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C

Posts for property-hunting



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: 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: Is a bedroom bonanza beckoning for London landlords?

By Alessandro Pasetti, 31 July 2018.

Most of the typically bearish headlines about the UK property market highlight the role that London has played since Brexit, with pundits often pointing to the difficult times experienced by the capital – “difficult times” which are here to stay, some argue. But recent research and trends suggest that by no means is London terminally ill.

Moving parts, prime London & changing habits

Take its rental market, for example, where Inveztments is looking at alternative ways to help landlords better monetise their assets at a time when for traditional property owners – those did the bare minimum except cashing in the monthly rent – the real estate heydays are a distant memory.

There are many moving parts here, including property prices trends, yet the rental market is often a good gauge of health in the private sector, and deserves attention. Given house prices dynamics in certain areas, London has been a national drag for some quarters now – although some sort of slowdown was surely inevitable after years of stellar growth, and latest signs this week were encouraging, particularly when other factors, apart from house prices, are considered.

(Source: 4-traders.com)

At the end of the first quarter, market specialist Savills noted that price falls across the “prime London rental market have continued to ease as a shortage of stock means supply and demand levels are becoming more aligned”, although the increasingly picky nature of tenants “has prevented any significant upward pressure on rents”. 

“Picky nature” means changing habits even for wealthy tenants who have become more selective than in the recent past.

Prime North West London, in particular, has recorded a strong demand for family houses but lower levels of “appropriate and available” supply, which has contributed to drive up prices. Stock of the best quality commands pricing power, with tenants prepared to pay a significant premium (up to a whopping 30%, according to Savills) for prime properties which are in immaculate condition compared with those considered moderate or poor.

Either way, value hunters are wary of paying up for the properties they are looking to rent because most tenants are looking for bargains: in fact, research shows that most are willing to relocate within prime London, which badly reflects on some areas (Kensington, Chelsea, Westminster) more than others, impacting landlords’ total returns.

Earlier this year, another market specialist, Knight Frank, analysed the performance of single-unit rental properties in the prime central London market (worth between £250 and £5,000-plus per week), and its findings were not surprising. In a nutshell, the annual rental value change was a modest –0.8% in April…

(Source: Knight Frank)

…standing at -0.1% in May, with better numbers for prime outer London, too…

(Source: Knight Frank)

…and look at the latest stats for June, which were even better and showed growth again in annual rental values.

(Source: Knight Frank)

On the one hand, rental growth could continue to outpace expectations. On the other, landlords ought to remember that income growth could be capped by the number of newbuild completions, which are expected to surge next year. 

Trends have not materially changed in recent weeks, so not only is London’s rental market possibly plateauing, but it’s getting stronger by the day, forcing landlords to find creative ways to boost returns – where applicable and feasible – such as adding rooms to their properties that can be rent out, while outsourcing the initial investment in order to extract value from their assets.

Break-down by type of available space on the market

Data on private rental market from the Valuation Office Agency shows that between July 2017 and June 2018 the “count of rents” (the number of rental agreements agreed on a monthly basis) for a single room in London has found a floor since the Brexit referendum at 1,220.

The average rental income for a single room stands at £628 per month, obviously lagging that of studio flats (£988) and all other property types, with anecdotal evidence showing that while count of rents have fallen, landlords have gained in terms of pricing power in this category. The same applies to other categories in the past twelve months.

All the latest stats available can be found in the table below.

One-, two- and three-bedroom flats typically account for 80% of total rents, and have been particularly resilient in terms of growth in the upper quartile, which validates the findings of market research specialists.

These bedroom categories are where the team of Inveztments plans to help landlords explore ways to boost their income streams and make a difference in the months to come, and we look forward to sharing some really exciting news with you later this year.

Are you a landlord and do you want to learn more about how to maximise your property-related returns in London? Do you want to talk to us and find out more about other projects in our pipeline?

Do not waste time and contact the INVEZ team today!

(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: London's (still) calling

By Alessandro Pasetti, 15 May 2018.

Research house prices in London and you almost immediately realise this is exactly the time to have a few properties on your radar, just in case Brexit plays out according to a base-case scenario hinging on future relationships between London and Brussels that will likely involve free movement of capital and people.

“More Than Half of London’s Luxury Homes Are Getting Discounts” ran the headline in Mansion Global earlier this month.

Need I say more?

Deep Pockets 

All you need now is deep pockets and a good understanding of what is going on in the UK market, where disintermediation of real estate services is having deflationary effects already well under way in the commercial property market (subscription may be required to access the link). 

“Up to 5,000 traditional agents are struggling to survive amid growing threat from low-cost, fixed-fee online firms and larger rivals, say accountants,” The Guardian wrote last summer 

Trends have hardly improved since.  

Cyclicality and value 

Counterintuitively, the best places where to look for a bargain in the property market are the city’s hotspots.  

If, for example, we witness a recession as soon as next year, then reassurance is offered by the typical resilience of luxury when the business cycle turns south. Think about the performance of several assets in the luxury space in the aftermath of the Great Crisis in 2008. “Stellar” springs to mind.

Today’s record share price of Apple, whose most expensive smartphone sold out in minutes when it launched, is another case in point, albeit slightly off topic.

Value

Talking of value, I recently reached out to a fund manager who is heavily invested in the City, and he told me his residential real estate empire was not worth renting out because any such cash inlays would not cover certain outlays in a tax efficient manner.

So, to paraphrase his thinking, he’d be better off swallowing his pride at some point — “maybe now, you know” — and take the best offer he gets if he needs to raise cash while, equally important, wanting to lower his exposure to the property market.

“There are not many other substitute assets worth the risk out there,” he warned.  

Other real estate investors eyeing residential properties, I understand, are waiting before accepting lower offers, though also knowing that holding forever is not exactly a good idea.  

(Source: Unsplash)

Mind the gap  

You need some serious funding, of course, to invest in high-end London. This approach makes a lot sense, when one gauges capital deployment options while considering the widening gap between the rich and middle class in the UK.  

Last year, This Is Money wrote that the UK’s middle class remained “one of the smallest and poorest in Europe despite having expanded the most over two decades”. This topic has been debated for years, and while the rich get richer wealthy clients would be well advised to keep an eye on Knightsbridge (London, SW1), Mayfair (W1), and Chelsea (SW10), where Inveztments offers property hunting services.  

Luxury trends

These are three of the most prestigious areas in the UK’s capital, so if you have dry powder you should notice that the average price paid (APP, £1.6 million) for all properties sold in SW1 was flattish in the past six months (-0.25%), according to Zoopla, and was also down significantly for the year (-4.3%). 

However, in the past three months APP has bucked the trend, up 2.1% during the period.  

By comparison, W1 has been more resilient, with APP (£2.1 million) up 5% over past twelve months, +1% over the past six months, and +2% in the past three.  

Meanwhile, SW10 (APP £1.7m) is the laggard at close distance in the past three months, but trends in all three postcodes point to a market that might be testing the bottom — naturally, I have no idea how long weakness is going to last and how it is going to play out.

But I do believe that Brexit risk is often overstated and all three areas are closely monitored by Inveztments, which could help you identify a hard bargain today given its directors’ vast knowledge both within and outside the M25.  

In town and elsewhere 

In north London, — N1, N2, Bishop Avenue and the wider Hampstead area and Maida Vale are traditionally outstanding residential suburbs, where to my knowledge the poorest tenant – a friend of mine — used to pay £800 or so monthly, excluding bills, for a tiny little room with a shared bathroom. 

The South West is further out from the centre, but Richmond (TW10), Twickenham (TW1), Teddington (TW11), are easy to commute to and from, and the same applies to Wimbledon and Putney, which are obviously on Inveztments‘ radar, and are all on the way to Surrey, where there are lovely areas such as Esher (KT10) and Cobham (KT11).

If you are posh and love British football, you should know why the latter area could be where your residential dream is located.

From SL3, in 20 about minutes you can reach the magic Henley-on Thames (RG9), where the true British aristocrats live — as well as one key investor who has enjoyed our services for years.

In fact, we can arrange for you to talk to him if you want to know more about deals we offer as well as a bit more about the fantastic area where he set up his own business with the help of Inveztments.

(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: The sun shines once more on the Costa Del Sol

By Alessandro Pasetti 

Are you looking for the real estate investment of your lifetime in Spain? Do you dream of retiring or living on the Costa Del Sol?
If so, we have some great news for you: thanks to strong local relationships with developers, real estate agents, tax advisors and legal consultants, the Inveztments team can help identify outstanding real estate investments to help you achieve your financial goals.

(Source: Andalucia.org)

The latest trends suggest there could be no better time to eye a property development or existing property investment in a country that after years of stagnation seems to be making a long-awaited comeback.  

The areas on Inveztments’ radar are Puerto Banus, Marbella, San Pedro De Alcantara, Nueva Andalucia, and Estepona.

Background 

“Three Costa Del Sol towns are driving Malaga’s property market into the top of national rankings,” ran the headline in The Olive Press (OP) last week.

Based on data from Panorama Properties, Marbella’s most established estate agency, price growth in Marbella, Estepona and Benahavis is greatly outpacing the national average.

“The three towns saw sales shoot up by 11.15% in 2017 compared to the year before, exceeding pre-2007 levels by 10.4%. The rest of Spain, meanwhile, still lags 21% behind pre-financial crisis levels,” OP reported, noting that Estepona, in particular, saw sales rocket by almost 30% last year.

Along with the UK, the south of Spain is where Inveztments’ founders have lived and invested in for over two decades, and while the choice between the two countries often concerns lifestyle, there are some other important considerations from an investor’s standpoint.

While currency risk has to be managed by European investors hunting for a property deal in the UK, a euro-denominated deal in the Costa Del Sol carries no currency risk at all for European residents funding their purchases in euros — and do not ignore the fact that the right place in Andalucīa could turn out be a hotspot offering even steeper growth rates than the UK.

Additionally, cultural barriers are likely to be lower, and as for the weather… well, that needs no explanation.

Why not? 

The allure becomes more obvious when you consider that not only is the outlook for 2018 in Andalucía undeniably rosy, but the region’s infrastructure continues to attract further investments — read more here about its encouraging mid/long-term prospects.

Of course, you could choose other Spanish hotspots, and even commute from other major cities at a bargain, but that choice comes with caveats.

In an infamous story published by The Guardian in mid-2015 headlined “Commuting from Barcelona: a London worker who makes it pay”, Sam Cookney explained that he had been renting in the UK capital, and was “getting very frustrated” with London prices – “the usual scenario”, he noted at the time.

“It began as a joke. I said to a friend that I bet it would be cheaper if I actually lived in Barcelona and commuted every day.” 

It turned out to be true — and even, if you are unfamiliar with London, you will probably understand why some areas are cheaper now than in the past. However, the recent political uncertainty surrounding Barcelona has harmed the local real estate market, at least temporarily. And inevitably this will boost the prospects of locations further south.

Previously on a roll, “the Catalan independence referendum on October 1, and the political uncertainly that followed, stopped the market in its tracks,” The Financial Times wrote earlier this month in a story headed “Lowballers hunt bargains in Barcelona’s faltering property market”. 

In the weeks following the independence referendum, it added, notaries and real estate agents reported a 50% drop in sales volumes. As a reference, although total transaction volumes in last year’s fourth quarter were up 3.4% on the year before, they were up 10.4% in the third quarter.

The Costa Del Sol is nothing like that.

What does it mean to invest in Spain today?

The most important headlines came in last summer, when the Financial Times reported that “Spain’s unemployment crisis continued to ease in the second quarter of 2017, as the jobless rate fell to 17.2% of the workforce — the lowest in more than eight years.”

After years of terrible unemployment levels and a sluggish recovery in terms of GDP growth, the property and financial markets currently reflect an increasingly benign economic environment, although admittedly the latest employment figures sent mixed signals, these are probably the result of seasonality. And it could take some time before real estate investment once more becomes risky, given that the ECB last week again indicated that interest rates will remain untouched in the near future — and this is good for buyers as it affects their funding costs. The Wall Street Journal was unequivocal: “ECB Seeks Clarity on Economy Before Next Move”.

Elsewhere, Reuters recently wrote that real estate firm Testa aimed for an IPO with an eye on the rental market rebound, and then there is property developer Metrovacesa, with the first listing since Catalonia’s political crisis?

Even Blackstone, one the largest global private equity houses, is benefiting from certain local dynamics, with the news agency recently noting that “bets on Spanish housing and oil assets” helped it mitigate stock market jitters that weighed on its performance in the first quarter.

The PE firm is so attracted to Spain that it is reportedly looking to bid for “Hispania, the Spanish property company whose shareholders include hedge-fund firms Soros Fund Management LLC and Paulson & Co., as investor appetite for Iberian real estate rebounds,” Bloomberg wrote.

At the end of 2017, the US news agency pointed out that investment in “malls, warehouses, hotels and offices is this year set to reach the highest since 2007”. 

Since the turn of this year, the news coming out of Spain has been consistently reassuring, with the latest reports suggesting that “almost 6,000 new building and property companies” were set up in the first quarter, boosted by rising prices across the country.

This is the right time to get in touch with Inveztments: fill in this form NOW and you’ll be contacted within 24 hours.

(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. )