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C

Posts for due-diligence



On The Threshold: Where is the UK property market heading in 2019?

By Alessandro Pasetti, 21 December

2019 is just around the corner, and there are signs it could be another decent year in terms of capital appreciation for real estate in Britain, if you listen to the experts, who in recent weeks have downplayed political and economic uncertainty in terms of growth prospects. The mid-term outlook remains encouraging, based on several projections.

According to market specialist Savills, house prices in the UK are set to rise broadly in line with income power over the next five years, “but the traditional north-south divide will turn on its head”, as one should expect. Between 2019 and 2023, prices are projected to rise by 14.8% across the country, ranging from 21.6% in the North West to single digit growth in London, the South and East.

These forecasts are consistent with data from Zoopla, which says that despite Brexit-related uncertainty, “Brits are staying positive when it comes to property” – with 55% expecting house prices to rise in the next 12 to 18 months. According to its State of the Property Nation report, consumer confidence in house prices is up from 44% in 2016, with most people expecting single digit price rises, although real estate agents are more cautious.

Meanwhile, Stephanie McMahon, head of research at Strutt & Parker, recently talked of “forecast for UK growth at 2.5% for 2019 – with the 5-year forecast from 2018 to 2022 standing at 18%.”

Total transactions for England and Wales in 2018 were flat, and similar trends are likely to persist next year, according to McMahon, with the number of registered buyers and viewing numbers gradually up, although Prime Central London is a rather different matter, with volumes continuing to be low by historic standards. As far as the number of transactions is concerned, a fall of “6.9% since the Brexit vote to 1.145 million” has been recorded so far, according to data from Savills, which says it demonstrates the resilience of the UK housing market.

A mild 1% drop to 2023 is now expected – in this respect, some useful data can be found here.

In big cities where Inveztments is heavily involved in new development projects, such as Manchester and Liverpool, trends remain structurally favourable on several fronts – for more evidence, please click here. Of course, some underlying data is mixed on a monthly basis across the country, but seasonality often renders very short-term trends highly volatile and less reliable than others.

Research published by PriceWaterhouseCoopers this year noted that under a base-case scenario, a further softening of house price growth to around 3% in 2018 was expected to continue at a similar average rate to 2025. This implies that the average UK house price would rise from £221,000 in 2017 to around £285,000 by 2025.

“Price growth at this pace would mean that the ratio of house prices to earnings would remain broadly stable, but still at high levels by historical standards,” it added.

As The Irish Times wrote, most property experts predict steady but unspectacular property growth in 2019, as lending rules and higher stock levels help slow house price inflation. Sherry FitzGerald chief economist Marian Finnegan argued that transaction activity improved marginally during 2018; however, “this expansion has been driven almost entirely by the new homes market”.

“The latest data from the Residential Property Price Register reveals that about 23,300 single transactions were recorded during the first half of 2018,” she said, adding “this represents a 5% increase on the same period in 2017.

“Notably, almost 4,300 new homes transacted in the first six months of the year, a 31% increase year-on-year. Sales activity in the established or second-hand market was much more subdued, with about 19,000 sales representing just a 1% rise.”

Action… and Happy Holidays!

We remind you that the flagship projects managed by the team of Inveztments – click here, here and here – have received a strong response from the market, and we would be glad to help you find the property investment that suits your risk/reward profile.

We wish you and your loved ones happy New Year and a fantastic holiday season!

(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: To Infinity and beyond...

By Alessandro Pasetti, 21 October.

The team of Inveztments has often warned real estate investors about the intrinsically volatile nature of financial markets and related asset classes such as equities, bonds and currencies. However, if you are on risk-off mode and sniffing opportunities that put funds to work, we might have something right for you: three property development gems – Infinity Waters, The Baltic 56 and Opto Student – could be ideal choices in a UK environment where several speculative investments are under significant pressure.

Landscape

Before moving to the most attractive projects marketed by Inveztments, here are a few examples of what it means to be invested in riskier assets in the UK and elsewhere nowadays.

Volatility, which has normalised in the low teens for a long time now, has recently surged to the 20s. It is still relatively low by historic standards, but nervousness is building among financial investors.

(Source Yahoo Finance)

Meanwhile, Gilt yields have risen significantly (similar trends, for different reasons, apply to benchmark interest rates in most developed economies), hence bond values have fallen.

Domestically, more pain is likely in the fixed-income market as the Bank of England prepares for another hike early next year, although when the second base rate rise since 2008 was announced in early August – thanks to a strong labour market and credit growth –the potential benefits, which should have boosted Sterling, were completely offset by bearish sentiment. Essentially, the move was already priced-in, and the pound failed to surge after mildly hawkish monetary policies were implemented, affected by fears of a no-deal Brexit.

(Source: Bloomberg)

Unsurprisingly, small caps were hammered, while the FTSE 100 also suffered, given pressure on bonds, Brexit uncertainty and a bounce in Sterling, although macroeconomic data was still acceptable.

(Source: Yahoo Finance)

(Source Yahoo Finance)

(Note for the reader: the situation has been even worse for many Italian clients who are long on financial assets in their domestic market, as equities slumped lately and large paper losses were recorded by those who have invested in bonds, given fast-rising spreads and yields.)

Our proposition

Infinity Waters tops the list: this is a residential property development located in the highly desirable Liverpool Waterfront, a prime area, which is benefiting from over £5bn worth of investment. The development is well positioned to appeal to the city’s thriving rental market, and demand from investors has been solid so far.

“We have dealt with several projects and developers over the years, and Infinity stands out on both counts,” Tonino Montesanti says. “It was well received, and we expect more interest ahead of closing.”

One year ahead of completion, the required disbursement is below the £100,000 threshold, with a steady 7% yield for three years.

If you are not familiar with Liverpool, and you want to find out what is truly unique about this flagship UK city and its amenities, please click here and here. World-class facilities are an obvious attraction, as well as the changing skyline: “the three towers will soar 27, 33 and 39 storeys high, with the tallest emerging as one of the city’s highest residential buildings,” the marketing material says.

If the cherry on the cake of residential development market is Infinity Waters, The Baltic 56, in the student accommodation segment, is the cream filling.

The initial cash outlay is significantly lower, given that the project offers self-contained studios – some of the largest available in the local market – from only £77,950 per unit, as well as a slightly higher yield for a longer period of time than Infinity; and, notably, a rather quick delivery for investors who cannot wait to deploy capital (click here for the full details).

Finally, in the student niche one of the flagship projects is Opto Student, based in Newcastle, whose strategic location and features are highlighted in the picture below. Perfectly positioned to cater to the rising demand for purpose-built student accommodation in the city, it is only slightly more expensive than The Baltic 56.

Give us a call or contact our team here if you have any queries.

(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: Is social housing the biggest threat to landlord earnings?

By Alessandro Pasetti, 16 August 2018 

As the Inveztments team continues to look at ways to help landlords monetise their properties in order to boost rental income streams, there remains plenty of risk for traditional landlords who choose the monthly cash while adding little value to their tenants – and at the same time the number of people who believe the property market is out of control is growing by the day.
So, what has been said in the marketplace, especially given that the BBC writes that giving tenants “greater support so they can hold their landlords to account is being considered as part of government proposals on social housing in England”?

Sanity

“The tide is turning, and voters are ready for sanity to return to the housing market,” The Telegraph reported earlier this month.

Elsewhere, in a story published by The Guardian last week, one author argued that “UK rents do not have to rocket”, noting that every element “of this (housing) system is set up to screw the average renter” – the British housing system “is the product of political choices that have lined the pockets of landlords at the expense of everyone else”.  

The article highlights the growing support for a renters’ union, while adding that “Britain’s landlords already collectivise: they have a body called the National Landlords Association (NLA), which proudly announces on its website that part of its work is lobbying the government”.  

Serious matters

Obviously, the NLA talks of rent control as being the greatest enemy of the private rental sector, although, as The Guardian author reported, “part of the reason your rent is so expensive is because the NLA has been lobbying the government so that it doesn’t adopt policies that might make it cheaper”. 

Poor landlords: what else should they do?

To start with, lobbying need not be a bad word. It is part of any viable business where politics and economics are so intertwined.

Moreover, the opinion piece ran by The Guardian completely overlooks the fact that demand – of which there’s plenty in the UK and London, and where INVEZ has a few irons in the fire – clearly outpaces supply for house purchases and rents. Equally, social housing is a good idea in theory but needs careful consideration (“A history of social housing” is worth a read if you are not familiar with the topic).

John Boughton

In an interview with Forbes earlier this year, social housing expert John Boughton, took a detailed look at the issue and concluded it is one of the biggest threat to landlords’ pricing power, given how seriously it could affect demand/supply dynamics.

The author of Municipal Dreams – defined by The Guardian as “an important and timely book, in the wake of Grenfell Tower, which emphasises how public investment enriches lives” – said that the housing crisis, particularly in the overheated markets of London and the South-East, consists of two elements, which we have extensively covered on this platform: “the lack of new homes being built to house a growing number of UK households”; and “the expense (whether for purchase or rent) of the homes we do have”. 

While there’s no real sign of a housing bubble, let alone a crisis, anywhere in London, the housing trade has become tougher, and about 250,000 new homes nationally need to be built annually to meet demand.

“Historically, that figure has only been met when council housing (as it then was) formed a vital part of the mix – at around 100,000 homes a year,” Mr Boughton noted. 

Rising risks

While the bears suggest all sorts of problems for landlords, recent reports still point to values spiking “across St John’s Wood and Regent’s Park as overseas families increasingly opt for luxury developments over five-star hotels for their summer sojourns.”

But should landlords fear a social housing resurgence?

Forbes has a point when it says that the creation of social or council housing interacted positively with economic growth, but I dispute the idea that its absence could harm the conditions for social and economic dynamism in the UK.

“The National Housing Federation, which represents the country’s social housing providers, estimates that every new social home built generates an additional £108,000 to the economy and creates 2.3 jobs.  In a post-Brexit world, this is money and employment directly benefiting the domestic economy,” Mr Boughton concluded.

Estimates are often misleading and could be debated – and then, how about unintended consequences?

One caveat, I reckon, is how Britain, and London in particular, wants to be perceived by the rest of world in the wake of the Brexit deal. Would the capital benefit from heavy investment in social housing? I simply don’t know, but there are obvious risks for landlords if investment in social housing becomes heavier, and it is hard to quantify the real benefits for the local economies.

Either way, what is apparent is that landlords, particularly in London, remain in the driving seat.

Data

According Knight Frank’s latest data, annual rental value growth was 1.1% in June, and this was the second successive month of growth following a 28-month run of declines.

(Source: Knight Frank)

The numbers I quoted in my latest post, which do not include social housing data, already pictured solid trends and a healthy outlook, so UK rents might actually be set to rocket.

The Guardian wrote in early 2014 that housing had “become the defining economic issue of our times“, and while from a social perspective the British newspaper raises some valid questions, look at the chart below (and enjoy it if you have skin in the housing game):

(Source: Trading Economics)

Then, look at this week’s headlines from the macroeconomic front.

(Source: BBC)

Finally, regardless of what the British press writes daily, there remain relatively cheap places to rent in London…

(Source: Metro.co.uk)

… as well as very expensive opportunities, which are shown in the table below, for wealthy tenants.

(Source: Metro.co.uk)

Bad landlords exist, but even if the bears are right, the bad times could be just a nuisance – that is surely the case if the right remedies are applied with the help of the Inveztments team.

Are you a landlord?

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, 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: Choosing stock markets over housing stocks makes investors laughing stocks

By Alessandro Pasetti, 16 July 2018.

It is a sign of the changing times: young people after a fast buck rather than wisely allocating their savings to traditional investments, such as property, are very much in vogue these days.  

(Source: Quotesville.net)

The Financial Times recently wrote that, according to market research, “three-quarters of British millennials would rather put their money in shares, bonds or bitcoin than property”. 

(Source: careerplanner.com)

That’s right: shares, bonds and bitcoin. 

Risks 

Trying to cherry-pick high-yielding investments is not for everyone.

It can be exhausting when it comes to equity and bond selection. And that is before one has factored in currency behaviour, from which, historically, is virtually impossible to draw any reliable prediction or conclusion, particularly on a relative performance basis against stocks, bonds and commodities.

(Source: This is Money UK)

If you go after equity risk, passive investing is a possible way forward, although there are benefits and risks worth considering, even more so now because several bond and stock markets around the world look fully priced, given interest rates, as well as other risks.

US stock market

Not only are these risky and, in many cases complex, assets but they also require a huge amount of time, skills, research, resources and knowledge. Because investing is all about doing the proper due diligence, as the Inveztments team advocates.

But let’s assume you remain unconvinced, and you really want to invest in the equity markets.

Let’s take a look at US stocks, which traditionally are the most liquid and hence one of the safest asset in terms of exit risk, worldwide. 

Below it’s the index’s performance since the current bull market began at the end of the first quarter 2009.

(Source: Yahoo Finance)

Here’s where we stand now, after testing an all-time high in January.

(Source: Yahoo Finance)

Throw in wild sings in volatility (VIX)…

(Source: Yahoo Finance)

… and while, in absolute terms, we must acknowledge a low-VIX environment, interest rates risk surely complicates things for capital appreciation and dividend growth prospects.

(Source: Yahoo Finance)

Isn’t this, too, one of the longest bull runs in the past 100 years of history?

(Source: CNBC)

Please also consider one key correlation that over the years has been mostly accurate in sending warning signs about what could be next for stocks.

DJIA + DJTA 

Never heard of them?

Throw into the mix the two US indexes, and the weakness of the DJTA could be scary, at least for those familiar with the basic concepts formulated in the Dow Theory.

(Source: Yahoo Finance)

For UK investors willing to bet on the FTSE 100 rather than property, one obvious risk stems from the currency, given that a weaker pound in the past year or so has boosted the index – but will this weakness last forever?

(Source: Yahoo Finance)

I doubt it, based on several macroeconomic indicators.

But think of equity risk as a value investor, and consider British American Tobacco (BATS). I recently talked to some very skilled investors, and many of them agreed that based on a number of factors, BATS (which offers a juicy forward yield of 5%, and which is typically defensive) was good value indeed between £40 and £45, after a large drop from its highs.

The fall of the gods: look at where it trades now.

(Source: Yahoo Finance)

Bad things can happen with equities, particularly over the short term, and you need to develop the best investment strategy that suits your risk profile to limit the losses.

Again, this is almost a full-time job also because, more broadly,  you must be familiar with other concepts: fundamentals (this involves reading financial statements to death) and trading multiples.

Trading multiples must often be adjusted based on core underling earnings and cash flows, and not even the easiest ratio of all (revenue/enterprise value per share) is reliable if you do not break down the growth rate between organic and inorganic sales, while volume/price mix considerations also affect what could be considered any reliable sales numbers.

Then there are also balance sheet considerations, mainly involving the seniority of different securities in the capital structure of any company. If you end up there, you should be familiar with a slew of technical concepts both concerning debt and equity capital which always affect the earnings power of a corporation of which you plan to become a shareholder and/or a bondholder.

Finally, there is also accounting risk, as many companies are used to hiding away as much as they can from their books.

Bonds  

You think the bond market is safer?

Managing This ETF Is Like Solving a $55 Billion Rubik’s Cube” Bloomberg wrote earlier this year.

In the early days of interest rates hikes in the US, more solid bonds rose thanks to the “Trump put” but since topping out two years ago, capital appreciation opportunities have been rare, and have been only for the brave institutional traders, given yield trends.

(Source: Yahoo Finance)

Say you want to be selective and search for additional yield (more risk, essentially, based on a lower credit rating), and you are keen to trade the yield curve of Italy’s debt. Look at what could have happened to your savings if you had bought the long end of the curve at the top of the market in recent years – you’d be down about 25%.

(Source: Borsa Italiana)

In all these risk/reward considerations, investors should keep in mind the typically inverse correlation between prices and yields, which is not often immediately obvious to beginners.

Moreover, sovereign credit risk (pictured below), geopolitical risk and monetary risk all blend into fixed-income securities, which seldom behave erratically.

(Source: Trading Economics)

However, given low rates, bond price trends in the past few years have been less predictable. And now, in a rising rates environment, where the European Central Bank could become more hawkish as early as next year, capital gain opportunities appear more limited.

Currency risk is there, too, for investors looking to bet on the Pound, but as we have said at times on this platform, the £/€ exchange rate trades well below mean. So, while some downside is possible, the upside potential is much greater.

Finally, to know more about Bitcoin and the risks surrounding its investment profile, we invite you to read our previous coverage here: good luck if you are invested at over $10,000 apiece.

Conclusion 

We have often highlighted the risk/reward profile of the UK property market, and we remain adamant this is a far superior asset class for investors who do not have the time to chase financial market developments. After all, the intricacies of diverse assets classes… are they worth the pain?

Alan Collett, chairman and fund manager of Hearthstone Investments, summed it up pretty well recently, as we pointed out last week on the wall of Inveztments.com Italia.

Residential property offers an important diversification opportunity for both capital and income risk. As an asset class, residential property shows low correlation with UK equities, fixed interest and cash over the medium to long term, through a combination of lower volatility and different underlying drivers – and also provides a diversified stream of income compared with traditional sources such as bonds or dividends.”

I could have not said it better.

(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: UK housing stats - fake news vs hard data

By Alessandro Pasetti, 30 June 2018.

Ever heard of ‘housing starts’? 
As defined by Investopedia, this key economic indicator (which is roaring in the US) of the property market represents the number of new residential construction projects that have begun during a particular month. It is a simple concept, and the related mid/long-term trends confirm that while the press continues to make a big fuss about supply of new houses in the UK, there are several trends that warrant further investigation.

Recently there have been a series of reports on growing supply in the housing market based on the first policy paper launched by Neil O’Brien’s new think tank, Onward.

Fake or lagging news?

Now, there is some news we have to take seriously, and other news that is just part of the daily nuisance of separating fake reports and market noise from importation information that could trigger investors’ action. 

In this post I flag different angles concerning housing supply in the UK, which we briefly anticipated as being a critical element in our mid-June coverage, when we noted that we were at a crossroads as recent data showed that the number of houses coming on to the market was showing signs of positive growth for first time in more than two years.

Thanks to Neil O’Brien, the press got really excited in the past week, but what should you make of his remarks and the real estate outlook?

As with all sell-side research and recommendations on price targets for stock, I suggest you pay attention to the supply data and its composition, which is the most critical value-driver for investors who are looking to deploy capital in the UK property market.  

Data 

I seldom read The Sun, but hot on the heels of the political and social debate surrounding supply dynamics, I found some valuable stats in its coverage on 24 June, headlined: “A million new houses should be built just for workers under 40, which sums up the landscape”.

These are the important bits:

-> The number owning their own home in Britain has plunged in the last fifteen years, from 71% to 63%.

-> Soaring prices have seen younger people hit the hardest, with the number of 16-34 year-olds on the property ladder dropping from a half to a third. 

-> Once known as the nation of homeowners, Britain is now fourth from bottom in a list of the 28 EU member states’ rates of homeownership. 

-> In 10 of them, the rate is more than 80% home ownership.

25 June: All hell breaks loose

One day later, The Guardian noted that a report written by Neil O’Brien, a former aide to George Osborne who also worked for Theresa May at No 10, “calls for government intervention in the housing market, including giving London councils the power to limit foreign ownership”. 

Wishful thinking?

Well, perhaps, given the UK’s dependence on foreign capital (net FDI has swiftly fallen, and, similarly construction output is down), but the interesting bit for investors looking to buy is that the UK is “one of the cheapest countries for investors involved in residential rental investments”.

Emphasising the link between shortage of supply and rising house prices, the report offered radical – rather than realistic? – ideas in order to boost the number of new homes in the country. 

On the same day, the UK government published a report in which it argued that a review of house building “has called for changes to the current system to ensure new homes are built faster”.

 

By the way, lots of interesting data and charts can be found here. The study, published on 25 June 2018, warns “developers are slowing the system down by limiting the number of new built homes that are released for sale at any one time”. 

The practice, clearly, is designed to prevent a glut of new built homes driving down prices in the local market and is known as the ‘absorption rate’. However, the report also suggests that developers could increase the choice of design, size and tenure of new homes without impacting the local market and therefore speed up the rate at which houses are built and sold, concluding that “to obtain more rapid building out of the largest sites we need more variety within those sites”. 

The analysis also says that a shortage of British bricklayers will have a “significant biting constraint” on government plans to boost the number of new homes built from 220,000 a year to 300,000. 

Landlord News pointed out that increased property prices are preventing the equivalent of 1.4m last-time buyers from downsizing, in addition to a lack of appropriate housing stock.

 

Finally, The Financial Times argued that the radical proposal comes as the conservative think-tank seeks an end of the buy-to-let tax break, while noting other relevant trends for real estate investors. Separately on Monday last week, the FT noted that former minister Oliver Letwin published a draft report on developers’ “buildout” rates, after the government commissioned a study into ways to speed up housebuilding.  

“Sir Oliver found developers are limiting the number of new homes released for sale at any one time to prevent a glut from driving down prices in the local market. The report also warned that a shortage of British bricklayers will have a “significant biting constraint” on the government’s plans (to build 300,000 homes a year), and called for an extra 15,000 bricklayers to be trained during the next five years.”

Should this debate surprise us at all?

And what relevant trends are visible in a market where more houses are surely needed?

Valuable charts

According to Trading Economics, housing starts in the UK decreased to 35,590 in the fourth quarter of 2017 from 41,820 in the third quarter of 2017, having averaged 38,274.69 from 1978 until 2017, reaching an all-time high of 69,520 in the second quarter of 1978 and a record low of 16,420 in the fourth quarter of 2008.

Look at the charts below from Trading Economics.

Aside from the latest drop, shown in the chart above, this could be just a simple adjustment, based on long-term trends. Housing starts have risen steeply since the credit crunch in 2008…

… and are now trending around mean.

Need we say more? Lots of noise and shouty headlines but, very possibly, little that we actually need to pay attention to.

Good luck with your investments!

(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: London's buy-to-let market may not be the capital risk you think

By Alessandro Pasetti, 18 June 2018.

Tax, funding and regulatory constraints, in addition to the ubiquitous Brexit risk, have all been flagged as major hurdles for Britain’s buy-to-let market ‘over the past year, with some experts turning even more bearish since the turn of 2018.

Yet many observers have overlooked different sources of funding that can be deployed in a real estate market where buy-to-let could continue to flourish for years. Additionally, other structural and behavioural changes could combine to lessen prospects of the worst-case scenarios for the buy-to-let market.  

Landscape 

As with every investment, real estate is not immune to exogenous shocks, but many risks can be mitigated. Indeed, a strong rental market, one of the engines of growth for buy-to-let appetite, supports a bull case in which cash-rich buy-to-let investors should not be overly concerned about future events, although they might have to compromise on yields prospects.

Certain systemic risks associated to financial assets in the UK are more manageable than elsewhere in Europe – check out the latest swings in the value of financial assets in Italy, for example, driven by political uncertainty. Moreover, domestic real estate investments continue to be an opportunity for investors who are selective in their purchases. However, the sector must also be treated with care – trends in some London suburbs are a case in point, although there are signs a bottom for houses prices might be forming in some areas.

That said, the latest set of data concerning domestic housing rental prices was unequivocal – growth rates are still strong.

According to data released last week by the Office for National Statistics, “focusing on the English regions, the largest annual rental price increase was in the East Midlands (2.9%), up from 2.8% in April 2018. This was followed by the South West (2.0%), down from 2.1% in April 2018 and the East of England (2.0%), up from 1.8% in April 2018”. 

(Source: ONS)

(Source: ONS)

Only London is in “negative territory”, but even in the capital there are pockets of value, as we recently argued.

Bring into the mix house price trends over the long term and, frankly, the UK remains in a sweet spot against virtually all of its major European rivals (Germany, click here; France, here; Italy, here; Spain, here).  

Structural shift  

What’s also worth considering is that a structural shift is underway in the marketplace which plays in favour of buy-to-let investors.  As The Guardian wrote earlier this year, UK tenants paid a record £50bn in rent last year.

Look at the narrowing mortgage bill/rent bill spread in the UK.   

The British newspaper, which has historically closely followed the developments of the domestic property market – and, in my opinion, is a pretty good source in terms of accuracy – added:

 “Rents have doubled in a decade and could eclipse the entire sum paid for mortgages by homeowners.”

It noted that these figures “reveal the dramatic reshaping of the property market in recent years as home ownership levels have gone into reverse”. That has a lot to do with stricter capital ratios for lenders, but it’s not necessarily a bad thing. 

On the one hand, it could mean higher yields and lower capital appreciation prospects (or just the opposite), but on the other, capital appreciation itself could be preserved by the imbalance between supply and demand, so the impact here should be minimal. Different logic applies to different areas in a sector that mostly remains a buyer’s market across the key areas/segments covered by Inveztments.

Notably, as far supply/demand dynamics are concerned, we are at a crossroads, with recent data showing that the number of homes “coming on to the housing market is showing signs of positive growth for first time in more than two years”. 

Cash is king 

Talking of quality, I came across research published by Hamptons International (labelled “What next for buy-to-let?“) that is truly compelling. 

It may well be that the London-based estate and letting agent was talking up its own book, but hard evidence lends credence to some of the many nuggets of information contained in it.  

Firstly, it points out that despite changes in government policy, the private rental sector will continue to grow, and it “estimates there will be six million households renting by 2025.” 

Secondly, look at the chart below: cash owners are in the driving seat.  

Not only are they the largest of any tenure group, but also “their numbers have increased for 23 out of the last 25 years”. 

This research offers a balanced view about what it is going on in the background. 

Of course, in recent years the market has become less favourable for new landlords chasing yield, but we already knew that.

“Since 2013 house prices have consistently risen faster than rents, squeezing landlords’ yields on new purchases. The average investor buying in 2018 starts off with a rental return 0.6% lower than if they had bought in 2013,” Hamptons argues.

Yet behind the figures describing the ‘average landlord’, there are many investors outperforming their peers. This doesn’t just mean landlords are heading North for lower prices and hence higher yields – although many do. Even within a local authority the 10% of landlords achieving the highest yields earn 4.1% more than the average landlord in the same place. Conversely the 10% of landlords earning the lowest yields get 2.3% less than average, or £3,900 a year less in rental income.  

A landlord’s yield is the product of both market rents and house prices in an area.” (emphasis is mine)

Crucially, this is Inveztments‘ core business: working on your behalf to find hidden gems is not only a mission, but a way of living for its founders.

Finally, here’s one last piece of advice.

“Strong house price growth has shrunk yields for new buyers, especially in the South, but buying wisely brings benefits. Average yields in London are 5.4% compared with 7.9% in the North West, yet 20% of London landlords achieve higher yields than their North West counterparts.”

(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. )

 

Inveztments On The Road: The Spotlight On Water Street

It is a good time to be on the hunt for a deal in the British real estate market.

Earlier this month ABC Money wrote that “although many UK investors have been straight onto the student property trend, investors from overseas are no strangers to this flourishing market that owes itself to the solid foundations of the UK’s higher education system. With most student properties fully-managed by local agencies, investors can commit to a venture in the student sector from the comfort of their home country.”

There are similar trends in the residential segment of the real estate market, and there are plenty of reasons why Liverpool, in particular, continues to attract new investment. In short, its property market stands out as one of the most alluring spots in the UK, given the yield and capital appreciation it offers.

On the road

Tonino Montesanti, managing director of Inveztments, has been on the road with clients to show them what it really means to invest in one of the most dynamic economic hubs in the UK.

In the following videos you’ll learn more about two flagship projects that were recently sold out — Sir Thomas (student and residential) and Reliance House (residential).

As far as another key development is concerned, 8 Water Street, books are now closed for phase one, but the good news is phase two is about to launch — click here and contact the team to learn more.

(Our British clients and readers are kindly asked to click on “cc” in the appropriate section of each video and select “English” in order to be able to upload the subtitles before clicking “play”.)

Sir Thomas from the outside
Sir Thomas: Interiors and common areas (1 of 2)
Sir Thomas: Interiors and common areas (2 of 2)
Sir Thomas: Heading to the rooms…
Sir Thomas: Here’s what you are buying 
Next stop: 8 Water Street
8 Water Street: More details
Reliance House: Sold Out, up over 10% in value in just one year 
More about the surroundings…
… and, finally, from the Three Graces to Albert Dock.

 

Why wait to make your next investment?

Hit the road with Tonino or contact the team of Inveztments to discuss the prospects of their flagship projects!

Inveztments On The Road: Liverpool Beckons

By The Editorial Team, 29 March 2018.

Tonino Montesanti, managing director of Inveztments, has been on the road since the beginning of the year to track the development of several projects his company has marketed over the past 12 months. Its latest trip was documented by a series of videos — some can be found here, while others will be uploaded on Facebook as well as this platform next month. Tonino flew from Malaga to Liverpool, where the typical British spring was unforgiving, as usual… never mind, money doesn’t care about the weather.

(Our British clients and readers are kindly asked to click on “cc” in the appropriate section of each video and select “English” in order to be able to upload the subtitles before clicking “play”.

From John Lennon Airport…
…to Mathew Street (L2 6RE)
…stopping by the Cavern Club…
…it’s always worth spending time in the city centre…
…before ending up at One Islington Plaza!
Here’s what we should expect to see only 100 meters away from One Islington Plaza
…before checking out the latest developments of Phoenix Place, which will be completed in the fourth quarter. 
Finally, Infinity Waters…

 

If you want to hit the road with Tonino and/or you wish to contact the team of Inveztments to discuss the prospects of their flagship projects, please click here.

On The Threshold: Not Every Monster Has FAANGs

By Alessandro Pasetti, 15 March.

At times, reading the doom and gloom surrounding the real estate market can be rather entertaining, especially given that what one reads in the British press appears to be driven by political ideology rather than an objective assessment based on hard figures — properly balanced analysis seems absent, in my opinion.

Latest news about the health of the real estate market in February, which points to the weakest growth in six months, was a case in point, and clearly omits other factors that are perhaps more important when it comes to determining the big picture for investors. Yes, London is struggling — click here to find out how Inveztments can boost your returns nonetheless — but look at the chart below.

(Source: ONS)

Residential prices in London have more than doubled over a decade, so even if they correct or plateau over the mid-term it will ultimately be considered “a healthy adjustment”.

That said, ever heard of the “FAANG trade” in the stock market?

Here is why it is relevant if you are a property hunter.

Heavyweights Investing In A Top-Class Strategic Hub

FAANG is the acronym for five global high-tech companies —- Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOGL) — that have made big investment plans in London.

Even if you haven’t heard of them from an investing perspective, their combined market value (FB’s $538bn; AAPL’s $913bn; Amazon’s $ $764bn; NFLX’s $143bn; and GOOGL’s $806bn) is higher than the GDP of the UK, and these five alone are behind the rally in the Nasdaq Composite Index, whose trends are shown in the charts below.

(Source: Yahoo Finance)

(Source: Yahoo Finance)

How much these companies invest in the UK is a direct function of the appeal that the UK historically has exercised over foreign investment. In early 2017, Reuters reported that the UK had “landed record foreign investment in year of Brexit vote“, while the chart below should help you understand why Brexit means less than you think it might if you are in the bear camp.

Ironically, 2016 was a record year for Foreign Direct Investment in the UK.

 

Now look at the table below, and spare a thought about the value of FDI inflows on a comparable, annual basis.

(Source: Office for National Statistics)

If you believe the bears are right, you might be inclined to suggest that the suitors of SAB, ARM and BG (AB Inbev, Softbank and Shell, respectively) squandered about $200bn in total (7.5% or so of the domestic GDP) in deals that were done exactly at the right time, and possibly at the right price, while paying awesome premiums to the shareholders of the targeted companies.

Then combine that knowledge with latest available trailing data for FDI as of January 2018, as shown in the chart below.

While the environment is ripe for consolidation in many industries, with the final offer by Melrose for engineering company GKN comfortably surpassing the $10bn price tag this week, it appears evident that deal-making is part of a dynamic and more efficient competitive landscape (than elsewhere in Europe) where some of the stories about the FAANG’s plans also should have left you in awe.

(Perhaps you saw other headlines this week, such as Unilever Abandons UK Headquarters — but so what?)

How about:

F) Facebook London HQ set to be build at King’s Cross (5 February 2018)

A) Apple’s park takes root inside the $5bn HQ (15 January 2018)

A) Inside Amazon’s giant new UK HQ in London (26 July 2017)

N) Netflix crowns strong year for London tech with new HQ (22 December 2017)

G) Google hails Britain as a ‘great home’ as it starts building its new £1bn London HQ (21 November 2017)

If FAANG trends are an obsession for you, as they are for me, their individual performances in the table below might explain why.

(Source: Yahoo Finance, 2-year performances of FB, AAPL, AMZN, NFLX and GOOGL.)

Counterintuitively, however, their rise says a lot about how far the perception of risk has gone in a market where property investment continues to be a safe haven for many retail investors I talk to.

The Banks

The war of words between Paris, London and Frankfurt concerning who will take control of financial matters on this side of the Atlantic if the UK doesn’t strike a good deal is nothing new — the topic has been debated for decades, but the reality is that London belongs to a different league, and it’s not fighting for European hegemony. Rather, it’s in the race for worldwide dominance.

London Retains Its Crown as World’s Top Financial Center” ran the Bloomberg headline in September

My sources in financial circles acknowledge some degree of uncertainly, but all of them still live, produce and get richer thanks to the emoluments they earn in the City.

Talking of bankers, Bank of America, SMBC and Deutsche Bank (click here, here and here) are just three of the major global banks to have renewed their leases in London, it recently emerged, while Citigroup (which decided to move some of its operations to Frankfurt) surely knows the importance of the UK, and decided to set up an innovation centre in the capital.

The bears could point that JP Morgan has plans to “give up on new HQ in Canary Wharf” but the site was reportedly earmarked for £1.5bn. And anyway, perhaps one could argue JP Morgan doesn’t need additional space in Canary Wharf at all, as it acquired the office of Lehman Brothers in 2010, and the assets up for sale could be remunerative.

Trends

In terms of non-residential space at a premium, I think you might want to pay attention to the latest annual figures recently reported by Segro.

As I recently wrote for Transport Intelligence, this logistics property developer gained about £1.5bn in market value over the past 12 months and it is now worth £5.5bn thanks to solid growth rates and falling loan-to-value ratio. While management was certainly upbeat about trading conditions, it is interesting to note how the message surrounding Brexit risk has changed in only twelve months.

Values of UK commercial real estate fell in the aftermath of Brexit, but the impact was limited for industrial assets compared to other real estate sectors, and last week’s filing with the London Stock Exchange barely mentioned Brexit, simply noting that “structural drivers of demand appear to have continued to outweigh Brexit-related uncertainties”.

In a way, we are currently in a vacuum, as the prices of several asset classes prove.

The exchange rate, for example, has been on standby mode since it rallied last summer, having consolidated the 1.13 area against the euro…

(Source: Bloomberg)

… while the yield of the 1o-year gilts have slightly retraced from the multi-year highs earlier this year, thanks to more accommodating monetary policies than at any given time in the past decade.

(Source: Bloomberg)

But look at the latest headlines about mortgage approvals, and the structures that are being marketed:

On cue, nominal growth rates stats are also impressive — “ONS Finds Investment Property Prices Up 5.2 Per Cent In 2017” Residential Landlord reported last month.

While many wonder what kind of deal politicians would cut — and obviously some downside is possible  if a hard Brexit scenario emerges — the remain odds long the UK government will be left grappling with highly unfavourable exit terms. So, the obvious question for me is how could you profit from protracted uncertainty in the UK landscape?

I suggest you read our previous coverage, and reach out to the Inveztments Team at the link below if you have questions.

On The Threshold: Simple Sums

On The Threshold: Opportunities Shrouded Amidst The Risks Of British Mists

On The Threshold: Brexit’s Silver Linings Could Turn Out To Be Gold

To contact the team 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, 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. )