A sea change from across the Atlantic?

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North America is leading the way once again, with the exceptional communicator and statesman Barack Obama safely installed in the hot seat for a second term.

Having led (i.e. caused!) the credit crunch, the US is making the most of its relative safe haven advantage and utilising the depth and diversity of its funding markets to great effect. This in turn has provided good real estate investors with more funding options through corporate bond issuances, plus loans from insurance companies as well as banks. DTZ boldly stated last autumn that, as a result, there was no funding gap in the US. In consequence, acquisitive US Private Equity funds such as Blackstone have begun mopping up bargains all over the world. Over the last year, domestic unemployment has decreased from 8.3% in January to 7.7%, homebuilder sentiment has risen to its highest level since 2006, and prices are up by about 17%.

Just as significantly, DTZ also said they expected the UK’s real estate funding gap to be all but eliminated by 2014, with equivalent funding lines to those active in the US recently tested and expected to expand significantly in the months ahead.

In the Eurozone, meanwhile, DTZ expect the funding gap to remain outstanding for some years. Even so, it looks promising that the crisis is taking a course “less bad” than most had expected  -much to the credit of (ex-Goldman Sachs) Mario Draghi, President of the European Central Bank and FT Person of the Year 2012. Draghi’s promise to “do whatever it takes” seems to be working.

As a result, the recovery of Greek Bonds has proven to be the hedge fund play of 2012. And if the Spanish government finally requested a Euro bailout, the country’s banks only required half the expected £100bn. The great exception of course is France, where policy makers seem to be doing their utmost to dismantle the economy (to the benefit of London). Economic disaster looks increasingly likely as wealth creators jump ship before they are pushed or even have their ships confiscated (as with Arcelor Mittal)!

Returning to the outlook for the UK, Mike Carney (notably also ex-Goldman Sachs) has been recruited as the new Governor of the Bank of England. He is widely considered to be one of the top two central bankers in the world, which is quite a coup for George Osbourne. Carney is generally expected to promote higher growth and employment, with interest rates staying lower for longer at the price of higher inflation.

This should be good news for investors like Inspired who concentrate on “real assets”, as values and incomes increase while debt as a proportion of value diminishes.

It is likely to encourage greater risk taking by investors who need to find higher returns in order to protect their capital, which will be at greater risk of erosion from inflation – currently standing at 2.7% and remaining stubbornly above the 2% target. Again, this represents good news for opportunistic investors like us: competition for assets may make it harder to buy cheaply, but there should still be plenty to go around as the US funds that bought loans in 2012 take action and make their margin by offloading in 2013. Additionally, our existing assets are all located in Inner London and should benefit from an increase in value, while capital should become easier and cheaper to raise.

I firmly believe that more risk taking (within reason) is a good thing generally: fear has a corrosive rippling effect through morale and into trust, investment and employment and has in itself become the greatest threat to our future wellbeing and prosperity. A more confident approach, as we’re beginning to see in the US, may just offer the perfect antidote.


Smiles all around

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Star JP Morgan real estate analyst Harm Meijer and his team recently published their 2013 forecasts – and they made for very encouraging reading.

The key message underlined the strong capital flows into markets and the belief that we are entering bubble territory for prime real estate in core Western European countries, which will prompt investors to move up the risk curve and invest in secondary assets.
Experienced management teams will be able to raise capital cheaply. To illustrate the point, almost 90% of listed property management teams (as surveyed by JP Morgan) expect capital raisings in the sector over the coming months.

The report also specifically highlighted London in stating:

“The ‘London is booming theme’ will carry on next year and we expect John Burns, CEO of Derwent London, to say at our conference in January again: ‘I can’t say it is bad, when it is good’.”

Shaftesbury too recently affirmed that London is more vibrant than ever.

“And we agree with that. The interest rate for London itself is too low. Valuations will rise further, but we believe there will be more talk about property values, after those have further surprised on the upside, and the coming residential boom in 2013.”

That sounds good to me and we share the sentiment.


Inspired is delighted to have acquired 19 sites during 2012. These will ultimately produce some 84 units of mostly residential accommodation in Inner London (typically Zone 2) locations and will be worth a total in excess of £20m on completion, with margins on cost typically exceeding 50% and in some cases even 100%+.

Such impressive returns are the result of a bold contrarian approach in a nervous market, not to mention an awful lot of very hard work. We couldn’t have achieved it all without the help of the people we have had the privilege of working with over the past year including friends, family, investors, lenders, professional advisers, and our Inspired team.

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Our objective has always been to establish an efficient business in which we and all our stakeholders would benefit. 2012 was the year we could truly say we succeeded in that aim.

I have absolutely no doubt that we will do even better this year and look forward to working both harder and smarter to achieve the best possible results. After all, it’s not really work when you’re having so much fun, is it?!

Inflation tumbles below Bank’s 2% target

Grainne Gilmore

Inflation tumbled below the Bank of England’s 2 per cent target for the first time in nearly 2 years as the recession continues to take its toll on prices.

The Consumer Price Index (CPI) gauge of inflation fell from 2.2 per cent in May to 1.8 per cent in June — the first time it has been under 2 per cent since September 2007, when the credit crisis began to grip the country.

CPI was dragged down by food non-alcoholic drink prices which fell in June but had risen in the same month last year.

Inflation soared to a 16-year high of 5.2 per cent last year as higher oil prices fed through into higher prices for consumer goods. But lower oil costs and falling consumer demand are now putting downward pressure on prices.

Today’s inflation figures, which were in line with expectations, will fuel expectations that interest rates will remain at record lows for months to come, and that the Bank may extend its scheme of quantitative easing next month.

Official figures show that the wider Retail Price Index (RPI) measure, which includes housing costs, tumbled deeper than expected into negative territory to a record low. It fell from -1.1 per cent to -1.6 per cent on the back of steep drops in mortgage costs, the sharpest drop since records began in 1948.

This gauge of inflation is of particular interest to workers as many pay deals are linked to RPI.

The Bank expects CPI inflation to continue falling in the coming months before stabilising at below 1 per cent. As soon as inflation falls below this level, the Bank Governor will be forced to write to the Chancellor to explain why inflation has veered by more than 1 per cent from the Bank’s target. He has already written three letters to explain why inflation rose above 3 per cent.

Food price inflation eased sharply during June, with the biggest downward pressure coming from meat, bread and cereals, fruit, vegetables and milk, and cheese and eggs. There was also a smaller downward effect from sugar, jam and confectionery.

A significant downward effect also came from furniture prices, which rose by less than last year.

But the rising cost of computer games acted as an upward pressure on inflation, the Office for National Statistics said. (Grainne Gilmore, The Times) http://business.timesonline.co.uk/tol/business/economics/article6705952.ece

Inflationary monster is just a bogeyman

Excellent article below by Gary Duncan of The Times dismissing the myth of massive inflation and interest rates to come soon. 

In addition to Gary’s summary it’s my strong view that to avoid a repeat of the Japanese lost decade the Bank of England is likely to keep interest rates low for some time.  We also still have deflationary macro-pressures from vast numbers of new participants to the global workforce as ex-communist countries open themselves up increasingly to market capitalism not to mention the products/services they produce/provide to the global economy; extra labour/consumer product supply vs steady demand keeps price inflation down meaning interest rates don’t need to go back up too quickly or too high.

Gary Duncan, Economic view

Alarm bells are being loudly rung. In panic-prone parts of the City, shrill warning cries can be heard. No sooner has the very real danger of a re-run of the Great Depression been averted than a growing number of pundits are gripped by terror over a new threat. Suddenly, the spectre looming in the imaginations of some economists is the return of 1970s-style inflation.

Never mind that official figures have just confirmed that the first quarter’s slump marked the deepest plunge in GDP for half a century. Never mind that the retail prices index (RPI) presently shows not inflation, but (mild) deflation. For some, the clear and present danger is from the re-emergence of rampant inflation.

In an economic environment fraught with uncertainty, we can be certain of two things: that this emerging inflation scare will become steadily more strident as the recovery takes firmer hold; and that the ensuing panic will prove to be a false alarm.

That inflation fears will intensify over the coming year is easily predictable because of a reversal of the trend in the official inflation numbers that is mathematically inevitable. At present, inflation is tumbling thanks to the collapse in oil prices over the past year from record levels above $140 a barrel to under $40. On the RPI, inflation is being driven still lower, and into negative territory, by the effect on mortgage bills of drastic cuts in official interest rates to their present, 315-year low of only 0.5 per cent.

Over the next few months, inflation on the RPI will slide further into deflationary territory, while on the Consumer Prices Index (CPI) (which excludes mortgage costs) it will sink decisively below the Bank of England’s 2 per cent target to 1 per cent or less. By next year, though, both inflation measures will unavoidably begin to climb as the past falls in energy costs and interest rates drop out of the sums. Adding to the upward pressure will be increases in VAT and petrol duty, which will add about 1.5 percentage points to inflation rates next year.

Although all of this is a simple matter of arithmetic, it is bound to inflame the anxieties over inflation already being stoked by some analysts. Those concerns are driven by three main factors: the belief that the moves by central banks, including the Bank of England, to infuse economies with newly “printed” money must inevitably prove inflationary; the worry that damage done by the recession to the economy’s capacity to grow will make it easier for inflation to take hold; and the fear that the huge public debt pile run up in fighting the slump will tempt governments to try to inflate this away. Yet all three of these fears can be readily dispatched. Consider them in turn.

First, fears over central banks’ “printing” of money under quantitative easing schemes, or “QE”. As the first chart shown here, from Goldman Sachs, illustrates, the Bank’s vast £125 billion QE programme has hugely expanded the quantity of money as gauged by “M0” — a narrow measure reflecting notes and coins in circulation plus commercial banks’ reserves at the Bank itself.

For monetarists, since inflation is always a monetary phenomenon, emerging as “Too much money chases too few goods”, creation of new money on this scale must surely lead to an inflationary nightmare.

Fortunately, this is a complete misconception. In reality, the money created through QE isn’t chasing anything much. Most of it is simply sitting in banks’ reserves, rather than finding its way to businesses and consumers.

Normally, giving banks bigger reserves would lead to inflation through the “multiplier effect”. Since banks use leverage, lending out each pound that they hold several times over, any rise in their reserves ought, in theory, to be multiplied up by this lending, pumping more money through the economy and expanding the “broad” money supply, which includes loans and credit.

Yet this just is not happening. Banks are hoarding cash and continue to tightly restrict lending. Gauges of “broad money” growth remain extremely weak.

This does not mean that QE is pointless — matters would be still worse without it. It does mean that scares over some sort of monetary explosion are plain wrong. If these sorts of effects were to emerge, the Bank could readily respond through higher rates or by quickly mopping up the extra money it has created.

The second concern, over the inflationary threat from a less productive economy, is better founded but equally misconceived. It is true that the economy’s effective speed limit, the sustainable growth rate at which it can expand without igniting inflation, will have been cut by the recession.

The slump means that some businesses will have scrapped productive capacity; others will have opted to rely on ageing equipment. The credit crunch has made finance costlier. These and other effects mean that, as recovery takes hold, the economy is likely to run up against shortages of machinery, labour or equipment at slower rates of growth than before, triggering cost pressures.

Yet, as Ben Broadbent and Kevin Daly, of Goldman Sachs, argue, although these worries are real enough, the recession has left huge amounts of slack in the economy in the form of spare capacity ready to be brought back into use. The scale of this, which Goldman estimates as equivalent to up to 8 per cent of GDP, should overwhelm the effect of any capacity lost in the slump.

Equally crucial, growth is unlikely to climb to levels that would test even the economy’s diminished speed limit at any time soon. With consumers facing soaring unemployment, a continuing squeeze on incomes, an overhang of debt and severe damage to their wealth from crashes in house and share prices, growth will be well below par and will struggle to pick up any steam until at least 2011.

The remaining perceived inflationary peril — unease that governments might deliberately stoke inflation to erode the real value of now enormous public debts — can also be largely dismissed. To achieve this, governments would have to wholly undermine the independence of central banks.

This is rendered impracticable since markets would inevitably punish any country that attempted this by driving up market interest rates on that country’s bonds, making the move self-defeating.

Taken together, all of this makes the inflation bogeyman being conjured up by some City scribblers no more than a phantom menace.

Yet the climate of fear that this threatens to create could carry real perils. Should it lead a wary central bank to fret over its credibility and move too far, too fast to retighten the screws on the economy, through withdrawing QE or raising base rates, recovery could be scuppered. Imagined dangers can be as pernicious as real ones. (Gary Duncan, The Times).  http://business.timesonline.co.uk/tol/business/columnists/article6644482.ece