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Posts for residential



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.)

 

 

More About Residential Property Investments

Residential property is the UK’s most significant asset class, given its track record in terms of total returns over the past thirty years. There are very good reasons why institutional appetite in the sector has been rising of late. The fundamentals of supply and demand look out of kilter, and should boost demand for quality rented housing projects in many localities for the foreseeable future.

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: 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.)