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Posts for currency-arbitrage



On The Threshold: Some words on the streets of pre-Brexit Britain

By Alessandro Pasetti, 17 September

British households’ confidence about their financial situation held at its highest since 2015 this month, as their concern about inflation eased and they were relaxed about prospects for the year to come, a survey showed on Monday.” – Reuters, 17 September.

“Uncertainty brings opportunity” is one of the most recurring clichés in the investing world, but there’s some truth in it, particularly if you are a real estate investor trained to read the runes.  

Risking everything to risk nothing at all

Let me share with you, briefly, the story of my lovely sister, my business partner in the UK who is in her mid-30s.  

In the immediate aftermath of Brexit in mid-2016, she negotiated a sound property deal worth £390,000, mainly financed by equity. She bought a semi-detached house in West Sussex, funding a large portion of her purchase in euros, which strengthened dramatically against Sterling after the UK voted to leave the European Union.

Source: Bloomberg

When negotiations with the seller began, it was immediately clear that she had gained pricing power because the owners of the house she bought were in a chain, and felt the urgency to grab the opportunity, mainly due to Brexit-related uncertainty. That meant the parties agreed a deal well below (~10% or so) the asking price.

Cash outflows from her then-whopping £450-a-week rent in Ealing Broadway, West London, where she lived for almost six years, were immediately halved when her new mortgage – which was struck on convenient terms and on a long-term fixed rate – kicked in, as well as due to the conservative funding mix. The Bank of England has raised benchmark policy rates twice in the past year, so that proved to be a wise decision, although interest rates have gone nowhere fast since 2016 and consolidation of the 2% area appears to be the most likely outcome through to 2019.

Source: Bloomberg

Decision time

In those days, in our second year of business, with all the hard work and uncertainty that setting up a new shop brings, my sister traded her dependency on rent to become the owner of a place she loves. And, more importantly, she ended up owning an asset that gives her greater financial freedom – paper gains, too, need a mention, given that prices in her residential area have been holding up well over the past 24 months.  

More recently, a relatively young couple I know well relocated to SW London, and their property, worth just below $1 million, was worth every penny they paid. There was some currency arbitrage involved, too, but the side effects of a highly volatile exchange rate during the purchase process were broadly contained.

Another married couple who work in finance are confident that a $1.5m bid in NE London will be soon accepted, while some other friends have bought a nice piece of land in the countryside; their cash outlay was not that significant, but anything over $100,000 is meaningful, right? For them, too, more freedom, a healthier lifestyle and a chance for their children to grow up outside of the pressure cooker of London were too hard to pass up, and the economics were surely worth it.

Elsewhere, a fund manager I am doing some work for recently complained that its house in posh North London was not appreciating at the same speed as previously, “although I have never thought of selling it for any price, because I enjoy it and this is the right place for me”. Prime London is resilient, as research from specialist Knight Frank shows.

(Source: Knight Frank)

As far as I am concerned, I am an asset-light guy, but when the outcome of the Brexit vote emerged two years ago, I tripled my equity position (I had a relatively small exposure as a percentage of my total portfolio allocation), eventually profiting awesomely from a surge in selected equities with meaningful UK exposure – Yoox Net-a-Porter, which was later taken over by Richemont, was my biggest win.

All the UK investors I know, one way or another, have decided to bet on a stable outlook for a country that would be daft to so simply allow a no-deal Brexit deal, given the consequences, to come to pass, as I have argued ever since the doomsters have to tried to scare us with the most bearish scenarios. Yet, if you do not trust our judgement, how about the view of some of the largest corporations and investors on earth?

Well, only a few months away from the final Brexit deadline, it could be your turn to profit from broader uncertainty before the dust finally settles.

More than a just bunch of friends

Not only is British households’ confidence at its highest in years, but, in case you missed it, the largest Spanish lender, Banco Santander – which gained larger exposure to the UK after the purchase of Abby National in the pre-crisis credit binge years of 2008 – recently announced that “it would build a new technology hub in the English town of Milton Keynes, representing an investment of £150 million ($196.82 million)”.

Elsewhere, oil behemoth Exxon is “preparing £500 million upgrade to UK’s largest oil refinery“, marking its “biggest investment in the UK sector in nearly 30 years”.

As it happens, Record London rents lure overseas landlords” to the housing market, Bloomberg wrote recently, adding “Brexit-driven pound weakness gives buyers more for their money”. So, unsurprisingly, “Korean investor Hana (is) in talks to buy WeWork London landmark“.

If all this is not enough to convince you, consider that investment guru Warren Buffett is doubling down on the London property market, with Battersea, Fitzrovia and King’s Cross (where Google is based) topping his wish list.

Some bankers are leaving the City, complaining about the regulatory framework and how it is affecting the competitive landscape: I continue to pay attention to these moans, given the importance of services to UK GDP, but banking trends and investment have shifted in importance, while bankers’ net worth is much less relevant to London than tech-land’s investment plans. I recently had a lunch meeting close to Google’s HQ in London, and the place was buzzing, as opposed, lately, to the usual staid feeling of the Square Mile, which really has lost some sparkle in the past decade – although admittedly, in 2008 I was in the early, exciting years of my career just off Ludgate Hill in EC4, and nostalgia is certainly reflected in my disappointment .

(This post was written by Alessandro Pasetti. Ale is the founder of Hedging Beta Ltd. He writes about investment strategy and assets valuation for European clients as well as Seeking Alpha, The Loadstar, Transport Intelligence and others. Based in London, he previously worked for about five years at Dow Jones/The Wall Street Journal, producing analysis for the IB community. Prior to that, he contributed to the launch of London-based Loan Radar, where he worked for three years. He had stints in equity research at Bear Stearns in London, HVB in Munich, and Unicredit in Milan.

It was edited by Gavin van Marle, managing editor of London-based The Loadstar. Gavin is also the author of the book Around the World in Freighty Ways: Adventures in Globalisation. He has won numerous awards, including the Seahorse Journalist of the Year 2011 and 2009, and Supply Chain Journalist of the Year 2010 and 2014.)

 

 

 

On The Threshold: Liverpool & Manchester building on the foundations of history

By Alessandro Pasetti, 31 May

The high turnover of the real estate portfolio of Inveztments testifies to the quality of the projects that have been marketed by its team in the past year.
But what’s the secret sauce?
In a nutshell, the ultimate choice between picking multiple real estate investments/projects and only the best projects/property investment available on the market always leans towards the latter.

Coming soon

As new investment opportunities are about to be announced – full details of three outstanding UK-based developments will be released shortly – Invezments managing directors continue to witness strong market appetite outside London. It is easy to argue that Liverpool and Manchester, in particular, continue to thrive is deeply rooted in their past achievements as well as in their reputation and bright prospects, regardless of the risk posed by Brexit.

To sum up where the portfolio stands, sold-out projects in the residential segment include:

– Salisbury Place, Liverpool

– Halifax House, Liverpool

– Downtown, Manchester

– Sir Thomas, Liverpool (pictured below)

– Reliance House, Liverpool

Attractive yields and strategic locations contributed to the success of most of these property deals, while student accommodation, another buoyant segment, also shone.

The projects that easily gathered interest were:

– Orme House, Newcastle-Under-Lyme

– Oakwood House, Sheffield

– Beaumont Square, Plymouth

– Phoenix Place, Liverpool

– QStudios, Stoke (pictured below)

Ancillary business

Outside the core competencies of the team, the hotels space also proved attractive. Eden Country (Cumbria), Afan’s land plots (Wales), Wyncliffe House (Wales, Fishguard), The Harland (Scarborough) and The Atlantic Bay (Woolacombe) are all sold out.

Clearly, market appetite spanned several cities, including Leeds and Sheffield, but Liverpool and Manchester remained the top performers.

If you want to know more about the competitive landscape and outlook there, it could be worth spending some time reading this research published earlier this year by Knight Frank, which also contains very useful data on the commercial property landscape and the development pipeline.

What is still available?

Focus is mainly on the residential segment, with the existing portfolio comprising:

– Fabric, Liverpool (please contact the team directly)

– 8 Water Street, Liverpool (please contact the team directly)

– Infinity Waters, Liverpool (this promises to be a gem; pictured below)

– Oxygen, Manchester

– North House, Liverpool

– Whitehall Road, Leeds

– Grapnel House, Manchester

As far student accommodation investments are concerned, One Islington Plaza (Liverpool) has recently gone, but elsewhere Afan Valley Resort (Wales, hotels) remains available, requiring different levels of commitment and returns.

Aside from the economics that each deal offers, which can be privately discussed with the team, we highlight below some news reports that should help you understand what kind of investment you might be undertaking, if you are not familiar with the history of either city.

Firstly, Liverpool.

1 of 3: Liverpool to Manchester railway: the first railway line to open in Britain

According to the BBC “the Liverpool to Manchester Railway, completed in 1830, was the first successful railway line to open in Britain”.

Why?

– It proved that a cheaper and more efficient alternative to canals was now available

– It was the first commercial railway line designed to carry paying passengers as well as cargo

– It made the trade and transportation of raw, heavy and bulky materials between Liverpool and Manchester easier

– It allowed fresh dairy and agricultural produce from rural Lancashire to be delivered to towns and cities

– It was a financial success and people suddenly realised that railways could provide huge profits

Over a decade ago, The Telegraph also noted that it “was the first successful passenger-carrying railway in the world. Trials for Stephenson’s Rocket were carried out at Rainhill in 1829.”

Liverpool to Manchester railway (Source: World on Trains)

2 of 3: The Queensway Tunnel … cutting-edge mobility

“On the 18th July 1934, over 200,000 people gathered at the Old Haymarket to watch King George V and Queen Mary, officially open the Queensway tunnel,” the BBC explains.

“Amongst those chosen to welcome the Royal party were Lord Mayor Councillor John Strong, Sir Thomas White, Chair of the Joint Tunnel Committee, Lord Sefton and Chief Constable A.K. Wilson. Liverpool City Police Band provided the music.”

The Queensway Tunnel (Source: Gutted Arcade of the Past)

3 of 3: Liverpool Streets

“The streets of Liverpool are fascinating, starting with the very early ones in the centre of the city – or borough as we should call it, because Liverpool wasn’t a city until the 1880s. Prior to that it was a town and a borough, the medieval borough was of course founded by King John in 1207, and the king’s representative, a bailiff or someone similar, laid out the first original streets of Liverpool – and those are still important thoroughfares…Chapel Street, Bank Street (now Water Street), Castle Street, Dale Street, Tithebarn Street (formerly Moore street) and Juggler Street (High Street).”

(Source: BBC, link here)

Water Street (Source: Streets of Liverpool)

“In addition to granting it a royal charter, King John designed Liverpool’s original street plan of seven streets laid out in a ‘H’ shape.”

(Source: Traveling with the Jones, click here for more details.)

Enter Manchester.

1 of 5: Great minds

Did you know that the atom was first split in Manchester?

“There are few discoveries in science that can be said to have changed the world but one must surely be the ‘splitting of the atom’ by Ernest Rutherford in Manchester.”

(Source: BBC, click here to read the full article.)

2 of 5: University of Manchester

You have heard about the first programmable computer, haven’t you?

“On June 21, 1948, shortly after 11am, the Small Scale Experimental Machine (SSEM) – nicknamed The Baby – executed its first program. The Baby changed the world and was the forerunner of all modern computers, iPods, mobile phones and other gadgets we take for granted today.”

(Source: The University of Manchester, click here for more details.)

Baby — The first programmable computer (Source: YouTube)

3 of 5: 25 Nobel Prize winners

“The University of Manchester has a rich academic history. We can lay claim to 25 Nobel laureates among our current and former staff and students.”

(Source: The University of Manchester, more here.)

Sir Joseph John Thomson was an English physicist and Nobel Laureate in Physics, credited with the discovery and identification of the electron (Source: ThoughtCo)

4 of 5: Chetham’s library: the oldest public library in Britain

“It’s the oldest public library in Britain, and is home to more than 120,000 books, maps and manuscripts, some dating back as far as the 13th century.”

(Source: Manchester Evening News, to learn more about this topic please click here.)

The Chetham’s library (Source: Trip Advisor)

5 of 5: Finally… it is listed among the 10 world’s greatest cities in 2018!

“After a tough 2017, locals said that the best thing about Manchester is that ‘We carry on, no matter what.’ It’s also the place with the most people who can’t get through the day without a cuppa, while its great drinking scene, live music and friendliness saw it end up ranked seventh,” TimeOut wrote earlier this year.

The most exciting cities in the world (Source: Time Out)

(This post was written by Alessandro Pasetti. Ale is the founder of Hedging Beta Ltd. He writes about investment strategy and assets valuation for European clients as well as Seeking Alpha, The Loadstar, Transport Intelligence and others. Based in London, he previously worked for about five years at Dow Jones/The Wall Street Journal, producing analysis for the IB community. Prior to that, he contributed to the launch of London-based Loan Radar, where he worked for three years. He had stints in equity research at Bear Stearns in London, HVB in Munich, and Unicredit in Milan.

It was edited by Gavin van Marle, managing editor of London-based The Loadstar. Gavin is also the author of the book Around the World in Freighty Ways: Adventures in Globalisation. He has won numerous awards, including the Seahorse Journalist of the Year 2011 and 2009, and Supply Chain Journalist of the Year 2010 and 2014. )

 

On The Threshold: Three books for real estate investors to live by

By Alessandro Pasetti, 15 February.

There are books you read that never leave you, and following the huge swings in financial markets since early February, I was reminded of some of those when thinking about how real estate investors ought to consider their positions in relation of other forms of investment.

(Source: financialtalkies.com)

Is a financial meltdown around the corner? 

Watching financial market events unfold by the hour is bad for your blood pressure, but some lessons I learned from reading have often helped me make better choices.

I have closely monitored the ups and downs of the past 20 years, from the dot.com bubble at turn of the century to the real estate and banking crash a decade ago and, indeed, further back. When I was a kid the private equity binge of the 1980s culminated in 1987’s Black Monday, which remains a worst-case scenario in terms of making investment decisions. In those years junk bonds doped financial markets where stellar inflation rates were still dropping from the second Oil Shock in 1979. 

I have been thinking about how these events (most I read in the books mentioned below) shaped my behaviour in finance matters, and how correlated they were to prevailing interest rates trends of the times.

Ultimately, I want to help you filter all the nonsense written when the bears, with grand fanfare, point to the nearing collapse of the real estate market, driven by a financial meltdown — there have been many strange headlines in the British press in both regards lately, spurred by the recent fall in the FTSE 100.

One typical Inveztments reader recently argued that comparing, for example, the housing markets in Milan to London, and their historical trends, it was easy to predict a further 50% decline in prices in London over the medium term. The lesson this gentleman appeared to forget was to compare apples with apples; barring growth considerations, here we have two very different investment by liquidity (and location).

Which reminded me of When Genius Failed.

That book changed my perception of risk: a masterstroke of how the cleverest humans on earth made their fund implode because their binary trades, which were meant to be perfectly hedged, weren’t hedged at all. Masterminded by Irish-American fund manager John Meriwether and other brilliant fellas, Long-Term Capital Management (LTCM) used the work of finance scientists Scholes and Merton, who were awarded the 1997 Nobel Prize in Economics thanks to their option pricing modelling.

“Scholes’ work had inspired a generation of mathematical wizards on Wall Street, and by this stage both he and Merton were players in the world of finance, as partners of a hedge fund called Long-Term Capital Management,” the BBC wrote years ago.

Look at the demise of LTCM, and how it financed its trades — think of it as if you bought a property, remortgaged your equity shortly thereafter, and then with that borrowed money bought a risky investment where Bitcoin is the riskiest in the spectrum today. That, in 1998, was Russian debt, which plummeted in value during a very hot summer for many traders.  

Leverage clearly compounded problems of a fund that evaporated in a flash, just like this month the value of a security conceived by Credit Suisse – essentially set to trade against volatility — evaporated overnight.  

In late September 1998, LTCM was taken over by its lenders — in those days interest rates in the US rose 200 basis points to 4%, then reaching 6%. By comparison, in recent weeks US benchmark rates have risen swiftly from only 2% to 2.8%.

(Your cost of funding might soon go up more than that, depending on how banks react, increasing your  mortgage costs.)

They say real estate is risky 

In the 1990s it began with LTCM and ended with Enron, which declared bankruptcy in December 2001. Rates during the LTCM-Enron period — at the post-heights of the dot.com bubble — rose from 4.4% to 6.6%, more than doubling current levels. Enron shareholders, of course, were wiped out.

The classic tale of the Enron affair is The smartest guys in the room. It touched upon capitalism and side effects, I learned that accounts can easily be faked even though regulators should prevent retail investors — you and I — from being scammed. Enron (click here to see how its downfall began) was essentially a massive conglomerate of Chinese boxes where accounting fraud was the rule. The property market is a good example of transactions that are often opaque, and that is why due diligence is an affair you often need help for. The Team of Inveztments performs close scrutiny on builders, and their financials, and this is clearly a plus.  

Before we move onto the third book and why all of this matters to real estate investors, think about where the 10 US Treasury bonds trade – what’s their yield?

While it is true that regionalisation in the real economy poses a threat to globalisation, finance is global and all markets are intimately tied to the driver of value — the US, where the fall in stock and bond prices in the past few weeks shocked, and badly harmed, stock and bonds traded in Asia and Europe.  

Shorting Europe and the euro? A bad idea? 

Call it transmission effect: interest rates in the US matter, and no doubt the Bank of England is looking to catch up with the Fed and open the gap with Europe in terms of interest rates hikes. The Fed was the first brave bank to push up rates a couple of years ago, although interestingly, it has been slow since.

Finally, The Big Short is a thoroughly entertaining read, even if it does describe the near-complete demise of the entire financial system, and the world as we know it. When Lehman Brothers collapsed due to troubled bets on derivatives and real estate, interest rates fell from 3.8% to a floor of 2.2%, but the plunge had started earlier when rates were at 5%.

The allure of barring a Japan-like scenario is obvious, but there are similarities. (Seeking Alpha this week wrote: “Japan’s economy grew at an annualised rate of 0.5% in the final three months of 2017, capping an eighth straight quarterly expansion and the longest growth streak in nearly 30 years”). This could be a very long cycle, which gives more time to profit to investors and realtors.

So, if you are ready to bet on short-term capital appreciation in the housing market, make sure you gauge what kind of risk you are embracing before the US reaches the critical 4.5%-6% threshold at some later point — given the shape of the yield curve, and three likely rates hikes each of 25 basis points (0.25%) a year in 2018, 2019 and 2020, you’ll have time to reap the rewards before the next financial meltdown occurs. And by then you’ll also hold an investment with more defensive characteristics.

To contact the team of Inveztments and discuss the prospects of their flagship projects please click here.

(This post was written by Alessandro Pasetti. Ale is the founder of Hedging Beta Ltd. He writes about investment strategy and assets valuation for European clients as well as Seeking Alpha. Based in London, he previously worked for about five years at Dow Jones/The Wall Street Journal, producing analysis for the IB community. Prior to that, he contributed to the launch of London-based Loan Radar, where he worked for three years. He had stints in equity research at Bear Stearns in London, HVB in Munich, and Unicredit in Milan. 

It was edited by Gavin van Marle, managing editor of London-based The Loadstar. Gavin is also the author of the book Around the World in Freighty Ways: Adventures in Globalisation. He has won numerous awards, including the Seahorse Journalist of the Year 2011 and 2009, and Supply Chain Journalist of the Year 2010 and 2014. )

On The Threshold: Brexit's silver linings could turn out to be gold

By Alessandro Pasetti, 31 January.

Do not say you had not been warned about the possible benefits of Brexit, and luckily the window of opportunity remains wide open in the real estate market, because uncertainty is likely to continue, which is exactly when good deals could easily turn into the bargain of a lifetime if you pick the right assets. 

In the wake of the latest news concerning the health status of the UK, there is no need to feel bad if you didn’t see it coming – you were in good company.  

(Source: New York Times)

Even the experts at the Office for National Statistics recently admitted they misjudged domestic growth data, while a slew of City brokers I have talked to since the 2016 referendum have often raised concerns about the outcome of this Euro-British saga. Many pundits are unconvinced an amicable deal is on its way but in my opinion political repercussions and commercial risks will be manageable.

Moving parts

There are certainly many moving parts when choosing to invest in the UK and its property market, not least because the London real estate sector since last year has been less enticing than for two decades, and inevitably that negatively affects business “sentiment” — and, in turn, GDP growth estimates. But on the bright side, a top-down approach suggests that there is little to fear nationwide, as many other major big cities — where Inveztments operates — are in a sweet spot, while recently released fiscal deficit numbers for the UK were pretty good.

(Source: Trading Economics)

Other trends for net borrowings in the UK were not bad at all, either.

(Source: ONS)

Other encouraging signs have been visible since last year.

“UK budget deficit narrows to lowest September level since 2007,” was the headline of a story published by The Guardian at the end of last year, which did not overlook that fact we have returned to pre-2007 crunch levels.

Comparables 

Some headwinds remain but there is no better time, I reckon, to assess the conditions of a market where prices could easily move in lockstep with the growth rate of domestic inflation — see the CPI chart below — for years to come, and compare the credit risk embedded in property with other asset classes.

(Source: Trading Economics)

Say you are keen to invest in equities, and you have been looking for a global brand that traditionally offers steady income in the form of dividends and, possibly, some capital appreciation at the right entry point.  

For example, how about General Electric, a company I have closely followed for years?  

(Source: Bitcoin News. The chart above shows the correlation between GE’s stock price and Bitcoin until late 2o17)

In the week commencing 22 January, the stock of this American behemoth, which has a strong investment grade rating – this means the rating agencies believe its business is highly cash generative and able to withstand cyclicality — has been as volatile as any other highly risky assets, such as Bitcoin.

(Note for the reader: GE is rated above Spain and Italy, the fourth- and third-largest European economies, and is considered healthier than either country based on many financial/cash flow metrics. Incidentally, it recently halved the dividend to $0.12 quarterly.)

Did you notice how the two trended last week?  

(Source: Yahoo Finance)

This has a lot to do with real estate investment as well as a key concept, known in economics as opportunity cost, according to which your paper loss in not only the capital appreciation you forgo if you pick the wrong asset, but also, adding insult to injury, the loss of possible gains stemming from a better-performing asset class (or, in GE’s case, the stellar performance of the shares of virtually all its industrial rivals in the US).

Say you don’t fancy exposure to equities: It is risky, and a comparison with the real estate market is a bit of a stretch because GE’s asset portfolio renders its associated returns more cyclical. But let’s stick with GE and imagine you have already opted for a safer investment profile, one closer to long-term real estate assets, given its seniority in the capital structure — its bonds.

But with these you would also have faced volatile trading conditions. If you had acquired its 2042 bonds with an annual coupon of 4.125% (the yield is higher), which are a decent comparison for real estate investment given their duration – investing in real estate puts you in a similar position to a bond trader seeking “durable liquidity” along with the upside, although GE would have given you good reasons to be a bit worried about capital appreciation.

(My full coverage of GE for Seeking Alpha since November 2015 can be found here.)

(Source: boerse-berlin.com)

The bonds are under pressure, while GE equity has lost about 50% of its value in less than one year — roughly the same percentage Bitcoin shed in less than three months — and bondholders now wonder whether the liquidity profile of the company is sound.

(Source: MarketWatch)

GE has disappointed investors, particularly those who did not do their homework properly. 

(If you are invested at the long-end of the yield curve of Italy’s BTP or any similar debt obligation, you might want to reconsider your options, too, unless massive gains accumulated over the past few years lead you to want to stay put to avoid a large tax liability.)

Sound advice

The problem goes to the heart of risk perception and due diligence. A senior analyst who covered GE in the heydays of Jack Welch twenty years ago recently told me:

“It is extraordinary how many GE shareholders deliberately chose to stand flat-footed and disinterested over some or all of the past 18 years as their investment drifted away from the performance of the market averages, but, instead, clung to their own unchallenged opinions and convictions. Layer on top of this their utter incapacity to even understand the underlying financial dynamics of GE is just as odd. Yet, of course, this hasn’t stopped one of them from screaming they’ve been robbed and cheated.” 

Following remarks from the ECB President Mario Draghi last week, the yield of German debt spiked, which meant a paper loss for its holders. Given that quantitative easing prospects have dramatically changed in less than six months, more losses could be on their way for several fixed-income securities.

Where to invest, then, if you are looking for a safe haven?

Convictions

We all hold convictions, and all we are trying to do on this platform is to stimulate debate and sketch out a first round of due diligence before any real estate purchase is actually made, just as we would do with any other asset classes.

So, with a critical view, what could be so wrong about the UK and property? 

Notably, the pound recently hit its highest level against the US Dollar, while it is consolidating a level significantly higher than 1.13 against the euro as government bond prices continue to fall, pushing up rates whose ascent had to be expected – all these factors bode incredibly well for real estate investors, until a critical threshold of over 3% for 10-year rates is reached (we are currently at about 1.4%).

(Source: BBC. Sterling appreciated further to flirt with the 1.43 level against the US Dollar at the end of the week commencing 22 Jan)

(Source: Yahoo Finance. GBP vs EUR, year to date)

(Source: Yahoo Finance. GBP vs EUR, six months)

Oil prices, meanwhile, are the fear gauge in many respects but could also propel inflation and perhaps benefit a real estate market where, as the Financial Times recently wrote, the value of UK’s housing stock grew by a third to £7.14tn in the past decade.

As far as the risks in the financial market are concerned, I warned readers at the end of 2017 on the prospects of homebuilders, gauging their risk profiles against Bitcoin and other asset classes. In October, I wrote it was possible that profit-taking would put some pressure on these stocks, but the homebuilders’ fundamentals are rock-solid, and remain so. Look at how the shares of the main players in the UK have fared since before Carillion imploded. 

Market specialist Savills says its UK estate agency branches enjoyed a strong finish to 2017 despite “uncertainty”, while in a trading statement, one of the UK’s largest house builders said the market remained “solid” despite wide economic uncertainty, which also weighs on the Eurozone given that this year Italy goes to the polls.

(Source: Taylor Wimpey)

The recent demise of Carillion was not a Black Swan event per se, but rather a one-off event that the government is still assessing — perhaps Downing Street could have done more to prevent its collapse, given Carillion’s working capital and debt maturities, but neither the exchange rates nor interest rates (see the chart below) were affected this month.

(Source: Bloomberg)

Which again proves that while some may fret about Brexit, there are deals being done and money being made by investor who can recognise the sound of opportunity knocking.

(If you want to know more about how to manage risk and the full details of the latest projects, please contact the team here.)

(This post was written by Alessandro Pasetti. Ale is the founder of Hedging Beta Ltd. He writes about investment strategy and assets valuation for European clients as well as Seeking Alpha. Based in London, he previously worked for about five years at Dow Jones/The Wall Street Journal, producing analysis for the IB community. Prior to that, he contributed to the launch of London-based Loan Radar, where he worked for three years. He had stints in equity research at Bear Stearns in London, HVB in Munich, and Unicredit in Milan. 

It was edited by Gavin van Marle, managing editor of London-based The Loadstar. Gavin is also the author of the book Around the World in Freighty Ways: Adventures in Globalisation. He has won numerous awards, including the Seahorse Journalist of the Year 2011 and 2009, and Supply Chain Journalist of the Year 2010 and 2014. )

 

On The Threshold: Simple sums

By Alessandro Pasetti,  December 2017. 

I was lucky enough in a previous career to work with a brilliant writer for the Wall St Journal who once sagely advised me when life periodically took a wrong turn: “There are some problems you can blame on the government; the rest you can blame on your wife.” I have since used that as prism – if neither applies you can only blame oneself… and frankly, if you can’t see the opportunities in the Inveztments portfolio neither the government nor your marriage is at blame; it’s more likely simple maths.

Arithmetic

Inveztments managing director Tonino Montesanti has reassured me about the returns that investors today can expect by deploying capital in two types of real estate picks contained in its portfolio. 

Tonino Montesanti, Managing Director of Inveztments

It’s pretty simple arithmetic: you shell out £120,000 at 7% for a residential investment or unit, and in year five you’ll have pocketed £42,000. With a capital appreciation of 5% per year (amounting to £30,000 by year five, assuming the value of the initial investment was £120,000), and you would have recouped 60% of your initial investment by 2022 — in addition, it is very likely that you’ll be able to sell the asset at that point, while dictating the price for the unit/apartment.

Multiply £72,000 (£42,000 plus £30,000) by two, and – in what is effectively a worst-case scenario given historic trends for capital appreciation – you should be looking at a pre-tax gain of £24,000 in year 10. Even with minimal capital appreciation, in a decade you’ll have covered the majority of your initial invested capital, whilst also owning the underlying asset. £84,000 will have covered 70% of your investment. 

(These calculation excludes tax considerations, management fees, service charges and ground rent, which Inveztments estimates could amount to about £1,050 yearly, based on the aforementioned example. A £11,600 tax allowance acts as a shield on the annual yield. An excel calculator is available upon request for clients.)

Base-case scenario

More realistically, your yield will work as if the real estate investment were a fixed-income security, one rated almost investment grade, “but yielding more, and your capital appreciation will likely be higher, considering trailing trends”, Tonino pointed out. 

(Source: Trading Economics, UK House Price Index. “House prices in the United Kingdom rose 4.5% year-on-year in the three months to October 2017, following a 4% gain in the previous period, in line with market expectations. It was the steepest increase in house prices since February but still below a peak of 10% recorded in March 2016,” according to Trading Economics. Other data on house price inflation can be found here.)

Let’s try another calculation. Rather than applying a 5% rate to the initial investment, what about a more modest 3% growth rate annually (it’s the magic of compounded interest vs simple interest)? The total amount investors will fetch in year 10 is over £240,500, for a respectable compound annual growth rate (CAGR) of 7.2%, on an all-in basis (capital appreciation plus yield) against roughly 2% previously.  

The above is modelled on the North House (Liverpool) investment, part of Inveztments portfolio, and full details can be found here.

“Yes, that is a good proxy indeed,” Tonino told me.  

(Full details and break-down by geographical areas are available here, with data from 1973 on.)

Irons in the fire 

The team has other irons in the fire, with student accommodation properties also in a sweet spot.  

A smaller investment amount of £60,0000 for a unit will yield 9% annually, and over five years gives you £27,000 in total coupons, which covers almost half of your initial cash outflows on a pre-tax basis. Again, if we apply a 5% rate to the possible appreciation of the capital invested on day one for the entire duration of the investment (and also assuming inflation will likely remain subdued for some time despite all the quantitative easing we have witnessed over the past decade), the numbers look very appetising – and if you apply annual market rates, your CAGR will be just awesome.  

Newcastle-under-Lyme’s Orme House is a top student accommodation development we currently offer, and it’s rather appealing,” Tonino said. 

Of course, a key question concerns the liquidity profile of the investment – and one gauge here is to check the “project turn” based on the total number of projects managed by Inveztments against how long they stay in the market for. in other words, how long it takes for each unit or apartment to be sold since the day it entered the portfolio.  

It is difficult to set this in stone but usually the window of opportunity shuts down after six months, based on the internal data I sighted, which is pretty good.

There is appetite for finished properties as well as new developments, but the ultimate choice depends on your risk profile.  

As a final side note, the latest Budget (November 2017) is likely to be a net-net positive for the industry, as it might boost first-time buyers’ appetite despite certain tax considerations that could harm short-term returns.

Want to discuss further this topic and other investment opportunities in real estate? Please contact our team here.

(This post was written by Alessandro Pasetti. Ale is the founder of Hedging Beta Ltd. He writes about investment strategy and assets valuation for European clients as well as Seeking Alpha. Based in London, he previously worked for about five years at Dow Jones/The Wall Street Journal, producing analysis for the IB community. Prior to that, he contributed to the launch of London-based Loan Radar, where he worked for three years. He had stints in equity research at Bear Stearns in London, HVB in Munich, and Unicredit in Milan. 

It was edited by Gavin van Marle, managing editor of London-based The Loadstar. Gavin is also the author of the book Around the World in Freighty Ways: Adventures in Globalisation. He has won numerous awards, including the Seahorse Journalist of the Year 2011 and 2009, and Supply Chain Journalist of the Year 2010 and 2014. )

 

On The Threshold: Beware Investment Red Herrings Posing As Cash Cows

By Alessandro Pasetti, October 2017.

In late November 2014, when few observers in financial circles predicted that then-prime minister David Cameron would shoot himself in the foot by calling the Brexit referendum fourteen months later, the relative performance of 10-year gilts against the £/€ exchange rate had reached a crossroads. In hindsight, this is quite revealing.

(Source Bloomberg: 10-year UK government debt yield vs. GBP/EUR; open, day range and previous close refer to the 10-year UK government debt yield)  

Unsurprisingly, similar trends occurred in the performance of UK Treasury yields against the £/$ exchange rate, as the chart below shows. 

(Source Bloomberg: 10-year UK government debt yield vs. £/$)  

Why does it matter?

The yield curve prices in several elements, including expectations for inflation, real wage growth, appetite for risk and a slew of other macroeconomic factors that matter a lot to real estate investors, who are typical clients of Inveztments, because they have to decide whether this is a good time to part with their euros to invest in GBP-denominated assets.

While we were right to call the bottom in the £/€ exchange rate recently, the picture remains mixed at a time when the bears are making sure their voices are heard, although certain headlines — HSBC reverses bearish pound view after BOE rate hints — and GDP figures released on 25 October make me feel more comfortable with Sterling’s risk profile.

This five-year cycle shows that debt yields, and therefore bond prices — the two boast a typically inverse correlation — reacted more rapidly and violently to macroeconomic changes than the exchange rate, although inevitably, yield swings have affected the value of Sterling against other major currencies. 

(Source Bloomberg: 10-year UK government debt yield vs. GBP/EUR; open, day range and previous close as well as 52-week range and YTD return all refer to the 10-year UK government debt yield.)  

Of course, this could be considered a guessing game at best, as the two charts below indicate…

(Source: Bloomberg; £/€ exchange rate down 24 October.)

(Source Bloomberg; 10-year UK government debt yield up on 24 October.)

… but the stars could be aligned for those who appreciate the risks involved.

Risks

In short, yields are acting as a floor for Sterling although there remains downside risk for certain risky asset classes, and it is unclear whether the Bank of England will actually hike base rates next month or whether its stated intent to do so in September was simply aimed at providing a short-term fillip to the domestic currency.

This is a delicate balancing act, because so often hawkish monetary policies bring more risk than benefit if they are not followed through by swift action in the short term, while many experts argue the Central Bank doesn’t have enough ammunition to hike rates rapidly in future — which, of course, would be bad news for yields, and, in turn, for Sterling, particularly if the Fed and the European Central Bank become more aggressive.

This approach, it is worth noting, does not take into consideration that lower yields (hence higher bond prices) could be boosted by diminishing appetite for equity risk in the UK, but what appears evident is that the £/€ exchange rate is trying to consolidate around the 1.11/1.13 area, and recent moves in the benchmark 10-year rates suggest that we might have to expect a high degree of volatility going forward.

Last week alone, the 10-year yield rallied strongly on several occasions, such as on 19 October…

(Source: Bloomberg.)

… but its intraday performance sent really mixed signals in the week commencing 16 October (as well as in previous weeks), when investors decided to buy bonds as cover from equity losses, which are clearly linked to exchange rate trends.

(Source: Bloomberg.)

For the time being, I’ll leave my crystal ball to one side, and focus instead on what Inveztments can actually predict: how risky investments, some of which are simply scams, the team deals with on a weekly basis? 

The obvious risk is to invest in a sector where are scams are plentiful 

Billboard advertising risk is apparent, and those dealing in the market where Inveztments operates will undoubtedly have received emails of a such alternative investments that offer “8% fixed yield for the first 2 years and can roll this on for the following 4 years if they wish or alternatively can opt for 2/3 split of revenue.” 

That advert typically continues as follows: “(…) in the next few weeks we will be also be listing a tradable bond and have also have been given a green light in principle from the most credible pension companies for Pension funds and ISA transfers. Despite this I feel the returns would be much higher on the alternative offering.”

Elsewhere, parking investment scams have been under the spotlight for a couple of years — “Pensioners warned over airport car park investment ‘scam’ as police launch investigation” ran the headline in This Is Money at the end of 2015, but these kinds of investments are commonly offered these days.

They have returned with a vengeance in recent times, I have learned from the managing directors of Inveztments — fraudolent schemes are nothing new, but nonetheless some agents seem confused about what they should actually offer to their clients, and many agencies are way too complacent. The key takeaway here is that investing is a risky business, and should be taken seriously: in this regard, Inveztments is pleased to offer two projects that have reached completion, and where the returns clearly outweigh the risks.

Check out now the appealing features of Halifax House in Liverpool and Oakwood House in Sheffield.

Disclosure:  Clients do not pay a penny to the team of Inveztments. The commission is paid by developers who have been painstakingly selected according to very strict criteria, and trust plays a key role from the early negotiations to the final closing of the deal.

(This post was written by Alessandro Pasetti. Ale is the founder of Hedging Beta Ltd. He writes about investment strategy and assets valuation for European clients as well as Seeking Alpha. Based in London, he previously worked for about five years at Dow Jones/The Wall Street Journal, producing analysis for the IB community. Prior to that, he contributed to the launch of London-based Loan Radar, where he worked for three years. He had stints in equity research at Bear Stearns in London, HVB in Munich, and Unicredit in Milan.

It was edited by Gavin van Marle, managing editor of London-based The Loadstar. Gavin is also the author of the book Around the World in Freighty Ways: Adventures in Globalisation. He has won numerous awards, including the Seahorse Journalist of the Year 2011 and 2009, and Supply Chain Journalist of the Year 2010 and 2014. )

On The Threshold: You Think Real Estate Is Risky? Try Being A Bitcoin Investor

By Alessandro Pasetti, October 2017.

The recent rise, fall and then rise again of Bitcoin testifies to fast-changing dynamics for risk appetite these days, and has a lot to do with the performance of several other asset classes, including real estate investment. 

(Source: MarketWatch, 14 October 2017)

While retail investors continue to bombard the Inveztments team with calls and emails arguing that “the real estate sector in the UK is one of the riskiest assets” around, I am pleased to share some charts that show otherwise, depending on your ideal level of risk when it comes to deploying your hard-earned savings in the British property market.  

Goldrush 

For a starter, the chart of Bitcoin – whose underlying blockchain technology, regardless of whether Bitcoin is in a bubble or not, is poised to revolutionise the way we do business in so many industries – is shown in the table below (as at 11 October, when it traded at a much lower level than only two days later). 

(Source: MarketWatch) 

The kind of volatility embedded in its price is almost unheard of in traditional asset classes of the past decade — this is a good example of a risky and speculative trade, as proved by recent events: “Bitcoin bounces 20 percent after dipping below $3,000” Reuters wrote last month.

“The digital currency’s price had fallen to as little as $3,434.78 at the time of report, according to the CoinDesk Bitcoin Price Index (BPI),” Forbes also wrote in mid-September.

(Source: Forbes)

It added: “This represented a more than 30% decline from the all-time high of more than $5,000, and the lowest price since August 11, additional BPI figures show.”

It is my view that retail investors should leave Bitcoin to the pros, and aim only for calculated risks elsewhere — and real estate could well be the answer. While the team of Inveztments pushes to get the message across — current conditions in the real estate market and new developments in the UK are sound! — the bears continue to point to ominous signs on their way.  Yet the following charts contained in this article suggest the doomsayers should give us all a break until early next year, at the very least. 

Charting real estate

The first signs that the real estate market is much more solid than several observers and readers have suggested, is reflected both in the share prices and fundamentals of two UK-centric powerhouses such as Rightmove (£3.7bn market cap) and Zoopla (£1.7bn market cap), which have made their fortunes on the UK property market.

The former — which has an operating margin of 74%, is debt-free, and boasts an extremely conservative payout ratio, with a forward yield of 1.4% — has seen its share price appreciate by 16.6% since Brexit, as the chart below shows…

(Source: Yahoo Finance)

… while the latter — with a 35% operating margin, little debt, and a solid payout ratio, which implies a forward yield of 1.6% — has fared even better, with its share performance pointing to capital appreciation in the region of 38% in less than 16 months.  

(Source: Bloomberg)

In all this, their trading multiples based on earnings and cash flows are not incredibly rich, given the projected growth rates of both, and offer some reassurance that disaster is unlikely to be around the corner.

Clearly, the world is not going to end for either tomorrow.

Now let’s look at the stock performances of the main homebuilders in the UK.  

Star performers

Their shares have defied the law of gravity and have contributed to cement shareholder value after the inevitable panic brought by Brexit last summer. Ever since, Persimmon has not been exactly an under-performer (+84%!) in a rising market boosted weakness in the British pound, among other things, as the chart below shows…

(Source: Yahoo Finance)

…while if you had invested £1 in Berkeley stock you’d have now pocketed £1.47, for a whopping pre-tax return of 47%, which excludes the additional 5% yield from dividends.

(Source: Yahoo Finance)

Finally, even Barratt Developments, which is heavily exposed to the slowing London market – which is being outperformed by other cities and towns where we have skin in the game —  has been on a roll, with its stock up 79% since Brexit. 

(Source: Yahoo Finance)

Where is the bubble, then?  

While it is possible that profit-taking will put some pressure on these stocks, the homebuilders’ fundamentals are rock-solid — they have been so for many years — and surely those invested in Bitcoin, in my view, have more to fear, although the underlying technology backing it is surely poised to make strides in many sectors.  

On this note, “Blockchain is going to affect almost every industry as it renders intermediaries obsolete,” Forbes wrote earlier this summer, adding the real estate market is not immune, while others have labelled Blockchain as “the new face of real estate”.

Technology changes should not be confused with risk associated to different asset classes, of course, and could help identify scams, which are bubbling up, in the marketplace.

In fact, there remain many projects and investment propositions — spanning carbon credit trading, binary options as well as agricultural, billboard and parking investments — that the Inveztments Team refuses to promote, despite being offered them on a weekly basis.

To learn more  about this and other topics, as well as our portfolio of projects, please contact us here.

Disclosure:  Clients do not pay a penny to the team of Inveztments. The commission is paid by developers who have been painstakingly selected according to very strict criteria, and trust plays a key role from the early negotiations to the final closing of the deal.

(This post was written by Alessandro Pasetti. Ale is the founder of Hedging Beta Ltd. He writes about investment strategy and assets valuation for European clients as well as Seeking Alpha. Based in London, he previously worked for about five years at Dow Jones/The Wall Street Journal, producing analysis for the IB community. Prior to that, he contributed to the launch of London-based Loan Radar, where he worked for three years. He had stints in equity research at Bear Stearns in London, HVB in Munich, and Unicredit in Milan.

It was edited by Gavin van Marle, managing editor of London-based The Loadstar. Gavin is also the author of the book Around the World in Freighty Ways: Adventures in Globalisation. He has won numerous awards, including the Seahorse Journalist of the Year 2011 and 2009, and Supply Chain Journalist of the Year 2010 and 2014. )

On The Threshold: Property Hunters -- Time For Currency Arbitrage?

By Alessandro Pasetti, 6 August. 

One of the most challenging questions we usually receive from continental European real estate investors looking for solid property deals in the UK is when is the best time to be opportunistic and opt for currency arbitrage, borrowing in euros to invest in Sterling-denominated assets.

Take our promising portfolio of projects in the UK, for example: it is a bet on outstanding yield prospects as well as a rising GBP/EUR exchange rate, which currently hovers around multi-year lows of 1.11.  

Weakness 

The euro has appreciated swiftly since Brexit, “but quite frankly, I am not ready yet to bet on the British pound”, is one comment we heard recently, which sums up the mood of several bearish investors in Europe.  

However, it is worth considering that the correction of the British pound is not just a reaction to Brexit. It also has a lot to do with monetary policies in the UK as well as in the rest of the Western world since mid-2015, when it became apparent that the Bank of England would not follow the Federal Reserve in hiking interest rates from historical lows.

As a result, the domestic currency has struggled since last summer both against the greenback and the euro, but could that now change?

Mean 

Recent weakness in the GBP/EUR is understandable: the outcome of Brexit weighs on the exchange rate, and investors looking to bottom-fish for a bargain would do well to keep a close eye on British assets, and not just properties.  

Why so? 

The charts below are self-explanatory when it comes to gauging downside risk from these levels… 

(Source: Yahoo Finance UK)

(Source: Yahoo Finance UK)

… testifying to the opportunity of investing in GBP-denominated assets.  

Capital appreciation

This is a very simple approach, but if the British pound reverts to mean based on one-year trends, capital appreciation for those long the GBP/EUR exchange rate would be over 3%; and given its five-year trajectory, it could be almost 15% from these levels.  

Remarkably, the latest downgrade by the International Monetary Fund — which at the end of July lowered its GDP growth forecast for the UK from 2% to 1.7% based on “weaker-than-expected activity” — had no impact at all on the exchange rate in the immediate aftermath of the announcement, which means the currency is mainly influenced by political and inflation risks these days, rather than shaky fundamentals.

Source: Trading Economics

Bulls & Bears 

Equally important as understanding why the British pound is so low is acknowledging that there is no consensus around its future performance — analysts and economists are divided between bulls who argue the slump is almost over, while the bears insist GBP/EUR parity is on its way.  

It would seem that the one certainty is further confusion with headlines such as “super-Thursday key to trade against the euro and US dollar”, reflecting how divided opinion is amongst analysts and traders.  

While sentiment is likely to determine volatile currency trades through to 2018 and beyond, household indebtedness in the UK combined with the inflationary forces that have harmed confidence justify risk taking on the British pound, in my view, although the gap between growth in wages and property prices remains one variable to watch 

Of course, currency risk is just one side of the coin for those looking to invest in the British real estate market — many investors are also worried about tax hikes and the risk posed by little capital appreciation over the medium term, which will be discussed in a follow-up column, although it is worth considering that more aggressive monetary policies could surprise the bears as early as next year, particularly if core inflation remains under control and “hard Brexit” fears fade away.

(This post was written by Alessandro Pasetti. Ale is the founder of Hedging Beta Ltd. He writes about investment strategy and assets valuation for European clients as well as Seeking Alpha. Based in London, he previously worked for about five years at Dow Jones/The Wall Street Journal, producing analysis for the IB community. Prior to that, he contributed to the launch of London-based Loan Radar, where he worked for three years. He had stints in equity research at Bear Stearns in London, HVB in Munich, and Unicredit in Milan.

It was edited by Gavin van Marle, managing editor of London-based The Loadstar. Gavin is also the author of the book Around the World in Freighty Ways: Adventures in Globalisation. He has won numerous awards, including the Seahorse Journalist of the Year 2011 and 2009, and Supply Chain Journalist of the Year 2010 and 2014. )