Jump to content
House Price Crash Forum
Sign in to follow this  
Frizzers

Well, Well, Well ...

Recommended Posts

Evening all,

This email arrived this evening from EAs Douglas and Gordon.

Several things amazed me about it:

1. That they are sending it out to everyone in their email database (to me that suggests things are bad, otherwise they wouldn't need to)

2. The sheer bullsh*t and poorly researched laziness of some of their arguments.

Anyway here it is. I look forward to your thoughts - and the tearing apart of some of their arguments:

There is a lot of talk in the press about what might happen to Prime London property prices over the next few months. We, at D&G, thought you might be interested to read the views of the Fund manager of the only regulated and open ended Fund that specialises in investing in Prime London residential property -The Prime London Capital Fund.

For more information on the Prime London Capital Fund which allows you to invest in Prime London property for as little as £10,000 either call 0207 9634622 or e-mail at

info@dngam.co.uk or have a look at the website www.dngim.com

Ivor Dickinson

Managing Director

Douglas and Gordon

Is the Prime London party over and/or will the USA housing crash affect Prime London prices?

Summary

1 The Prime Capital London ( PCL ) market is quite distinct from the rest of the UK property market, let alone the USA one;

2 The areas in USA where prices are falling fastest, and where we have been warning since Q1 that UK prices will fall too, is where there have been recent large increases in supply of housing stock;

3 Supply in Prime London is diminishing, not increasing;

4 In next three months it is possible that, compared to the first and second quarters, demand will soften in Prime London for all but the very best stock. As price increases pause and the press write about the PCL party being over potential sellers will retreat, leading to stock shortages in first quarter 2008;

5 Demand for best PCL stock likely to remain strong;

6 City bonuses likely to be slightly down on expectations of a few months ago but still strong ( those paid in their Bank's stock are likely to get that stock at very good price );

7 UK interest rates likely to be coming down by 2nd quarter 2008;

8 Next three months presents good buying moment for investors in PCL with 5-7 year time horizon;

9 The value we are adding to the current portfolio ( refurbishment and/or improving lease quality) will not be fully reflected in the unit price until March 2008;

10 Rental market still strong -gross yields of 4% still achievable target for the Fund's properties.

11 The Prime London Fund performance this year compares favourably to UK commercial Funds ( source : Sunday Times July 15th ) :

- Prime London Capital Fund : + 7% ( since Feb 2007 -launch )

- Scottish Widows SWIP : - 19.5 %

- New Star Property Fund : - 5.1 %

- Aberdeen Property Share : - 16.2%

- Norwich Property : - 4.6 %

12 Sound fundamentals supporting the London economy.

What lessons can one draw from the USA housing market situation?

Firstly, all property investment, like politics, is local. In the USA some regions are suffering, others continue to grow. Of course, in any huge and diverse economy, like the USA, different regions will be at different stages of their economic cycle and that tends to be reflected in local house prices. What is different about this US housing cycle is (a) supply, (B) rising insurance premiums, © the sudden and dramatic move up in US interest rates.

In the USA it is " sub-prime " mortgages that have attracted all the headlines. But it is important to draw a distinction between the effect that these loans have had/will have on the financial markets and the cause of falls in median USA house prices. In terms of the USA housing market these sub-prime mortgage problems are tiny. The root cause of falling prices is a dramatic increase in supply, and it is a reminder, once again, that when trying to make money out of property supply uncertainties are the major headache for any investor.

1 The US mortgage market is worth $10,400 billion;

2 13% of that ( $ 1,350 billion ) has been lent to " sub-prime " borrowers;

3 14% of that 13% is delinquent ie the mortgagor is late with payments or has defaulted -so less than 2% of the total USA mortgage market is affected to date;

4 About 5% of that $1350 billion is in foreclosure ( $67 billion ), of which half is likely to be recovered;

5 Known losses so far are therefore about $33 billion;

6 That represents about 0.047% of the USA total national wealth.

So, our observation would be that the current malaise in USA housing is less down to the sub-prime lending per se but more to the fact that there is an unprecedented overhang of inventory ( source : Joint Center for Housing, Kennedy School of Government, Harvard, June 2007 ). Median USA house prices have fallen because of very large drops in those specific areas ( eg the South and South East ) where supply has been greatest. This has dragged down the national numbers. The " median " USA house price is that number where 50% of all USA houses cost more, and 50% less, than this number. It is not the average price. When there is a big overhang of stock ( up to 1 million units -see above report ) that hugely increases the numbers below the old median, and so the new USA median house price falls significantly. This tells you little or nothing about what is happening to the value of houses above the old median. As ever, statistics can be made to tell you anything but the moral is - average/median/index house prices are virtually worthless when it comes to assessing the strength and/or the outlook for prime areas where the supply/demand dynamic is totally different.

The second, less-commented upon contributor to the fall in median house prices in the USA -insurance premiums. Since Hurricane Katrina ( 2005 ) household insurance premiums have risen by 300% in the very same areas where the supply of housing stock has been greatest ( the South and South East ). This has added hugely to the entry cost of any new home buyer and has meant many have been unable to enter the market.

Thirdly, do not under-estimate the extent of the monetary tightening that has taken place in the USA. In June 2003 Fed Funds were at 1%, by June 2006 they were at 5.25 %. This is a 425% rise in USA interest rates in three years.

Conclusion

:

If I told you that the average number of goals conceded by football teams throughout the English professional leagues was 1.5 a match would that be a helpful statistic when trying to work out how many goals Chelsea were going to concede per match this year? Of course not. What happens to football teams in the fourth division has no relevance to what happens to Chelsea -they are, effectively, playing a different game by different financial rules. Why do people continue to think that what happens to the general UK housing market, let alone the USA market, is relevant to what happens in the Prime London market? They are as different as the said football teams, perhaps more so. There are many differences but the big one is supply. In Prime London there is not only no extra net residential supply coming on stream but, arguably, supply is diminishing as flats get knocked into bigger flats or houses. That is what makes the PCL residential market totally different from the rest of the UK and it is why the USA example should be a reminder to investors that, in a mature market, demand will fluctuate to some extent during different parts of the economic cycle but what really disrupts/destroys property investment returns are supply shocks. If you can rest at night because there is no risk of further supply, as you can with PCL, that makes life a lot easier. This differentiates PCL residential property investment from not only the rest of the UK housing market, but also the London commercial property market where large amounts of fresh supply look like spoiling the London commercial property party for the next couple of years.

So do you think Prime Central London average prices will fall over the next quarter or two?

It is not our central forecast but it is possible that the Savills PCL Index could show a small decline over the next two quarters. That should not unduly worry investors in the Prime London Capital Fund. The Fund is a " stock-picking " Fund and picks the best properties from within the PCL universe. The properties within PCL that are most likely to show price declines will be the " sub-prime " ones ( basements, walk-ups, ones on busy roads, new builds ). The Prime London Capital Fund looks at about 30-40 properties before it makes an offer on any one and has done so since we launched. By definition, the properties we have rejected/failed to offer on we think have been overvalued, and it is these that could show some small capital decreases over the next six months. But, the best stock will remain in demand and will continue to get top prices and, as potential sellers react to talk of a softening sales market, so stock will dry up again. Once again, it all comes back to supply in PCL and we expect that to dwindle even further over the next six months.

The next couple of months will be a good time to buy PCL stock if you are a long term investor.

Why are you so confident?

History. Over the last 20 years when there have been financial market jitters potential sellers of Prime London pull their stock, leading to supply problems..and, after a pause, a continuation of the long term trend growth ( + 9% p/a ).

1 1994 - Mexican devaluation crisis.

PCL - March 1994-March 1995 : + 19.2%

- March 1995-March 1996 : + 3.2% ( slowing but still positive growth )

Due to the slow-down in growth during 1995/96 stock was pulled leading to a rise of + 13.6% for period March 1996-March 1997.

2 1997-1998 - Russian and Long Term Capital Management crises

PCL - March 1997-March 1998 : + 23.8%

- March 1998-March 1999 : + 2.9 % ( slowing but still positive growth )

As in 1995/96, the slow down in capital growth in 1998/99 led to stock being removed from market leading to rise of + 23.3 % for period March 1999-March 2000

3 2000 bursting of tech bubble

PCL - March 2000- March 2001 : +15.2 %

- March 2001-March 2002 : + 6.8% ( slowing but still positive growth )

The pattern continued - slow down in growth in 2001/02 led to supply shortages and capital growth for the March 2002-March 2003 period was + 9%

4 Finally, September 11th 2001/Enron collapse 2002

PCL - March 2003- March 2004 : - 0.6%

- March 2004- March 2005 : + 2.5%

After these, relatively, slow years stock diminished and period March 2005-March 2006 was + 4.4%, and March 2006-March 2007 + 22%.

Conclusion

:

What no-one can predict is when (a) the slow down in growth rates will take place, and (B) when the next big + % year will be. What can be observed from the last 20 + years of PCL price action is that when the slow down occurs (a) it is likely to be a slowing in growth rates, not an actual decline, (B) any slow down soon affects seller sentiment and thus supply levels, leading to © a demand-supply imbalance and a resumption of long trend growth. The time between (a) and B) and (B) and © is anyone's guess. The risk of not being invested for the © leg of the process ( ie the big % year ) is clearly greater than the risk of investing in a year of sub-trend, but still positive, growth. Of course none of the above takes into account rental yields which tend to rise at times of capital growth slow-down and make a significant contribution to total returns ( which have not had a negative year since 1992 ).

So what about units in the Prime London Capital Fund -where will they go over the next few months?

I am restricted from making any hard and fast forecasts but what I can say is that we are in the midst of adding, we believe, significant value to some of our properties. We will be spending capital to improve the look of the estate and/or improving the quality of the lease through lease extensions. We expect the added value in the units to be fully reflected in the price of the Fund's units by March 2008. There are, at least, a couple of dealing days ahead of March 2008 and the intention is to move the Fund to monthly dealing next year.

Wouldn't it make sense to wait a bit before entering the PCL market?

If you can pick the highs and lows of any market, let alone the PCL one, you don't need us. Nobody knows for sure where prices are heading and what the outlook will be. What we can say with 100% certainty is that the lesson of the last 30 years in PCL is that the longer you have been invested in the market the more money you have made. We have been buying, selling, investing, managing Prime London properties for nearly fifty years and there are far more examples of people regretting that they delayed buying or getting out of the market than there are of people who have successfully sold at the top and bought at the bottom. The strategy of this Fund is not to trade -we are not pretending to know when the top of this cycle will be ( although on an historic basis there is at least another 100% in capital increases to go in this cycle which started in June 2003 ). We are an investing Fund looking for quality and value and we will leave calling tops and bottoms to others. We will get on with seeking the best Prime London stock, improving it and making it sweat a steady 4% p/a gross yield.

Isn't one of the lessons of the USA-led financial market volatility that now is a time to reduce risk?

I would put it differently. The events of the last month are a salutary reminder that you should always invest in things (a) you understand, and (B) where the risk is transparent. The extraordinary aspect to the current bout of market jitters is that the so-called financial market experts did not understand the risk they had bought. Many, apparently, thought they had triple A grade debt but it turned out they didn't.

The risk profile of the Prime London Fund is easy to understand and transparent :

1 We invest only in the very best residential Prime London real estate;

2 We borrow, on average across the portfolio, 50% of the purchase price;

3 Our net yield from the rent more than covers our mortgage payments;

4 We seek to improve the underlying asset through refurbishment and/or lease improvement;

5 We are seeking long term p/a total returns of 9%. This is made up of 6% capital growth ( long term average for the PCL index is 9% ), and 3% net yield;

6 We will never be a forced seller of the underlying assets because the Fund will never have to redeem more than 8% of its NAV in any one year.

Our strategy is a simple one and our borrowing is modest. The trick comes in (a) getting access to the best stock, and (B) acquiring it at the right price and that is very labour-intensive. That is what you pay your Fund manager to do for you, and to make sure that the assets are improved and made to sweat. But there are no hidden complications and the model and the Fund is straight forward and transparent.

The moral of the recent USA " crisis " according to the great Mr W Buffett is " don't fear risk, make sure you understand it ".

Is the growth in PCL based on a secure economic footing?

The financial and business services sector of the UK economy doubled between 1980-2007 ( from 15% to 29% ). In London the sector went from 20% to 42% of the region's economy over the same period. This sector of the UK economy grew by 10% in the year to the first quarter 2007, compared to 2.8% growth for the rest of the economy. In London 28% of the workforce is in this sector.

In short, the importance of financial services to the UK economy is huge as is the centrality of London to that sector. No Government will risk the pre-eminence of London to the UK financial services sector and that is why the Prime Minister, and his right hand man Ed Balls, have resisted calls to revisit the tax status of private equity and wealthy overseas non-domiciled residents as well as insisted that they will work to continue to make the City the financial centre of choice ( see attitude of FSA vs SEC to markets regulation ). They know that it is these high earners who can decide where to base Fund management and Private equity firms, and if they leave London it will have a serious impact on tax revenues.

As for the future, the consensus is that economic growth in London will out-strip the rest of the UK by up to 1/2 % - 3/4 % p/a every year for the next decade ( source : Cambridge economics ). There are also the planned infrastructure projects associated with the Olympics.

So, future demand look set fair.

What do other market participants thinks this all means for the future of PCL prices?

One of the joys of being a residential property Fund manager is that everyone is a property expert. The press love to write the story about " booms " and " fat cats " and then "busts" and " pricked balloons ". Remember the press need to sell newspapers and so there is no point in a property page sub-editor being understated when he prepares the headline for the next property story. Over the next few months it is quite possible that the press turns on the housing market in general and the Prime London market in particular. This could well have the effect of scaring off marginal sellers in Prime London, reducing supply ( see above ) but have little or no impact on the competition for the best properties, except maybe there will be 3/4 after each rather than 8/9.

On a longer term perspective, investment bank Investec undertook some research in August 2007 and found that over half of all London agents thought that, within two years, £4,000 per sq ft would be common place for the best stock. The Fund is currently buying the best stock for between £1100-£1600 per sq ft.

For more information on the D&GIM Prime London Fund please either call or e-mail me at the number/address below and/or go to our website www.dngim.com

Edited by Frizzers

Share this post


Link to post
Share on other sites
Why are you so confident?

History. Over the last 20 years when there have been financial market jitters potential sellers of Prime London pull their stock, leading to supply problems..and, after a pause, a continuation of the long term trend growth ( + 9% p/a ).

1 1994 - Mexican devaluation crisis.

PCL - March 1994-March 1995 : + 19.2%

- March 1995-March 1996 : + 3.2% ( slowing but still positive growth )

Due to the slow-down in growth during 1995/96 stock was pulled leading to a rise of + 13.6% for period March 1996-March 1997.

2 1997-1998 - Russian and Long Term Capital Management crises

He says going back twenty years, but he doesn't. he goes back to 1994, which is 13 years, to the time, conveniently, that this great bull market began.

What happened between 89 and 93?

he says, 6 City bonuses likely to be slightly down on expectations of a few months ago but still strong ( those paid in their Bank's stock are likely to get that stock at very good price );

has he seen the charts of UK banks - they are in freefall.

Who would want to be paid in Northern Rock stock?

Or Lehmann Bros, or Bear Stearns, or Barclays - I'd rather be paid in dollars. They don't fall as much

Share this post


Link to post
Share on other sites

The PCL market is very different. The rich people of the world play a cooler game compared to the sheeple and might be less prone to selling when prices stagnate. But the credit crunch is global - rich foreigners and hedge fund managers may have slightly less money to play with. I wouldn't be bearish on this particular market, but I certainly wouldn't put any money into it either.

Edited by dellboy

Share this post


Link to post
Share on other sites

The fact this e-mail is being sent at all is proof that the EAs are starting to detect a change of sentiment. They are clearly frightened that when people read about a house price crash and hear their friends and colleagues talking about one, it increases the chances of one happening. Well, they're right! Whereas the media was useful during the boom times, they are going to find it uncomfortably inconvenient on the way down.

Share this post


Link to post
Share on other sites

Errr I know this sounds childish. Can you get the document scanned in and archived on the internet? Just that when the sh!t goes down then it would be nice for any of us who happen to pass by their offices to hand a copy to anyone coming out just in case they are thinking of trusting them with any of their hard earned cash.

Share this post


Link to post
Share on other sites
1 The US mortgage market is worth $10,400 billion;

2 13% of that ( $ 1,350 billion ) has been lent to " sub-prime " borrowers;

3 14% of that 13% is delinquent ie the mortgagor is late with payments or has defaulted -so less than 2% of the total USA mortgage market is affected to date;

4 About 5% of that $1350 billion is in foreclosure ( $67 billion ), of which half is likely to be recovered;

5 Known losses so far are therefore about $33 billion;

6 That represents about 0.047% of the USA total national wealth.

If this is correct, then isn't the US sub prime scare a bit of an over reaction?

Share this post


Link to post
Share on other sites
Errr I know this sounds childish. Can you get the document scanned in and archived on the internet? Just that when the sh!t goes down then it would be nice for any of us who happen to pass by their offices to hand a copy to anyone coming out just in case they are thinking of trusting them with any of their hard earned cash.

It was sent by email - I'll keep that and it's posted here, so we could always link to this thread.

Share this post


Link to post
Share on other sites
If this is correct, then isn't the US sub prime scare a bit of an over reaction?

I don't know if it's correct.

But I do know that there are inaccuracies and selective fact picking in the argument, so I bet it's a convenient simplification at best.

Share this post


Link to post
Share on other sites
If this is correct, then isn't the US sub prime scare a bit of an over reaction?

No. Holders of subprime Mortgage Backed Securities have no access to the secured property if it goes into default. They lose the whole $67 billion. A number by the way which is over twice what the top ten investment banks make in profit yearly.

Because of the heavy gearing in mortgage bonds even small movements like this can send a market into panic. As you have seen.

Share this post


Link to post
Share on other sites

What a strange thing to send out, unsolicited and indiscriminately. A typical reaction from Mr M. Class in Fulham: "I thought everything was fine, but now you've got me thinking...".

Oh, 4% sounds like a crap yield to me.

Edited by JustYield

Share this post


Link to post
Share on other sites
10. Rental market still strong -gross yields of 4% still achievable target for the Fund's properties.

Gross yield 4% still achievable eh?! Phew. Glad to know it isn't just capital appreciation that makes this such a "worthwhile investment".

What sort of moron wouldn't read that line and think it the 13th strike of the clock?

Share this post


Link to post
Share on other sites

Give the poor guys a break people. They only started in February and already they're up a whopping 7%!

Seven percent since February. I wonder how they figure that? I wonder if they bought property and sold it and made 7% or whether they're marking to model? (Just like the sub-primers) Or maybe they're talking about client money?

Well, I see that they think it matters that the London market did not go down during the Mexican peso and Russian ruble crises? I expect they think that if even such highly-correlated relationships (London residential property and the Mexican peso/Russian ruble) can withstand pressure then those nasty 0.000000000043% of American rednecks in trouble won't affect London?

Did they mention anywhere about how the London market performed during London property crises? Of course, they mention how it is a 'long term' investment. And they are absolutely correct about that. After the market crashes, smart money will be looking for the right point to buy. Property will make money in the future but only after it has lost money. And even when it makes money these characters will not be able to provide returns for anyone setting up such a fund at such a time has got to be kidding. (Talk about missing the boat?)

It is quite the most pathetic begging letter I have come across in some time. In fact, it is the worst I've seen since I lived in Mexico during the peso crash (the one that should have crashed the London residential property market?) and I got a letter from a fund that was bragging because they had lost less than a competitor (they had only lost 17million out of sixty million; their competitor had performed much worse with around 1% more).

They will be out of business very soon. They're just trying to whip up enough funds to pay their wages until they can get other jobs. Maybe the Halifax and Nationwide will invest? I hear property is on the rise? :lol:

Share this post


Link to post
Share on other sites

"On a longer term perspective, investment bank Investec undertook some research in August 2007 and found that over half of all London agents thought that, within two years, £4,000 per sq ft would be common place for the best stock. The Fund is currently buying the best stock for between £1100-£1600 per sq ft."

ah I have been going wrong all this time, I should take finanical advise from EAs!!!!

"suggesting £ per sq ft would trebble in the next two years" - anyone know how to fix a keyboard covered with coffee!!!

I wonder what the Michael Hodgson (mhodgson@dng.co.uk), (D&G Chief Executive) would say to this email making his organisation and people look like muppets ? P45 anyone? :lol:

Share this post


Link to post
Share on other sites
"On a longer term perspective, investment bank Investec undertook some research in August 2007 and found that over half of all London agents thought that, within two years, £4,000 per sq ft would be common place for the best stock. The Fund is currently buying the best stock for between £1100-£1600 per sq ft."

Over half of all Turkeys polled said they believed Christmas would certainly be abolished within the next two years. :lol:

Share this post


Link to post
Share on other sites

DON'T PANIC.

To be honest - a letter to me like that from the estate agent it would worry me. My line of thinking - in my not very economic way - says that if they are going to put THAT much effort in trying to convince me, there must be something up.

Don't think they have done themselves any favours.

Share this post


Link to post
Share on other sites

That is a very long read and I cannot see anyone being really persuaded by it.

However, I would have thought that prime London property prices will continue to be supported by the super-rich. At the moment, it is the central London effect which is pulling up the property price and price rise averages.

Also, I think it is interesting that the UK average house price on the FT index is around 220k - this includes cash transactions - many of the super-prime house transactions in London are conducted in cash. Whereas the Halifax and Nationwide indices - which cover much more bog standard mortgage-funded purchases only - show the UK house price average around 10% or so lower.

Share this post


Link to post
Share on other sites

QUOTE

1 The US mortgage market is worth $10,400 billion;

2 13% of that ( $ 1,350 billion ) has been lent to " sub-prime " borrowers;

3 14% of that 13% is delinquent ie the mortgagor is late with payments or has defaulted -so less than 2% of the total USA mortgage market is affected to date;

4 About 5% of that $1350 billion is in foreclosure ( $67 billion ), of which half is likely to be recovered;

5 Known losses so far are therefore about $33 billion;

6 That represents about 0.047% of the USA total national wealth.

If this is correct, then isn't the US sub prime scare a bit of an over reaction?

Regardless of whether it's correct (doubtful - depends on how they're defining sub-prime) the logic makes no sense. "3 14% of that 13% is delinquent ie the mortgagor is late with payments or has defaulted -so less than 2% of the total USA mortgage market is affected to date;" this and the following points assume the default rate on the remaining 87% of US mortgages to be zero .. which could be a little optimistic :blink:

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 355 The Prime Minister stated that there were three Brexit options available to the UK:

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.