Worrying backdrop:

• Massively increasing debt in the UK (£1tn) Europe (€8tn) and the US ($15tn).
• Political dysfunction in both Europe and the US.
• Substantially increased regulation including Basel III and Solvency II which are set to further reduce the financial sectors capability to fund growth.

If Europe completed the same degree of quantitative easing as the US has then they would be able to buy some $1.3tn of assets which is thought to be likely to be enough to staunch the crisis.

Michael Portillo:

Described himself as an ex future Prime Minister turned entertainer.  He made an excellent speech in particular highlighting the reasons the Chinese gave for not investing in the European bailout namely stating that that it was because the welfare state was wholly inappropriate.  “The welfare system should not be structured to encourage sloth and indolence”.

This highlights the trend towards growth in the East (Asia) & South (South America) and extended slowdown in more mature markets in particular in Europe.

Interesting aside when the Greeks borrowed in their local currency (drachma) they paid 25% interest rates whereas they paid closer to 1% after adopting the Euro.  With that in mind you can understand why they are keen to stay and also how they got themselves into too much debt after joining.

Even though many of the troubled Southern European nations have made great improvements to their fiscal positions they are not emerging from the crisis.  The overriding issue is that many are stuck with inappropriate exchange rates as a result of their tie into the single currency.

Whatever is said about the likes of the Greeks own culpability the human cost has become very high with aid agencies that typically operate in places like Uganda now to be found working actively to help people in places like Athens.

Policymakers should consider all the possible outcomes and, in particularly difficult cases like the ‘bleeding stump’ Greece currency presents, look for the least bad option.  One major problem to-date has been European leaders have called a break up for the weakest economies ‘unthinkable’ which means they probably haven’t thought about properly yet.

In the UK Portillo believes the government effectively has a policy of shrinking the public sector to make way for the public sector.  He suggested we think of it like a great big tree casting a shadow over the private economy.  [MS: I agree, the state should step back and reduce its interference so that entrepreneurs can enjoy fuelling real growth again.  And I believe we're very lucky that in this country we're moving in this direction.  It should give us an improved competitive position in the years ahead.]

The austerity measures are critical for us because we need to maintain low interest rates on govt debt and markets can move against us extremely quickly if they don’t continue to display strong fiscal competence and consistency.  The deficit is fine if you can finance it at present rates of interest.  If not it becomes a very vulnerable position to be.

Opportunities we in the UK are taking advantage of include devaluing the currency and effectively printing money.  This raises the spectre of inflation which most governments are in favour of at present because it’s the easy way to deflate sovereign debt.

Government is following the Thatcher strategy of not trying to win a popularity contest rather it is simply trying to make the right decisions which it hopes to be recognised for later on.

Opportunity Funds Panel (inc BNP Paribas, Pramerica, Tristan Capital Partners & E&Y):

Audience votes generally in favour of opportunity funds buying real estate now.  Expected to be more of a medium term grind suited to stock pickers than a general gold rush.

A shrinking capital market is still expected over all with the number of managers set to halve in the next few years.

Fundamental gap between returns from  enforcement and restructuring (nominally estimated at 70% of face value of loan returned) compared with the return from a sale to an opportunity investor (nominally estimated at 50% of face value once current asset value discounted to allow for 20%pa return).  This has limited bank disposals to the wall of advisors and investors who are continually offering their help with problem loans and assets.

Bank deleveraging to meet Basel III is the equivalent of squeezing an 8 year business plan into 8 months and the total value of this is estimated at between £1-3tn.  This is likely to be focussed on low hanging, dollar denominated, fruit.

The bid ask gap hasn’t narrowed sufficiently yet for the volume of trades to increase significantly and it’s therefore still very difficult and taking a long time to close deals.

Proceed with caution.  There are and will continue to be miss-priced assets out there for those with the skill and determination to find them.

There is a sense that the best deals are in the c-grade market but that investors will ‘practically throw up all over you’ if you recommend even secondary.  Hence it’s going to be difficult to deploy substantial volumes of capital but there is money to be made.

REITs (Real Estate Investment Trusts):

Changes are underway to the REIT market in the UK in particular to encourage the creation of residential REITs.  E&Y thinks more needs to be done to facilitate significant activity here though.  In particular the trading rule needs to be allowed because residential investors tend to trade a proportion of their stock to boost yields and currently the tax implications of this are prohibitive within the REIT structure.

Strong investment & market case for the creation of mortgage REITs.

Institutional Investor Panel (inc Canada Pension Plan, Oxford Properties, Allianz & Orchard Street):

Appetite shown for increasing the allocation to real estate but cautionary comments made around some of the challenges involved.

No rush to deploy capital seemed to be the general attitude with some tentative signs of an increase in suitable deal flow.

Allianz explains that insurance companies account for 30% of the RE lending market in the US but far less in Europe.  This is probably because the margins were twice as high in the US as compared with Europe so with margins on European Real Estate loans having now increased the insurance sectors’ exposure to the lending market should steadily increase.  LTV’s around 60% and 7-10 year terms are typical.

The panel appears expects to be relatively unaffected by Solvency II because in the case of pension funds and insurance companies they have very high capital adequacy ratios already.

Real Estate Funds: Strategic Options Panel (all E&Y):

Extending again is becoming a less convincing proposition to incumbent lenders.  This should lead to some additional transactions (not a flood).

Fund raising:

• 440 funds chasing £151bn of equity (3 times the amount raised in 2010) – so basically there are too many funds chasing too little equity.
• Simplified fee model desired – single fee model clearly preferred over multiple transaction-related fees.
• Sector specific funds (by geography & asset class) preferred
• Funds focussing on fewer ‘like minded’ investors
• Funds are raising around $50bn a quarter which is the 2004 level.  By around 2014 this should have picked up quite a bit and investment globalisation should have returned.

Future trends:

• Uncertainty – a little bit more of more of the same
• Maturing debt
• More HNWI investments

The pro-Europe team (Internos, Westbrook) won the Industry Debate against the pro-Emerging Markets team (E&Y).  The transparency & security arguments proved persuasive despite all parties seeming to agree Europe was effectively bankrupt and the expectation that Emerging Markets would grow a lot faster in the years ahead.

Following on from my bright side article, I’m pleased to be able to report that the positive mental attitude approach appears to be working out rather well.  Investors (including my own little family office) have bought no less than 13 auction/receivership properties through Inspired Asset Management in the last month alone – with more sure to follow them.  That’s more than we transacted in the whole of the previous 12 months!

Dynamic duo | Inspiring interns

To achieve this we’ve been considering and discarding 1,000′s of other opportunities – more than ever before.  As you might imagine, organising, viewing and thoroughly appraising this volume of residential property is very labour intensive.  Like many other post credit-crunch businesses, we have far less resources at our disposal having dramatically reduced overheads and staffing in the wake of the squeeze.  So I would like to say a big thank you to the unsung (and unpaid) heroes of the City and the West End.  We have benefitted hugely from a series of very smart, diligent and hard working interns, most notably Louis, Kunal, Agne and Akvile who will all no doubt go on to achieve great things.  The help they have given us has been priceless.  Thank you!!

Our Joint Venture partners at Urban Share have also attracted a number of new equity investors and are close to securing their senior debt facility, so we’re clearly not the only ones making headway despite the choppy economic conditions.  Rather than blind optimism these developments are undoubtedly the result of the plain hard work and persistence that fuel most growing businesses these days; and a smile always helps.

On the macro-economic front there has been quite a lot of good news recently with employment up by 143,000 during the traditionally difficult Dec-Feb period and unemployment down by 17,000; the trade deficit reduced from £5.7bn in Dec to £2.4bn in Feb; and GDP growth again establishing itself despite the spending cuts. 0.5% growth has been initially reported for the first quarter and this is likely to be revised up, while 1.8% growth has been recorded for 2010/2011 as a whole despite an estimated 1.5% GDP fiscal tightening.

However, real incomes (i.e. after the effects of inflation) are still falling, retail spending is down and growth is likely to remain muted as public spending cuts take effect and the private sector continues to hoard its profits.  In general this should be good news as the government gets out the way and the economy rebalances from debt fuelled consumer spending and imports towards business investment and exports.

I believe this shows we are getting off our backsides and doing more with less.  The next couple of years are likely to remain tough as lower real incomes mean we feel poorer. But with this trend forecast to reverse in 2013/2014 and house prices, at least in London, expected to push beyond their previous peak, we will in due course start to feel wealthier again.

Meanwhile the North/South house price divide is continuing to widen dramatically as I and other Southerners forecast back in late 2009.  London is clearly driving this local growth on the back of global interest in our relative advantages, not least our discounted exchange rate and stable legal and political systems.  For example Galliard reportedly sold 80% of its new flats in the Strand for between £1,500 – 2,000 psf in just 8 weeks, with 90% going to overseas, typically Asian, investors.  Interestingly, the IPD’s recent annual results also highlighted the fact that Inner London (where we focus our activities) has outperformed all other areas on a total return basis over the last 10 years, including Prime Central London.  This is because Inner London yields are much higher than those in Prime Central London, while capital growth is only marginally lower.  And if you like London you’ll really like Jim O’Neill’s (Chairman of Goldman Sachs Asset Management) recent article entitled Brics herald a golden age for London.

IPD residential regional performance 10 year

George Osborne’s decision in the budget to finally link stamp duty land tax (SDLT) on bulk purchases to the average unit price, instead of the total transaction price, could actually make a real difference and eventually lead to a wholesale market developing.  And a barely reported amendment to housing benefits will mean more than 80,000 extra people need to rent rooms just as the unintended consequences of the House in Multiple Occupation (HMO) Licensing regulations start to bite and their supply is cut off.  We already expected rental growth in the young professional market to outstrip the rest of the market and issues like this will simply serve to push rents up further.

In conclusion it is my firm belief that investors should be planning their routes into the London residential property market right now, while the supply and demand imbalance is most acute, before the recovery becomes too established and opportunities for super profits dry up. Institutional investors may also start dipping their toes in the market, but are sure to lag behind the more entrepreneurial and often underestimated buy-to-let and private equity brigades.  So there’s still time for us to thrive.

I’m glad I took notes because Patrick Minford in particular was excellent!

Patrick Minford CBE (Economist) – Economic Outlook

Crisis & Response

• Commodity shortage, US housing crash causing subprime defaults, Lehman failure in Sept 2008, bank panic & banking crisis
• Collapse of world GDP 2008Q4-2009Q1, massive bank bailout, money printing, zero interest rates
• Great Depression turned into Great Recession
• Strong recovery in emerging markets, muted recovery in developed markets
• Productivity growth held back by commodity shortage in developed countries while emerging markets productivity growth grew fast despite this.  “Commodity wall”
• Biggest mistake was Lehman

Strength of Recovery

• Muted recovery in the West (c2%pa GDP growth) – stock markets weak, high unemployment, weak consumer spending, high industrial production growth (exporting to the emerging market consumers).  No double dip but a slow recovery.
• Strong growth in the East (c4-9%pa GDP growth) – leading to near record world GDP growth which is causing inflation and EM countries are having to raise interest rates to control it.
• Strong carry trade – borrow in the West at near zero rates to lend/invest in the East where growth is at near record highs.
• Boom in money and credit in the emerging market economies.
• World commodity prices soaring, wages rising in EM, general world inflation (e.g. 3-4% in the West and near 10% in much of the East)

Summary & Outlook

• Expectation of higher interest rates of around 2.5%pa in the UK for 2012 and staying around that level through 2014.
• Supports Osborne’s plan which should bring Public Borrowing under control even with low growth rate peaking in 2014/2015 Relative price of housing pretty much on track (not over-valued) – housing is a commodity shortage Profits will go on growing as real wages fall and yet growth keeps going.
• Real wage growth expected again in 2 years or so.
• Structural reform will not occur in Europe where countries like Greece and Portugal don’t like reform and will only do so at a slow pace.
• The likes of Greece will go bust, it’s just a matter of when & how.  Typically this happens by devaluing a country’s currency and dropping out of the Euro to achieve this would be the best thing for Greece, Portugal & Ireland but they don’t seem to understand economics very well on the continent so can’t say what they will do.

Asset Allocation “In the New Normal” Panel

• Caroline Butler (Lord North Street) – Greater awareness that who you surround yourself with really matters. Hedge funds provide an alternative to bonds in reducing volatility.
• Michael Turner (Aberdeen AM) – Regulation and government intervention to affect asset class returns much more than in the past.
• John Moore-Stanley (Cardona Lloyd) – Strong focus on liquidity and time horizons.  Likes hedge funds & CTA’s.  We will constantly be going through cycles of uncomfortable inflation and this will push us towered cash and away from bonds.
• John Veal (Stonehage) – Managing underlying family businesses is key because often cash calls occur during crisis just when the best opportunities arise.
• Jean-Yves Chereau – The crisis is generating lots of opportunities and beautiful assets as banks clean their books and as lending has dried up opportunities arise providing debt looks interesting.  Do you have the management capacity to access the deal flow or who are your advisors to assist with this?

Martin Skinner

The last few weeks have been frantically busy and while lots of big deals are on the horizon, fundraising and transaction setbacks are still frequent and frustrating.

On the personal front I’ve just returned from a trip to New Zealand and best man duties at a close friend’s wedding.  In fact I wrote most of this on the long flight back, having written my speech at the last minute on the way over.  The big day was fabulous and was followed by a tour of the North Island together with Ben and Anna the newlyweds, their daughter Trilby (hats off to them for that name) and Ben’s family.  Some honeymoon! I was there when we heard the terrible news from the South Island and my heart goes out to everyone in Christchurch.

Ben & Anna's Wedding in New Zealand

While I was out there corrupt leaders were falling like dominoes as people harnessed the power of everyday web tools like Google, Facebook and Twitter.  The debate rages as to whether the situation will deteriorate without the ‘regional stability’ these leaders used to provide.  Personally I believe increased transparency and accountability will lead to better government in the long run and that must be a good thing.  Short to medium term the instability will increase the flow of capital out of regions like the Middle East and into safer environments such as prime and fringe prime London property.

In terms of the UK economy, discussion is finally turning towards growth. While the downside surely has to include rising interest rates, there is also much to be positive about.  David Smith recently published another superb piece describing how the ‘feel good factor’ was lost when consumer price inflation overtook wage inflation, an event that paradoxically contributed to higher employment and lower interest rates.  He also highlighted a report forecasting a return of the feel good factor next year, when broad inflation is expected to fall back below wage inflation once more.  At the same time, development luminary Mike Slade listed many more reasons to look on the bright side of property life in his recent Property Week article.

I’m sometimes accused of being optimistic as if that’s a bad thing.  Yes, I underestimated the credit crunch and agree it’s important not to get too carried away with wishful thinking.  At the same time, it’s also important to recognise the positive signs that are beginning to appear.  When I was playing a lot of tennis, we were always told to focus on where we wanted to hit the ball and it clearly improved results.  With timing and location critical to success in the property market too, I’m looking forward to some excellent years and returns ahead – particularly for investors in London residential.  As real estate emerges from the downturn, London’s diverse, much vaunted and ultimately proven strengths will continue to draw both investment and human capital in ever greater numbers.

Having just gone through a recent batch of reports from the big UK residential agencies, I thought the following key points and charts on London residential property were worth sharing:

“…an astounding 70% [or £2.9 trillion of the £4.1 trillion total market value of UK residential property] is held as equity”.

“…it is London’s status as a world city that sets it apart in value terms from the rest of the country.” Yolande Barnes, Savills, Residential Property Focus Q1 2011
Savills are now forecasting a rise of 33.4% in prime central London house prices over the next 5 years.  See the full report here.

Available Stock vs Price Growth | Savills

“Outperforming their national markets, the cities of London, New York, Moscow and Hong Kong are sought after by the world’s richest households and are at the forefront of a truly global market ~ the residential sectors of these global cities have more in common with each other than they do their domestic markets” Yolande Barnes, Savills, Spotlight on Four Global Cities, Feb 2011  Read the full report here.

5 Year City Performance | Savills

“Global economic growth is now running at pre-recession levels contributing to wealth creation around the world which is pouring into London again. ~ London’s reputation as a ‘safe-haven’ investment location, combined with geo-political concerns elsewhere around the world, most recently for example in Egypt and Tunisia [and now Libya], have helped draw buyers into the market”  Liam Bailey, Knight Frank, The world’s most desirable residential market: The Super-Prime London Report 2011

P.S. Check out www.beek.co This is recently married Ben Knill’s new and innovative technology venture and it’s shaping up to be a huge success!  I’m proud to say that we incorporated early versions of his interactive 3D walkthroughs on our consumer website Nice Room as early as 2003.  Prospective tenants loved it and we got a lot of remote bookings as a result.  As consumers increasingly shop online and seek comfort in online research before buying or travelling, its potential is enormous.

Here are my notes from the excellent E&Y Workshop I attended recently.

Bid-ask spreads narrowing
Transaction levels rising

Sir John Gieve (former Deputy Governor of the BOE)
The uncertainty is still there because:
Economic forecasting models are broken
Prediction: big swings in market sentiment & lots of volatility in the markets Currently fiscal (spending) and macro-prudential (regulation) brakes on while the monetary (interest rates, QE) accelerator is firmly on Expectation that private sector investment, consumer spending and emerging market growth will pull the UK towards around 2% GDP growth in 2011 MPC likely to be cautious about raising rates early in 2011 but if growth continues throughout the year then rates could rise faster than the market currently expects (to somewhere between 3-7%) Emerging market economies in particular the Chinese likely to lead to a big inflationary boom that spreads to the West through commodity prices

Adrian Cooper (CEO, Oxford Economics & ITEM club advisor)
World GDP growth is outstripping already relatively bullish forecasts North and South Europe dramatic divergence in growth and prospects German competitiveness has improved significantly over last 10 years whereas southern European states have become significantly les competitive as labour costs have risen Fiscal tightening and divergence in investment will also hold back the Southern economies for a prolonged period c50% chance of Greek debt restructuring and/or smaller chance of some form of Eurozone breakup Other notable risks include oil and commodity inflation and recognition of Spanish debt/losses as a result of their boom time lending to construction In the UK massive switch in govt spending worth around -1% on annual GDP growth Household de-leveraging to hold back growth further Rising exports will help though past failings in exports to emerging economies (Italy exporting more to the BRICS than the UK for example) Modest growth forecast in office-based employment and consumer spending leading to limited demand growth in offices and retail property High single-digit total returns expected for prime commercial property

Macro-Economic Panel
Huge demand from the Middle East for construction and infrastructure but there are major risks around political risks as a result of underinvestment in food, healthcare, education, employment and social stability.
If we can see civil unrest in the UK then we can expect to see unrest in other states as austerity measures start to bite.
US deficit is not expected to be a major threat in the next couple of years but it will be in the longer term – the UK had the same problem when it ran the reserve currency and that held us back for 50 years after the second world war Currency disparities and interventions make life difficult for global Investors seeking to hedge out risks Pension funds slowly increasing allocations to real estate but notably focussing on core assets and focussing increasingly on specific cities rather than whole countries Negative real interest rates could lead to a bubble in some asset values.  Highly leveraged investors even in core assets are at risk from interest rate rises designed to combat high inflation Euro stress tests back in July showed 84 out of 91 banks were well capitalised including the 2 largest Irish banks which are now bailed out.  This will prove a drag on the economic recovery and it will take quite a long time to relieve c50% of maturing real estate debt is underwater and although resulting opportunities are few and far between they are worth looking for

Drivers of Real Estate Panel
Property looks more interesting than bonds but less attractive than equities (Harm Meijer, JPM) Lots of inflows to direct investment funds moving out of bonds (Harm Meijer) JPM are positive on property, more prime but starting to find opportunities in secondary Institutions are currently underweight in property and increasing their allocations.  Increased inflation driving this demand as they look to protect themselves.  Harm Meijer is astonished that they are coming so late to the party Trust issues will endure for years ahead while funds re-align their interests with LP’s and increased co-investments are demanded UK retail funds raised a lot of money in Q1 2010 and 2007 opportunity funds are all sitting on a lot of cash but is there a bubble in prime and super-prime and do return expectations need to come down.
“If you look at what is happening to real estate, it is exactly what happened in 2007 and 2008 when cap rates were plunging and LTV’s were going up without cash flows”. (Starwood Capital Chairman & CEO – Barry Sternlicht) Caveated with in certain prime sectors (Doug Kirkman, Blackstone) It’s probably the best time in living memory to setup a bank because margins are very high and lenders can pick their borrowers and properties.
Existing lenders cannot afford to take the losses on existing loans so they are very limited in their capacity to lend.  Particularly in the UK where there is still no securitisations market in contrast to the US which has begun to close some and is expected to increase this flow.
Insurance companies may increasingly likely to enter the market (Solvency II will encourage them to do so) but it will take them time to build their teams and they are unlikely to buy up existing debt portfolios.
According to Knight Frank 2010 occupier take-up in Financial Services in the UK was actually higher than during the boom years however this is substantially offset due to impending lease expiries and competition from Internet based businesses etc so net absorption and rental growth is likely to be quite limited and generally restricted to prime.
London and Germany are relatively booming whereas regional locations are really struggling.
Supply of product is going to be slow while the clearing prices continue to sit below the holding values and supply of debt is highly restricted and it is likely to take some years before big non-performing loan books really come to market due to political debates around bank break ups etc.
Sustainability – opportunistic investors are less interested in this than price etc however pension funds are pressuring listed owners and occupiers are increasingly expected to demand higher standards.
Increased transaction activity is expected though only by around 10-20% and from a relatively small base.
Banks will have to extend and pretend until deals break and have to be dealt with or they have generated sufficient profits for their capital base to enable them to take losses on existing holdings.

At home in the Skinner household Jack is growing up fast and the focus is now on education.  Magdalena is teaching him English, Polish, Chinese, swimming, walking, and maths. And I’ve been chipping in with football, video games, iPhones and blowing raspberries.  Is this a good modern example of division of [parental] labour?

Speaking of education, Mark Weedon at the IPD has been teaching the property industry one of its best kept secrets.  Despite residential property appearing to produce a lower net rental yield compared to commercial property, it has actually been on par over the last nine years when commercial value depreciation is taken into account.

“These findings indicate that relative residential income return is significantly devalued by its superior capital growth. In fact, residential property can deliver as much net income receivable as a percentage of original outlay to commercial for an equivalent sum invested in both. Therefore, the residential sector is now able to boast that it not only offers superior total returns but also that the cash returns from rental income can match commercial even if the percentage yield and income return remain noticeably lower” (2010, Mark Weedon, Head of UK Residential Services, IPD)

This means that, despite the rhetoric, UK residential property not only outperforms commercial property (and all major asset classes) on capital growth, but it also matches commercial for income return too.  The arguments from institutional investors against investing in this £6 trillion asset class are steadily being whittled away.

You can find the full International Property Databank (IPD) presentation here and their biannual research reports are available here.

Additionally, why not take a look at some recent Jones Lang LaSalle research forecasting house price inflation rising back towards its long term trend of above 7%p.a.  It makes an interesting read. Nationwide estimate that house prices rise by 2.9%pa in real terms, whereas researchers broadly agree that commercial property depreciates by around 1.5%pa in real terms.  This reflects the fact that commercial properties typically become obsolete and require replacement much faster that residential.

So no wonder UK residential has historically provided a hedge against rising inflation, rising in value by 274% in real terms over the last 50 years compared to a 55% drop in commercial values.  Those interested in comparing the overall returns from residential with other asset classes should have a look at Tim Watts’ article from last year.

On the ground I’ve also noticed the effects of the ongoing supply shortage during the traditional moving season of November and January. Demand for vacant rooms and flats in our own buy-to-let houses in London’s Docklands was so enormous that we pushed rents up considerably and got them straight away, on top of substantial advance rents from Chinese students.  Yep, we should have asked for more…

Our vacancy rate is 0% and Inspired Asset Management’s partner Urban Share has also enjoyed near 100% occupancy for most of 2010, even after increasing rents by between 10-40%!  According to Knight Frank, residential rents in London have risen by an average of 16% over the last year.  They offer very rewarding and attractive returns for equity rich investors increasingly – and rightly – concerned about rising inflation.

Spareroom.co.uk (the UK’s leading website for finding and letting rooms) told me that they are now placing more adverts for rooms wanted than rooms available for the first time since they began in 1999.  That’s really quite remarkable when you think about it.

With no significant improvements in the debt funding environment or in local authority demands for affordable housing, supply will continue to fall short. At the same time, babies continue to be ‘born every day’ and more and more migrants are moving to London, whether from southern Europe or northern England.  I think I’m safe in making a new year’s forecast that London and the south-east will experience substantial increases in real residential rents over the next 5 years.  And that’s great news for current and future landlords.

Even the recent shock drop in UK GDP could prove to be good news for investors in London residential property – assuming that the recovery resumes relatively swiftly.  The shock has without a doubt pushed back future interest rate rises, while a weaker Sterling will continue to attract cash rich foreign investors.  There should also be some more exciting property deals available to experienced parties that are prepared to look and work hard enough.  Here endeth the lesson.

Sophisticated investors interested in deploying capital into London residential should contact me on 07968 790 611 to discuss the ways in which my partners and I can help you to enhance your returns.

Well after keeping radio silence for what seems quite a while, I’m proud to introduce a new member of the team to everyone.  Jack Christopher Skinner was born on the 26th March 2010!

Jack has already chosen his football team (Tottenham Hotspur needless to say) and is also starting to show signs of his parents’ impatience.  Like most youngsters these days, he’s also better at the high tech stuff than they are and is fully operational with his own Facebook, Twitter, You Tube and Google Buzz accounts.

So as you can imagine, life has been even busier than usual in the Skinner household.  In fact, this is the first time I’ve really been able to sit back and reflect on how dramatically things have changed over the last couple of months.

We’ve created a new family, the country has new leaders (hopefully better than the last lot), and Inspired has made its first great property acquisitions with Urban Share. Even the sun has come out!

Then again, some things haven’t changed and we still love London Residential Property.  Their recently published residential IPD (Investment Property Databank) report fully supports my own and Inspired’s views.

Aside from linking to the report here and the multiple award winning IPD here I thought I’d just share a few of the highlights with you:

“The residential total return index has experienced real [after inflation] growth of 86% [in the 9 years] to December 2009, compared to 33% in all commercial property. This equates to 7.2% per year in residential against 3.21% per year for commercial. The real capital growth in the residential index is the same to the total return in the all commercial property index. The residential income return on top of the capital therefore represents a real out-performance “bonus”.”

“Over fifty years real house prices have risen by 274% compared to a -55% fall in real commercial property value. This represents long run annual residential value increase of inflation plus 3.3% compared to inflation minus 1.2% per year for commercial property.”

“Residential has represented the best real return to a December 2000 investment [against equities, bonds and commercial property] at every stage throughout the previous 9 years.”

“The annualised rental growth over the 9 year period was 2.23% for residential compared to just 0.45% for commercial.”

“Residential market let investment has consistently rewarded investors with greater returns than commercial property and other asset classes since 2000 despite lower income returns.”

“The long term real performance of residential represents a hedge against inflation and volatility whilst maintaining impressive performance relative to other sectors.”

“The fall from peak to trough is smaller in the residential market cycles.”
Source IPD Residential Index 13/04/2010, The Strength of Residential as a long term Investment

As you’ll know if you’ve ever met me, I’ve long been an outspoken advocate of UK residential property investment – especially in London.  Discovering this report (as well as Jack’s arrival, of course) has made my 2010 !!

If you’d like to discuss the property opportunities we can offer, would like to raise finance for an amazing site, or you’ve discovered a distressed scheme or portfolio that might interest one of our funds or clients, we’re always keen to hear from you.

I’m also collecting high tech baby accessories and bargains/donations are welcome – particularly if you can offer me a great deal on one of these little beasts !

For the last week I’ve been networking like crazy at a big property conference called MIPIM.  The event’s hosted in Cannes in the South of France and a is big, glitzy affair with lots of investors, developers, property fund managers, Mayors and service providers doing their best to attract attention and investment to their new schemes.

Boats hired by the sponsors jam the marina

Finances are very tight these days and I had to do it on a shoe string budget travelling there in cattle class on the train and sleeping on a friends’ sofa (thanks Bradley!) for the duration.  The time commitment alone meant the opportunity cost was also high.

Martin, Sav, Bradley

Naturally, with property & finance having been hit so hard there were far fewer people there than when I last went.  Numbers were down from about 30,000 to 18,000 delegates.  It struck me that the people that were there were much more serious than before.  Discussions weren’t about the market as such but more about deals.  Those there were clearly making the most of the current climate and using their time in France effectively to speed network.

Cannes Mosh Pit

Most of the people I met there were top influencers – as an example the chap I happened to sit next to and chat with in a cafe on Saturday is developing a huge scheme in Korea.  I’m pretty sure he casually mentioned it was the largest in the world and that he had hosted 7,000 guests at the MIPIM launch party (and he owned 15% personally).  I didn’t have the money to buy a ticket to go into the main ‘bunker’ (which cost 1,600 Euros) so I missed that bit but I was lucky enough to be invited to quite a few of the lunches, boats and parties where I chatted to numerous UK property legends.

Knowing I had to make the most of my time there I collected plenty of business cards and made sure I sent them all personal emails and Linked In connection requests before I left.  In the months that follow I’ll aim to turn at least a few of those brief business card swaps into coffees events, coffees into mutually beneficial exchanges and as a result some new business all round.

Cannes Flea Market

A love affair – my story
I’ve been a passionate advocate of residential property investment particularly in London since I bought my first investment property our in the far reaches of London’s Docklands in 2002.  My love affair with residential began much earlier though…

I spent my formative years from 7-18 growing up in a big house on 3/4 of an acre of land in East Sussex.  My parents had settled there after many years of travelling and teaching in far off places like Uganda & the Solomon Islands, where I was born.  It wasn’t a particularly expensive house or in a particularly expensive area but it had a big garden, big trees, a gravel driveway and a garage big enough to play table-tennis & snooker in.  And I had a bigger bedroom than I remember any of my friends having – so they often came to my place – I loved it !  An Englishman’s home is his castle and I didn’t have to pay any rent…

…  until I moved up to London for university in 1998 and had to pay rent.  From 11 years old onwards I’d always worked to earn extra money to pay for extra toys – first skateboards, then bikes and finally sports cars – and I really didn’t enjoy having to throw a whole £300 a month away on something I’d always enjoyed for free.  Have you any idea how much faster I could make my car go for £3,600 (12 months’ rent)??  My parents didn’t seem to share my pain.  “I could buy a 3-bed ex-council flat, rent out the spare rooms to friends and live rent free if only you’d guarantee the mortgage”  I explained. Mum would have helped but my dad, who was a tough old sod from an army background, threatened to divorce her and move out if she took such a huge risk on me.  And then my car got stolen.

Anyway, as soon as I had the salary to support it without a parental guarantee I bought my first 3-bedroom house.  I paid £220,000 for it in March 2002; quickly knocked the kitchen into the dining room to free up an extra bedroom and let the 3 rooms out.  I received enough rental income to pay the mortgage, all the bills and still left me with £500 a month (and my own bedroom).  I then re-mortgaged it for £70,000 extra just six months later.  It would have taken me at least 10 years to save up that much money from my £34,000 a year job and I was convinced; this was how I would earn my money.

Institutions – still flirting
Meanwhile institutional investors rarely share the passion I have for the sector and consistently struggle to get their products beyond first base.  A number of large UK institutions announced their intentions to invest last year but almost a year on they still haven’t got them off the ground.  The main reasons appear to be:

• More active management required
• The recent rebound in market values
• Lower net yields compared with commercial
• Short-term tenancies (longer-dated income is preferred)
• Reluctance from banks to release large volumes of discounted stock

In addition to this many financial advisors struggle to differentiate between an investor (or client)’s home and their investment portfolio and therefore look to diversify into commercial property over residential alternatives.

These are not insurmountable challenges however and some including Invista Real Estate and Inspired Asset Management (who I advise) with their Urban Share Fund are succeeding with their products.

Why not just stick with commercial property?
Assets are generally valued based on multiple of their current and future income (in this case net rental yields).  And rents are still under downward pressure for offices, industrial and in particular retail where sheer weight of money meant more space was developed.  Combined with changing consumer and occupier behaviour (online shopping for example) the recovery in commercial property is likely to be much more muted.

In residential meanwhile there was a housing supply shortage/crisis before the downturn even began.  The demand pressure is building and the supply-side is hamstrung.  National house builders had to shrink their businesses to survive the recession and could take 5 years to get back to where they were in 2007 and smaller developers cannot raise the development finance they need to produce new stock.

Hybrid variants of residential including affordable housing and student accommodation are attracting more attention from investment funds but even they are both still in short supply; particularly in London where according to Savills student numbers are growing at 15 times the rate of new supply.  London is also where waiting lists for council housing have reached such extreme levels that dedicated workforces are being recruited to persuade those on the lists to look to the private sector for help.  Private landlords of course prefer to steer well clear of tenants on housing benefit after suffering huge losses when the government diverted payments from landlords to tenants who then frequently failed to pass them on.

Anecdotal evidence from West London agents suggests rents are increasing again and at quite a pace.  Knight Frank is forecasting house price increases of 34% in London over the next 5 years.  The Centre for Economics and Business Research (CEBR) expects prices in the UK as a whole to rise by 20% over the next 3 years as banks step up lending and interest rates remain low.

Historically residential property has proven to be a relatively safe asset class hence the expression ‘as safe as houses’ and:

• outperformed other asset classes
• offered higher income yields than bonds
• offered an effective hedge against inflation

Whether the powerful few step up their investment programmes in Residential Property or not it’s clear that in the years ahead many students and young graduates are going to have a much harder time finding accommodation they can afford to rent let alone buy.

If you would like to learn more and/or discuss some of the pressing issues faced by our next generation please book your tickets for our University Challenge event.  We will be hosting a discussion involving fund managers, property managers and students at the May Fair Hotel in London from 6.30pm on Thursday the 11th February.  The last few tickets are available now on http://inspired.eventbrite.com.

Putting on events is H.A.R.D.!

Admittedly I’m a newbie at it and I often try to do too much in too short a period of time but seriously I have a new found respect for those that manage to get regular events running – let alone running smoothly.

To give you, the reader, a bit of background on me I’m basically a residential property investor and advisor in London.  On the one hand I specialise in ‘supercharging’ yields for investors and on the other hand I specialise in developing accommodation for student and graduate occupiers.  The aim has always been to profit through raising the bar for:

• quality
• flexibility
• community

Bedroom in a student/graduate houseshare

Having been successful at this in the past I’ve been working hard to get back in the saddle after stumbling in 2008/9.

Most people in London can’t afford much more than £500 a month and it has always been clear to me that making life easier for sharers adds significant value to both investors and occupiers.

The government has managed to consistently interfere with misguided policies on Houses in Multiple Occupation and is about to make matters worse (in a populist attempt to combat NIMBY complaints of ‘studentification’) and in doing so will only force more landlords to withdraw from the marketplace.   Many major institutional investors either don’t understand the broader residential market (let alone students/HMO’s/graduate’s) or can’t be bothered with it instead preferring fire and forget commercial property investment.

Anyway, what’s that got to do with events you say?  Well, I see bringing interested parties together for great events, regularly, as key to building momentum behind a movement to solve what I believe to be a very serious problem – housing and enabling the next generation upon whose endeavours our retirement depends.

Getting people to spend some of their hard earned cash is very, very, difficult these days though and getting people to take time out of their busy schedules to attend an event or two is also very, very, difficult.

I’m sold on their value to an individual or a business (here I represent both) once established and I’m committed to both attending and promoting our own Inspired Events and other people’s events.  Because regular face-to-face interaction builds both:

• breadth – expanding & connecting networks and
• depth – strengthening relationships within networks

And here are some other reasons for perseverance that I was attracted to online:

• Entertaining clients
• Brand differentiation
• Increasing brand loyalty
• Highlighting community responsibility, or corporate social responsibility

But and it’s a big but, and contrary to the famous song I don’t like big but’s, I cannot, lie I’m really struggling to get people to book tickets to come along.

Expensive direct marketing (c1,000 personal contacts and c9,000 purchased) has failed to yield meaningful results and despite pumping in expert assistance, promotions, considerable sums of money and an unbelievable amount of time I’m struggling to gain traction.

The best results so far have come from kind friends – in particular Nick Tadd, Vanessa Warwick and Tony Chads – who have endorsed the event and spread the word.

The venue - The May Fair Hotel, W1

If we don’t get a lot more people along we’ll still have a great event (and a lot more pre-paid drinks per head) but the message from the students and the investors and managers that are getting involved will be muted.

So I’m asking you for your help to get the message out for me.  I am not as smart as all of you and I’m certainly not as effective as all of you (no matter how many hours I put in).

If you are interested in coming along please book online at http://inspired.eventbrite.com by the 7th February and/or if you know any investors, accountants, lawyers, developers or fund managers please encourage them to come along on the 11th February.

This could be you (or me)

Thanks !

Martin

07968 790 611 or martin@inspiredassets.co.uk