Doing more with less

By Martin Skinner,

"Martin Skinner"

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

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 2009London 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

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.

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Notes from the Family Office Investment Europe Summit

On Wednesday I was a guest at the Family Office Investment Summit

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?