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.

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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?!

Home Economics: a capital sign of recovery

More clear signs that the London Residential market is recovering well ahead of the rest of the UK (as has traditionally been the case): 

“So many surprising things have happened over the past couple of years that it is encouraging to see something reverting to type. The norm is for the housing market in London to lead the rest of the country, and that is what seems to be happening.

The latest survey from the Royal Institution of Chartered Surveyors (Rics) reveals increased activity, with prices starting to stabilise — and the capital is showing the way. On an unadjusted basis, a balance of only 5% of surveyors in London saw prices down last month, against 89% in December. Looking forward, more of them in the capital expect prices to rise than fall in the next three months.

Nationally, the balance of surveyors reporting a fall in prices has dropped from 84% to 36% (74% to 44%, seasonally adjusted) since December. At the other extreme, a net 82% of surveyors in the West Midlands say prices are falling; in Yorkshire & Humberside, it is 69%.

David Adams, head of residential at Chesterton Humberts, thinks London prices probably bottomed out last month, but that the rest of the country will not stabilise until November. This would be consistent with the ripple effect of previous cycles.

Yet this cycle, we were told, would be different. With the City and Canary Wharf hit hard, and bonuses in short supply, some feared the London market would be hit hardest. At the top end, though, the loss of bonuses has been compensated for by overseas buyers — especially Europeans taking advantage of the weak pound. Italians, in particular, seem to have decided that this is the time to buy a luxury flat in London.

Lower down the scale, estate agents quoted by Rics talk of returning confidence, limited supply and a perception that the worst is over. Even for those working in financial services, recent months have seen a shift in mood. Last autumn, they thought their world was coming to an end. Even in January and February, they weren’t sure. Now they are optimistic, and the concern among agents is that prices will bounce back too quickly, threatening the sustainability of the recovery.

Such thoughts are a long way off for many parts of the country. They have to hope that, as in the past, where London leads, they will follow.

– As many as one in 10 homeowners are caught in negative equity, the Bank of England reports. It says the scale of the problem is similar to that of the early 1990s, but it has emerged more quickly, because of the sharpness of the fall in house prices from their peak in mid-2007 to the first quarter of this year. Thanks to low interest rates, however, the level of mortgage arrears and repossessions has, so far, been far lower than last time around.

– Confidence appears to be coming back to the market for farmland after nine months of falls, with prices now beginning to edge above £5,000 an acre and, in some case, reaching £6,000, according to research by agents Knight Frank. Sentiment is being boosted by the return of investors, who had helped drive prices above £7,000 an acre at their peak. Future growth is expected to be steady rather than spectacular.”

http://property.timesonline.co.uk/tol/life_and_style/property/article6487270.ece (David Smith, The Sunday Times).

Is this the right moment to jump back into property?

Halifax reports jump in UK house price values by 2.6% for May 2009.  Read about the pro’s and cons of investing now.  http://www.timesonline.co.uk/tol/money/property_and_mortgages/article6439523.ece (James Charles, The Times).

Urban Share 2

The new £10m London Residential Investment Fund, Urban Share 2,we’ve been working on is now ready to be marketed.  It’s a very conservative 7 year fund with an LTV of 50% and an expected IRR of 10%+ (approx 100% cash on cash return over the life of the fund).  It will be buying below market value properties that generate high yields in London Zone 2.  Properties will be let to students and young professionals.  It will pay an annual distribution of between 2 & 5% and investors can access it through their Financial Advisors.