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?!

Poor recession figures will keep interest rates down

Anatole Kaletsky: Commentary

The modest fall in Britain’s GDP in the third quarter will cause some big gains and losses among currency and bond traders, but it does not change economic reality in any significant way. While economists may define the “end of recession” as the quarter when GDP starts to grow, no matter how feebly, this is not how ordinary people and businesses see things.

Suppose GDP had risen marginally instead of falling, most people would still have believed that Britain was in recession — and rightly so. Even if the economy had started crawling out of the hole into which it stumbled after Lehman, the hole would remain very deep and the top hardly in sight. The German GDP, for example, expanded slightly in the second quarter, yet Germany is still in a deeper hole than Britain — 6.7 per cent below its peak GDP peak, compared with 5.9 per cent here and 3.8 per cent in the US.

What matters is not whether GDP moves up or down a little in one quarter or another. It is when economic activity recovers with growth strong enough to reverse unemployment and restore wealth, production and consumer spending to their pre-recession peak levels.

How long might this take? In Britain’s last deep recession, it took two years after the resumption of growth in mid-1981 for output to return to its previous peak. And the middle of 1983 was, in fact, about the time that Britain’s economic confidence increased and the Thatcher Government’s popularity recovered. To restore the economy by early 2012 to its peak level of output would require not just a marginal resumption of growth, but a rapid recovery with growth rates above 0.7 per cent per quarter.

Is such a strong “V-shaped” recovery possible given the debt burdens on consumers, the credit crunch and the pressures to cut public borrowing? Nobody knows, but the weak GDP figures may paradoxically have made a V-shaped recovery more likely. Because of these figures the Bank of England will probably increase its monetary expansion and will certainly keep interest rates near zero for the foreseeable future.

As homeowners, businesses and consumers realise that ultra-low rates are not just temporary but are here to stay for years ahead, house prices and shares should keep rising and the pound should remain weak. This monetary stimulus should eventually feed back into exports and consumption — and could generate a surge in economic activity. If and when this happens, the Bank will be in no hurry to damp it down, as there will be little inflation risk until the economy returns to its peak output. Nobody knows when that might happen — but we can now be confident that interest rates will remain near zero until 2012 or beyond. (Anatole Kaletsky, The Times) http://business.timesonline.co.uk/tol/business/economics/article6888261.ece

Bank stays hand on new money and holds rate

Good news that interest rates have been held again as expected; not great news that they’re not expanding the Quantitative Easing program although they’re likely to do so after the next inflation report.  IHMO they should be increasing QE and at the same time reducing the tier 1 capital requirements thereby encouraging banks to increase their actual lending rather than just hoarding the cash – this is what China is doing quite effectively – encourage banks to hoard cash in the good times and to lend it to in the difficult times.

Gary Duncan, Economics Editor

“The Bank of England pegged interest rates today for a fourth month in a row and stayed its hand over any other changes in its recession-fighting strategy as it paused for breath in its battle to combat the slump.

The Bank held interest rates again at their existing 315-year low of 0.5 per cent as it weighs the impact of its expanded £125 billion drive to jump-start the economy with massive injections of newly-created money.

The decision by the Bank’s Monetary Policy Committee (MPC) to prolong last month’s “wait and see” stance surprised the City.

Many economists had predicted that the MPC would further extend its quantitative easing (QE) scheme to pump extra money into the economy through huge purchases of government and corporate bonds.

The Bank has already completed purchases of more than £100 billion in bonds under QE, and analysts had expected the MPC to increase spending to the £150 billion maximum authorised by Alistair Darling. Some had predicted that the Bank would seek the Chancellor’s authority for a still higher limit.

The Bank said that it would review the scale of QE at the MPC’s next meeting in August.

Instead, the Bank today fuelled uncertainty over its next move by keeping its policy on hold, and deferring any extension in QE until it completes its next set of quarterly forecasts next month.

The MPC’s verdict will unsettle markets, since it is bound to spark speculation that the Bank may now call an imminent halt to the quantitative easing strategy as signs accumulate that an economic recovery is starting to emerge.

But pressure on the Bank to expand QE still further is likely to persist following grim news last month that the economy suffered an even steeper first quarter slump than was thought, plunging by 2.4 per cent, rather than the 1.9 per cent that was previously estimated.

Despite hopes that conditions have since greatly improved, with a slew of indicators pointing to recovery taking hold, optimism over prospects was dealt a blow this week as manufacturing suffered an unexpected further decline.

Factory output fell by 0.5 per cent in May to a level not seen since 1992. The influential National Institute of Economic and Social Research estimated that this pointed to a further 0.4 per cent drop in GDP in the second quarter. If confirmed in official data due on July 24, that it would dash City hopes that the recession might already have ended last month.

The further expansion of the QE programme will fuel controversy over the policy, however, with critics warning that its results remain disappointing.

Some economists argue that much of the extra cash created under the scheme is being hoarded by banks that remain reluctant to boost lending to businesses and consumers, while another large part of the money is flowing abroad as overseas investors dump holdings of gilts.” (Gary Duncan, The Times) http://business.timesonline.co.uk/tol/business/economics/article6667803.ece

Bank of England expected to hold interest rates

Another great article by Gary Duncan on the likely future direction & timing of changes in interest rates.

Gary Duncan, Economics Editor

When the Bank of England’s ratesetting Monetary Policy Committee (MPC) gathers again this week in Threadneedle Street, the economic picture it confronts might be summed up as “the only way is up” — and in more ways than one.

Since the MPC last met a month ago, startling official figures have revealed that the economy plunged in the first quarter at an even more savage pace than had been believed, with GDP plummeting by 2.4 per cent, compared with the 1.9 per cent fall previously reported.

Yet the burgeoning conviction in the City, and the hope at the Bank, is that this will mark the worst phase of the recession and that the slump has since bottomed out.

An accumulating slew of evidence suggests that the quarter just ended will be far less brutal and that a return to growth, albeit of an insipid sort, is impending.

This leaves little doubt, too, that the next move for interest rates will be upwards, from their present, 315-year low of 0.5 per cent. But with Britain’s recovery prospects still fraught with uncertainty, any such move remains a long way off, perhaps as far off as 2011.

The clouded picture of a sharper downturn in the past, hopeful signs of an emerging upturn and worries over how strong an economic revival lies ahead also leaves much of the City concluding that a move up is also on the cards for the scale of the MPC’s radical quantitative easing scheme.

Many economists think that the Bank will opt to further raise the scale of its purchases of government and corporate debt under “QE”, through which it is trying to transfuse newly created money into the economy.

The Bank has completed an estimated £106 billion or so of the £125 billion asset purchases ordered by the MPC. Analysts think that this month it could order the use of the remain-ing £25 billion of purchases allowed within a £150 billion maximum set by Alistair Darling.

Some think that the MPC might also ask the Chancellor’s permission to extend QE further, although most believe that, even if it seeks this authority, it is unlikely to use it until next month, when the Bank will have completed its latest quarterly forecasts.

Here is our monthly guide to the issues that the MPC must weigh up.

Growth and activity: picking up A raft of data has pointed to the economy having begun to recuperate. Among the most encouraging signs have been key CIPS/Markit purchasing managers’ surveys showing that the services sector expanded last month for a second month in a row, while manufacturing continued to contract, but at the slowest pace for 13 months.

Official manufacturing data for April showed the first rise in output, by 0.2 per cent, since February 2008.

Optimism that the housing crash may be ending has also been lifted by reported rises in house prices, with Nationwide Building Society detecting a 0.9 per cent June increase on the heels of a May rise of 1.3 per cent.

Serious anxieties remain, however. Consumer demand is a central concern, with spending power under severe pressure from rising unemployment and a squeeze on pay. Official retail sales volumes fell by 0.3 per cent in May and the CBI’s snapshot of high street conditions in June was also disappointingly anaemic.

The jobless toll from the recession keeps climbing, even if at a slower rate, with a further 39,300 people joining the dole queues in May, although this was the lowest number for ten months.

Costs and prices: proving sticky Worries over inflation have re-surfaced, despite the retail price index showing the cost of living tumbling at an annual 1.1 per cent pace in May. Consumer price inflation remained stubbornly above the Bank’s 2 per cent target, at 2.2 per cent, boosted by the rising cost of imports thanks to a weak pound. Sterling has clawed back ground in recent weeks, however, with its overall value up almost 6 per cent over the past three months.

Signals from pay are mixed, with headline average earnings growth at a modest 0.8 per cent in April. but unit wage costs up sharply as plunging output undercuts productivity.

International economy: nagging fears Hopes have continued to rise that the worst of the deepest global slump since the Second World War is over. In its latest assessment, the Organisation for Economic Co-operation and Development revised up its forecasts for the developed world for the first time in two years. But big fears remain, notably over the eurozone, the still fragile state of banks and persistently tight credit conditions.

Rates verdict: Interest rates are on hold indefinitely. A further expansion of quantitative easing is very likely. (Gary Duncan, The Times).  http://business.timesonline.co.uk/tol/business/economics/article6652377.ece