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C

Posts for real-estate-risk



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: The bricks of Brexit Britain can still build value for investors

By Alessandro Pasetti, 27 November.

It is not just me anymore.
“Europeans may not think much of the UK’s politics, but they still like the look of its real estate,” The Irish Times wrote earlier this month.
While the Irish are known for their sense of humour, this was serious stuff. It continued: “Brexit Britain will be the top destination for major European investors to snap up commercial property next year, according to a survey of executives managing more than £500 billion of real estate conducted by Knight Frank.” 

Relief

Firstly, it was a pleasure to find that, despite all the doom and gloom in the press, I am not alone in continuing to believe in UK real estate market opportunities, .

However, it would make for a big change if all the Brexit uncertainty disappears, mainly for the bears. Take this: “Britain has become cheaper than markets like France and Germany, where returns have shrunk in recent years as buyers have piled in,” The Irish Times added.

It makes a lot of sense, from a trade prospective, to be prepared to bite if you are selective. Outside the commercial real estate arena, whose prospects bode well for residential and other investments, there are also good signs of future heath in a market that needs more confidence as well as properties to satisfy demand, and where good deals could always entice foreigners ready to deploy capital. Warren Buffett is doing just that in the UK, in case you missed it.  

On the investment guru and his investment decisions, earlier this month Fortune wrote: “The tie-up with a luxury-property brokerage focused on London neighbourhoods including Mayfair and Hyde Park comes as Brexit hammers the UK housing market. Undeterred, the UK firm—now known as Berkshire Hathaway HomeServices Kay & Co.—plans to expand through acquisitions and joint ventures, and will add as many as 10 standalone offices in the next decade.”

Deals

Yes, the spotlight is on Brexit Britain, but the Inveztments team does not waste time on fluff: two brand new project entries, selected exclusively for you, have now formally launched. As the search of the best developers continues, so does a balanced risk/reward profile for the investment the team promotes.

Dealing with clients is not always easy, but the team does its best to satisfy all those needs that are central to the customer experience when they choose Inveztments.

Bearing this in mind, look at where the real estate investments if offers are located and the kind of upside these locations offer on a global scale.

IBM this year screened the world for cities that are true gems, based on several aspects. In its own words, research was performed based on “What factors are driving foreign direct investment and impacting economic growth around the world”; “Where is foreign direct investment originating and which countries and regions are benefiting”; “What must government and economic developers do to navigate the new era of Globalisation 4.0.”

The report, headed “2018 Global Location Trends” clearly identifies three cities where the managing directors of Inveztments have talked of and done real estate business for decades.

The one topping the list … drum roll … is London, which is slowing big time in terms of investment projects (the amount of capital and jobs it has attracted on various levels from foreigners, quantifiable as “FDI”), but is still the leader worldwide in terms of investing attractiveness. Then, look at Liverpool and Manchester, on the global scale. Even Birmingham made the list, although I doubt its Indian cuisine, arguably some of the best on the planet, had anything to do with the achievement.

(Source: IBM)

In terms of FDI, the UK has inevitably lost appeal, but it still comes fifth in the global rankings, ahead of Germany, Russia, France, Canada and a few others.

(Source: IBM)

The Inveztments portfolio of projects has been trimmed lately in a pursuit of true excellence.

The two latest additions are shown below

Full details can be found here and here.

In a nutshell:

A) Aura (Liverpool, student)

From £64,950
Net Yield – 8% per year for five years
Modern en-suite & self-contained studio apartments arranged in clusters
Desirable knowledge quarter location

B) Parliament Square (Liverpool, residential)

From £94,950
Net Yield – 7% per year for one year
One, two & three bedroom apartments plus 16th floor penthouse
Located in the Baltic Triangle

Why wait?

(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: 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: Three books for real estate investors to live by

By Alessandro Pasetti, 15 February.

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

(Source: financialtalkies.com)

Is a financial meltdown around the corner? 

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

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

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

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

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

Which reminded me of When Genius Failed.

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

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

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

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

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

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

They say real estate is risky 

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

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

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

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

Shorting Europe and the euro? A bad idea? 

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

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

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

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

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

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

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

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

By Alessandro Pasetti, 31 January.

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

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

(Source: New York Times)

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

Moving parts

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

(Source: Trading Economics)

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

(Source: ONS)

Other encouraging signs have been visible since last year.

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

Comparables 

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

(Source: Trading Economics)

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

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

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

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

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

Did you notice how the two trended last week?  

(Source: Yahoo Finance)

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

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

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

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

(Source: boerse-berlin.com)

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

(Source: MarketWatch)

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

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

Sound advice

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

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

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

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

Convictions

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

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

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

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

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

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

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

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

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

(Source: Taylor Wimpey)

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

(Source: Bloomberg)

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

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

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

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