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?!

Always look on the bright side of life

By Martin Skinner,

"Martin Skinner"

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 take their vows led by Captain Barnaby

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.

How low levels of available housing stock have historically supported house prices

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 performance, cities (executive unit) versus countries (national house price index)

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.

Residential – what’s it all about then?

By Martin Skinner

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.

Safety In Numbers

By Martin Skinner

The debate over our recovery from recession continues to rage and provides an amazing insight into the different ways economic facts and figures can be interpreted.  Forecasting is a tough game these days and I will simply express my opinion that we are experiencing a recovery more akin to a craggy[rock]-V than a W or an L for example.  This is based on historical rebounds and the remarkably rapid global response to the credit crunch in the following three key areas:

  • Loose fiscal policy through a) reducing taxes and b) increasing spending
  • Highly stimulative monetary policy (low interest rate) and
  • Vast quantitative easing campaign.

Even with this huge boost and my optimism we are being regularly rocked by shocks.  Last weeks’ Dubai debt crisis for example combined with end-of-year profit taking removed a good chunk of the years stock market gains.  Markets are nervous, investors are nervous, workers are unemployed and it’s going to take time for confidence to build.

So, in this uncertain climate how can investors profit whilst still hedging their bets against the downside risks?  A focus on location, cashflow and occupier demand will help.  Our chosen location is London where occupier demand is assured.  A cashflow boost is possible through servicing the undersupplied student and young professional markets (and multi-letting).  Demand constantly outstrips supply, rents are rising again and the low currency rate is tempting investors to the city.  Other strategies also work and the moral of the story is rather than running for cover each time we get hit by an aftershock we should be looking to adapt to the uncertainty/turbulence and push forward with an effective strategy and subsequently confidence in our abilities.

We will be exploring many of the issues involved in investing in student and young professional accommodation at our next event at the May Fair Hotel in London on the 11th February.  More details closer to the time.

In Other News:
David Smith – Alistair Darling’s balancing act: cut deficit or win votes
John Waples – Bosses’ bonuses will be next under the spotlight
Irwin Stelzer – Now Barack Obama gets down to work on job creation

And some funnies from the Sunday Times:

  • One for the naughty step – A masked robber who held up a restaurant at gunpoint was recognised instantly by the manager: she was his mother.  Jason Zacci’s face was covered by a bandanna as he threatened staff with a sawn-off shotgun and tried to grab cash from the till at the Wendy’s restaurant in Dearborn Heights, Michigan.  His mother also recognised the getaway driver, his girlfriend Amanda Yost.  (The Sunday Times)
  • To pee or not to pee – The mayor of Delhi has launched a campaign to stop people urinating in the streets.  Kanwar Sain wants to clean up the city’s image before it hosts the Commonwealth Games next year.  Posters have been stuck up around the city urging: “Don’t be Mr Wee-Wee”.
  • Trucker chisels DIY tunnel – Ramchandra Das, a lorry driver, used a hammer and chisel to tunnel his way through a mountain just so it would be easier to park his truck.  The 53-year-old from Bihar, India, took 14 years but said it was worth it. “I had to leave my truck miles away, so I decided to do something about it myself,” he explained.
  • You may now Tweet the bride – Forget kissing the bride; an American groom, Dana Hanna, had a better idea when the minister declared the couple man and wife.  He whipped out his mobile phone and changed his Facebook status from “in a relationship” to “married”.  He then sent a Twitter message, “Standing at the altar with @TracyPage where just a second ago, she became my wife! Gotta go, time to kiss my bride.”  Before that, however, he handed over her BlackBerry so she could do the same.  Hanna, a software developer from Maryland, said after the service: “This was just done to be funny.  We really don’t Facebook that often.”

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).

Normal service resumes in the housing market

Great article illustrating the change in the market over the last few months and the relative difference in value/prospects time between London and the rest of the UK:

“In a downturn, properties are mostly bought and sold for three reasons: debt, divorce or death. In the past few weeks, however, people registering with estate agents are citing less dramatic motives, such as needing to be near a good school, moving to the country or simply wanting a larger — or a smaller — house.

This evidence that people are once more viewing properties for the “normal sorts of reasons” is another sign that the market is stabilising, according to Savills, the estate agent, in research published yesterday. Savills’ growing conviction that there has been a “real change” in mood follows more positive price, lending and transaction data from the Land Registry, the Department for Communities and Local Government, and the Royal Institution of Chartered Surveyors (RICS) and others.

RICS members also highlight that more people are interested in buying because “they want to get on with their lives”.

Lucian Cook, Savills’ residential research director, even discerns a few signs of a “herd mentality”, with buyers eager not to be caught out by a sudden uplift in prices. He hopes that they are making a reasoned assessment of conditions.

The return from the slough of despond to something resembling normality is evident in almost all locations. But the pace of improvement continues to be fastest in London, although there is also a rebound in areas such as Tunbridge Wells and Winchester, towns within easy commuting distance of the capital.

Homeowners in London and the South East typically have a larger cushion of equity, or more cash than those elsewhere, putting them first in the queue at mortgage lenders, which continue to ration finance. Last month in London, Savills handled the exchange of contracts on 42 per cent more properties than in April; the May tally was 32 per cent up on the same month in 2008. Homes in areas as diverse as Putney and Belgravia are coming on to the market and going under offer within days at their asking prices, so long as these valuations reflect the market decline.

However, some homes are fetching much more than expected. A terraced house in Portobello Road in Notting Hill was offered at auction last month for £700,000. It went under the hammer for £980,000.

The increase in activity is encouraging a few previously reluctant sellers in the capital to put their properties up for sale. This will represent the first significant test for the tentative recovery, which, until now, has been powered by a shortage of homes for sale.” (Anne Ashworth, The Times).  http://www.timesonline.co.uk/tol/money/property_and_mortgages/article6481784.ece