to see half the lease lengths I am trying to buy, so the risk is not that great,” jokes Derrington. “I could probably find a more secure way to spend my pension — but not with such good returns. And I think I have reached the age where I can take a few risks now.”
Retail funds: bears come out of hibernation

Retail funds are also back on the acquisition trail. The same funds that, battered by redemptions from private investors looking to exit, were some of the biggest sellers in the market only six months ago, are not only seeing net inflows — they are now also looking to buy again.

Henderson’s New Star UK Property Trust fund expects to invest in long-let property in the next two months — as does the £1.3bn Aviva Norwich Property Trust, which expects to complete a deal before Christmas. Aviva, the largest private investor fund, had its first net inflows since June 2007 in August, and this trend has continued through September and October. Now, with an offer status and a cash weighting of 18%, it is seeking to buy lot sizes of £15m and above.

“As long as private cash buyers are paying the current prices, we won’t be able to compete”
Manish Gudka, Aprirose

But it is not just retail fund managers that are becoming more bullish. The most recent survey of sentiment among independent financial advisers (IFAs) by the Investment Property Forum (IPF) shows an increase in the number recommending a greater allocation of clients’ funds to property.

Fewer IFAs are recommending no allocation to property — down to 11% from 18% in May — and there is an increase in the number that are recommending an increase of between 1% and 15% (see graph).

Illustrative of how quickly sentiment has changed is the view of Mark Dampier, research director at Hargreaves Lansdown, who in his August Property Week column was a self-confessed bear regarding commercial property.

“I have changed my mind,” he now says. “I have moved from deeply bearish to neutral. At the very least there will be a short-term squeeze on capital values. I would say start allocating 2%-5% of portfolios.”

The latest figures from the Investment Management Association (IMA) show property funds’ net retail sales more than doubled in September from August to £261m. So after six months of successive inflows, property now makes up 10% of total net retail sales across all sectors — up from 6% in August.

But improved sentiment and the return of net inflows to funds are not enough to convince some that the man on the street has truly returned.

Philip Nell, head of retail funds at Aviva Investors, certainly thinks not. “The early investors have been funds of funds [operators of open-ended investment companies and listed trusts] and discretionary wealth managers,” he says. “The core IFA community have not returned to us yet. The man on the street fears unemployment and so is protecting his cash.”

Dampier agrees: “Property retail funds were one of the standout burns of the downturn. Investors were badly led down the garden path at the wrong time. The man on the street will return at some point — hopefully before everything gets too expensive again.” (Nick Duxbury, Property Week). http://www.propertyweek.com/story.asp?sectioncode=38&storycode=3152154

The worst may be over but this ‘mini-boom’ is not sustainable

By Philip Nell

So it looks as though 2009 will turn out to be a year of two halves — as 2007 was — but is this incredible recovery sustainable?

My own view is that it can’t possibly be, but what will be the shape of the performance graph from here?

Many commentators believe the sheer quantum of equity available today, combined with the complete lack of investment product, will sustain the recovery in the short term, until rental growth returns to the market in two to three years’ time.

So 2011 might be a year of income return only, but it is suggested that we are now looking at the prospect of no further capital declines over a five-year forecast period from the end of this year.

That’s all positive, but let’s not forget that we’ve just fought the equivalent of a world war. The country — which was already more highly geared than it should have been in 2007 — is saddled with debt that will remain a legacy of this economic downturn for some considerable time.

Not that I think the wrong action was taken by the UK government and central bank over the last two years — I don’t think anyone will really know the answer to that for some years to come — but in reality, flooding the financial system with credit was probably the only action available to them.

Inflation — yes, you remember that? — is coming and, for a highly geared economy, that’s a good thing.

Property has elements of inflation hedge, and so is a better bet under such circumstances than fixed-income investments. That adds to the argument that corporate bonds and government gilts are now overvalued.

Unfortunately, inflation will almost certainly bring with it increased base rates and increased bond coupons, particularly if central government needs to raise more funds through bond issues into an already-saturated system.

“There is a passive rebalancing of portfolio weightings. These have changed because the value of equities has gone up”

That’s bad for property. True, the spread of property yields over gilt yields remains at an all-time high, so there is some capacity to absorb gilt yield increases. But this is not simply a function of property looking cheap — it is also about gilts looking expensive.

So, where does that leave the question of the likely shape of the recovery? My view is that we are in a very different place from six to 12 months ago. There is infinitely more stability in the financial system, equities have shown that capital markets can go up, as well as down, and the worst of tenant default is almost certainly behind us.

Institutional investment

On the pure institutional side, there is a passive rebalancing of portfolio weightings. These have changed because the value of equities has gone up — meaning fund managers need to increase the allocations to property to keep the weightings the same.

But institutions are increasing investment not just to match their equity holdings, but also because they are going from negative to neutral or even positive to property. This means they need to invest even more in property.

Having said that, a weak currency attracts overseas investors and helps to retain UK ones, and low base rates only have one way to go — remember Play Your Cards Right?

But that also means that it will take a sustained recovery in the pound before UK-domiciled investors start to look overseas. The risks are too great. The value of sterling will go up against the euro again at some point and then you will lose out if you invested in euro-denominated assets — and hedging out that risk is still very expensive because of that.

On that basis, I think the total return graph from here will look more like my six-year-old’s attempts at joined-up writing than a smooth upward incline but, as we all know, markets very rarely respond smoothly to anything. (Philip Nell, Property Week). http://www.propertyweek.com/story.asp?sectioncode=38&storycode=3152148

Dare to think the unthinkable: an undersupply in the City of London

By Deirdre Hipwell

Leasing agents in the City of London are almost genetically programmed to see the upside in any market situation.

Even after the worst first-quarter performance in 20 years this year, when less than 300,000 sq ft of office space was taken up, there remained a determined, sometimes desperate, confidence that the Square Mile faced more of a risk of undersupply of the best office space than oversupply.

The events of recent weeks may yet prove them right.

In the eight weeks since Nomura agreed to occupy the whole of UBS and Oxford Properties’ 541,000 sq ft Watermark Place, a further 470,000 sq ft is close to or has already been placed under offer at 30 Crown Place and Drapers Gardens.

This is in addition to Bank of China agreeing to occupy — with an option to buy — Goodbody’s 117,500 sq ft One Lothbury scheme. Hammerson has achieved a healthy maximum rent of £47.50/sq ft and nearly let the whole of 60 Threadneedle, winner of City development of the year at last week’s Offices O9 conference, while Aviva Investors and Atlas Capital Group has almost fully let 20 Gracechurch Street.

And even though strong-covenant tenants AllianceBernstein and AstraZeneca may have turned their noses up at City schemes, there is still a range of big-name occupiers trawling around for space, such as Blackrock, Clyde & Co, Bloomberg, and Royal Bank of Canada.

But for tenants looking now for more than 200,000 sq ft in the City, the choices have suddenly shrunk to British Land’s Ropemaker scheme or Minerva’s Walbrook.

And those that have to move because of an upcoming lease expiry may find landlords are gaining the upper hand as rents and terms will start to harden.

Digby Flower, executive director at CB Richard Ellis, says effective rents on the best space in the City will now start to improve more quickly than “headline” rents, as the rent-free periods landlords are prepared to grant reduce. He says rent-free periods are likely to fall by as much as 12 months quite quickly as landlords seek to “get to the cashflow sooner”.

But the agents may not want to pack away their cheerful optimism until the next downturn just yet, as it is still far from plain sailing in the volatile City market.

Gerald Ronson, chief executive of Heron International, speaking at Property Week and CoreNet Global UK’s Offices 09 conference last week, warned that, although London’s rental growth prospects look keener, “we are only two years into this nightmare”.

Nomura watershed

There is also still heated debate over whether landlords are giving away too much in their haste to secure occupiers.

Nomura’s 48-month rent-free period, which with other base build contributions equated to a rent-free period of six years, generated a mixed reaction and headlines as far afield as Singapore. However, Nomura was a watershed deal of more than half a million sq ft of speculatively developed space let to a good-covenant tenant on a 20-year lease following the world’s worst financial crisis.

UBS would have been mad not to do the deal and, although those terms may not be replicated, they are not to be sneered at.

Nomura’s was the first of a clutch of deals that have entirely shifted the City market — at least for grade A space. There are still fairly high levels of supply of secondary space, of which tenants looking for less than 50,000 sq ft may have their pick.

We are not there yet but talk of recommencing development in the City may start again. The prelet market is still too expensive for tenants, because no developer will undertake a scheme unless it can secure a rent of at least of £50/sq ft and a guaranteed profit.

In addition, construction costs are still high and, although predicted to fall a further 3% in the last quarter, they are nowhere near as low as they were at the start of the last development cycle. Nor is there that much evidence of any significant return by the banks to the development finance market, so developers may have to look to other sources for forward funding. But the shift between supply and demand is moving in the right direction.

“In London, unlike the last recession there has not been overbuilding. We will see a change in the pattern of falling rents as there is not a lot of property available,” continues Ronson.

“If you look ahead into next year, when these buildings are gone, when developers are not building, and banks are not lending, there will be demand. Rents will go up.”

Nicely in time for the completion of Heron Tower in 2011. (Deirdre Hipwell, Property Week). http://www.propertyweek.com/story.asp?sectioncode=38&storycode=3152149

Banks and propcos make perfect bedfellows

Land Securities, British Land and Grosvenor are all in the frame for the biggest new property game in town: advising and forming joint ventures with banks.

By Giles Barrie

At the same time, executives such as former Tishman Speyer UK chief Mark Kingston are being recruited to work in house at banks.

Why are these relationships being formed now, two years after the downturn began, and how will they work?

The timing gives the clearest indication yet of the mess the banks are in. Most spent six months re-organising their own teams after being caught in the post-Lehman maelstrom, and have spent another six understanding their property problems and helping troubled clients service their debt.

With those clients’ equity wiped out, it has now dawned on the banks that, while they are the UK’s biggest owners of property, the expertise on how to manage those assets resides in another place: property companies.

Strong relationships

Agents and accountants may be able to advise, but they cannot be trusted as much as a property company, with which a bank may already have a strong financial relationship in place.

Moreover, property companies are good organisers of teams: the agents, architects, contractors and lawyers that can help the banks out of their hole.

Working with banks holds an appeal for property companies because many began to specialise in the asset management needed in the overheated latter days of the boom, as they withdrew from bidding for new properties.

Property companies also need to put very little money into these arrangements, although at this point, the two parties’ wishes start to diverge.

Banks may indeed want property companies to put equity into new joint ventures to show their commitment, but property companies are more likely to ask for a “promote” payment for their asset management work.

So, on a distressed portfolio worth £100m, they might now ask for 25% of the uplift in value if it is worth £115m in three years’ time, plus a fee on the way through — an easy £7m-£8m, potentially.

There are two possible problems with this.

How will a bank know whether the property company has driven up values, or if it is simply a function of the market?

And how can a bank be sure if it is getting truly independent help on the £100m portfolio if the property company has a rival asset or development down the road?

But these are details: the property companies hold all the aces, and the quicker the banks get into bed with them the better for the sake of UK plc. (Giles Barrie, Property Week). http://www.propertyweek.com/story.asp?sectioncode=38&storycode=3152120

Market leap for landlords

David Salusbury: Home Economics

The rental market is notoriously difficult to predict.  Every week, different indices, reports and surveys are published, providing material for market watchers.  Do they always agree?  Rarely.  Does it matter?  Rarely.  What is good news for landlords is usually portrayed as bad news for tenants.

Some of the latest facts and figures from Paragon Mortgages will bring a smile to any landlord’s face.  It’s quarterly survey shows they can expect an average 0.8% increase in the value of their portfolios over the next 12 months.  Paragon sees this as evidence that the falls in house prices have bottomed out.  What might be more surprising is that 14% of landlords expect to make further investments in the same period.  Whether mortgage finance becomes available to make this a possibility remains to be seen.

The property website Findaproperty.com offers yet more good news (for landlords, anyway).  It says rents rose in September, making them 1.2% higher than in April.  I must admit I haven’t noticed this particular market improvement quite yet.  Apparently, the increase is due to a lack of supply caused by the decision of many so-called “reluctant landlords” to sell up.  This will be offset however, to the extent that the professional landlords succeed in expanding their own portfolios.

Rental prices have yet to bounce back in Liverpool, Bournemouth and Leicester, according to separate research by the website Gumtree.com.  Tenants can find the best value-for-money deals in Derby, Bolton and Sheffield, apparently.  So, tenants, take heart.  The rental market differs from one end of the street to the other.  Sometimes landlords can appear to be the winners, but sometimes you get the upper hand.

House prices in October registered their first year-on-year rise for 19 months, providing further evidence of the upturn in the property market, says the Nationwide.  It says prices were 2% up on October 2008, making the average home cost £162,038.  The pace of monthly rises appears to be slowing, however, in an apparent sign that more people are taking advantage of the improved climate to put their homes on the market.

People in the Midlands are the keenest in the UK on home improvements.  Their spending on projects rose 21% this year, according to the tradesman recommendation website Ratedpeople.com.  the biggest drop was in Northern Ireland, where expenditure fell by 68%.  (David Salusbury, The Sunday Times)

Why is America gloomy when the news is good?

Irwin Stelzer

It has been a long time since the economic data have been flashing positive signals, and an equally long time since consumers, businessmen and occupants of the White House have been so gloomy. It’s worth considering why this disjunction of fact and perception is dominating the economic news.

Let’s start with the data. America’s economy grew at a 3.5% annual rate in the third quarter (preliminary figures). The Federal Reserve Bank’s survey of business conditions reports “either stabilisation or modest improvements in many sectors … reports of gains in economic activity generally outnumber declines . . .” There follow the usual warnings that improvements are from low levels and that setbacks remain possible, but the news is better than it has been for some time.

Economists at Bank of America Merrill Lynch agree: “Recent data point to … modestly higher overall growth.” As do those at Goldman Sachs, who might be driven to excessive exuberance by the size of their bonuses: “We remain convinced that the worst of the recession is behind us. The global economy has steadied itself and the current recovery is sustainable. While there certainly are some threats to the recovery, we assign a low probability to any one of them derailing US growth.”

Even the gloomier bunch at Coutts, who believe the global recovery remains fragile, admit that “the financial climate has improved markedly”. As indeed it has: dollar-denominated corporate bonds worth more than $1 trillion have been sold this year, a record.

Retail sales are showing some strength and although sales of new homes fell last month, inventories of unsold homes are well below their peak and sales of existing homes are up, as are prices. And an increasing amount of corporate news is quite good: IBM is so confident that business is picking up that it is stepping up purchases of its own shares; Verizon Wireless, in which Vodafone has a 45% stake, reports the highest increase in its customer base since 2005; and — most important — Caterpillar, the world’s largest maker of construction equipment, is signalling a revival of the manufacturing and construction sectors by rehiring some of the 34,000 workers it laid off.

None of this seems to matter to the psyches of the businessmen with whom I speak, the consumers about whom I read, or the White House. Businessmen tend to look further ahead than most participants in the economy — consumers worry about paying the rent or the mortgage next month, and politicians worry about tomorrow’s opinion polls. Company executives know that the profits picture is improving but they worry that much of the improvement comes from cost cutting rather than increased demand.

They are fearful that a new banking crisis will emerge. They see an administration and a Congress that are spending America into such deep debt that the dollar will continue to decline, forcing the Fed to raise interest rates to prevent a collapse of the currency.

Some executives expect the price of gold to double or triple in the next five years, interest rates to climb from their current level of close to zero to perhaps 8%, and taxes to soar to bring the deficit under control. They also believe President Barack Obama has no use for a market economy, preferring instead to turn over the management of the country to a series of “czars” who set bankers’ compensation, run the domestic automobile industry, will take over the healthcare sector, and now issue some 85% of the nation’s mortgages.

Small-business owners are more concerned about the administration’s emerging $1 trillion healthcare plan, which will drive up their costs, and with the new taxes that are aimed squarely at the income groups into which owners of small firms generally fall. So they won’t expand or hire.

Which is why the White House is so unhappy. The only indicator that matters to the president is jobs, jobs, jobs, about which he quizzes his staff every day. That’s another way of saying votes, votes, votes. The latest polls show that the portion of Americans approving Obama’s handling of the economy has dropped from 58% to 50% in the past six months, approval of his handling of the deficit is down from 49% to 40% and that 67% believe it is “not possible” that his healthcare plan will not add to the deficit. Nevertheless, the president remains personally popular. He would like to keep it that way and is considering a programme that would give tax credits to employers who add to their workforces.

Consumers are the third unhappy group, completing the gloomy business-political-consumer troika. Consumer confidence fell in October for the second consecutive month, no surprise given the weakness of the job market, and the reasonable fear of the vast majority of Americans who are satisfied with their healthcare insurance that the Obama plan will reduce their benefits and raise their premiums.

What is one to make of all of this? Last quarter’s return to growth should be sustainable in the near and even the medium term. Inventory building, increased exports resulting from the declining dollar, stimulus money that is only starting to hit the economy, and other spending created by a Congress eyeing the November elections will combine to provide a boost. In the longer run, however, the pessimism of the business community seems justified: the White House and Congress are dominated by politicians with little understanding of what makes an economy grow sustainably, and a devotion to spend-and-tax that bodes ill for the future of the dollar as a reserve currency, and for future generations who will have to pay the bills Obama will leave in his wake.

However, what politicians have created, other politicians can put asunder. The problems that have so many so gloomy are reversible. As Lawrence of Arabia tried to persuade his fatalistic Arab allies, “Nothing is written”. (Irwin Stelzer, The Sunday Times) http://business.timesonline.co.uk/tol/business/columnists/article6898002.ece

One step back two steps forward

The Bank of England will this week be deciding on the quantitative easing commitment for the next three months.

Despite in all likelihood treating the unexpectedly awful GDP result for Q3 with cautious scepticism the bank is likely to be more aggressive with its digital money injection (hopefully £30bn+) than if the figures reported had been better.

If so this is good news for those that own assets because it will add momentum to the recovery and increase chances of both a V-shaped outcome and of earlier inflation.  The flip-side of course is that it increases the probability of overshooting and pumping too much money into the economy.  That is a problem for tomorrow (or 2013+) though and the priority should be avoiding a resumption of the destructive asset price deflation we’ve experienced over the last two years or so.

And we need it – after a nice bounce back from the brink people seem a little more nervous again with talk of a double-dip, W-shape recovery etc etc.

David Smith’s article is (as always) a well balanced review of the situation and well worth a good read.