Property Unplugged

Wednesday, 20 August 2008

Whatever Happended to the Property Boom?

Property group turns to Dylan for inspiration!!

By Daniel Thomas, Property Correspondent

Published: August 19 2008 08:25 | Last updated: August 19 2008 22:08

The four horsemen of the apocalypse made an appearance in the property industry on Tuesday as UK developer Brixton warned that worse was to come for the struggling sector.

The company’s weak first-half results were fronted by a picture of the horsemen, although the suggestion seemed to be that they were coming for the industry rather than for Brixton.

Tim Wheeler, head of Brixton – described with only a modicum of irony by a real estate analyst on Tuesday as “everyone’s favourite” chief executive – quoted from Bob Dylan’s All Along the Watchtower in the company’s results: “None of them along the line know what any of it is worth.”

He said the song captured the beleaguered mindset of the commercial property industry.

Mr Wheeler, a veteran of the property industry and known for his opinionated comments, warned that there would be further falls in prices as valuers struggled to catch up with the real level being set by the few transactions carried out in the market.

The value of Brixton’s own portfolio lost 10 per cent in the first half, or around £245.3m ($458m), underperforming the benchmark IPD industrial index.

Brixton focuses on what is seen as the less salubrious part of the property market: developing warehouses, industrial buildings and business parks, mainly around London’s M25 motorway and the south-east gateway airports.

The group’s name – like that of rival Segro, the developer formerly known as Slough Estates – derives from the London district in which it started.

Mr Wheeler has been one of the most bearish chief executives in the market, accurately pinpointing the top of the market in 2006 with a large sell-off of Brixton’s properties.

In the event, with hopes of a short, sharp downturn dashed, his once unfavoured predictions of a drawn-out and damaging property slump appear to be on the mark.

Mr Wheeler gave a confident report of the company’s prospects, saying that its £2.2bn of good-quality properties let to a diversified tenant base meant it was well placed to weather the storm and declaring a 2.1 per cent increase in the interim dividend.

However, he warned of the deterioration in the wider market.

The company said that net asset value per share fell 17.8 per cent to £4.48 in the six months to the end of June.

The company revealed a loss before tax of £236.7m, from £192.3m in June last year, and a loss per share of 86.8p, from earnings per share of 70.9p.

There was more positive news on rental income, with rental growth of almost 4 per cent and net rental income up 13.5 per cent to £39.4m.

But there were warnings about the future.

Mr Wheeler said that its properties would not be immune to the economic slowdown, and voids – the empty space in its buildings – had risen to 18.7 per cent, in line with company forecasts.

Tenant defaults were rising, but still modestly, as were bad debt provisions.

The group has frozen new development and acquisitions.

The company has been affected by the rates that owners of unoccupied property are having to pay, which have cost the group £1.6m since their introduction in April.

roper

Wednesday, 30 July 2008

Worrying Trend to Hit Banks?

Barclays dismisses San Marino lawsuit

Barclays Capital will fight vigorously a lawsuit filed against it in London’s High Court by a banking client Cassa di Risparmio di San Marino, which alleges misrepresentation by the UK investment bank in the sale of complex debt products.

The San Marino-based bank is seeking damages of at least €170m (£134m) in losses and lost income related to five complex credit-linked notes bought by CRSM for €450m in 2004 and 2005.

It is also seeking unspecified damages related to the restructuring of three other complex notes in June 2005.

“The legal action has no merit and we will contest it vigorously,” Barclays said on Tuesday.

The suit is part of an increasing number of actions faced by banks over their complex credit products since the market turmoil that began last year led to widespread losses in the financial industry.

Lawyers said that many disgruntled clients are pursuing the banks that had arranged complex debt products, but that claims are mostly settled well before they near a court filing, which is seen very much as a last resort, particularly in Europe.

Barclays has faced a number of similar lawsuits over collateralised debt obligations it has structured and sold.

In 2005 it settled a $151m claim brought by HSH Nordbank of Germany.

HSH is also currently suing UBS, the Swiss bank, over alleged mismanagement of a $500m portfolio of collateralised debt obligations to London. The case, which is set to be heard in New York, was among the first to be filed over subprime mortgage losses in the wake of the credit crunch.

Barclays, meanwhile, is also named in a lawsuit filed this month by Oddo Asset Management of France in New York, which relates to two investment funds known as “SIV-lites”.

That suit also seeks damages from Solent, a London-based hedge fund that managed one of the investment funds, and from McGraw-Hill, the owner of Standard & Poor’s, the rating agency.

Bankers said Italy was beginning to discover the depths of its problems with structured products. Marco Elser, senior manager in Rome at Advicorp, an independent investment banking group, said: “Half of Italian banks don’t know what they have in their accounts, because the derivatives around which the structured products were sold are so complex that it would take an Einstein to figure it out.”

Additional reporting by Guy Dinmore in Rome
By Paul J Davies

Published: July 29 2008 19:05 | Last updated: July 29 2008 19:06
Copyright The Financial Times Limited 2008

The action above could be the first in an avalanche of law suits filed by investors who could feel a little hoodwinked by the avaricious banks and their rush to sell "products" to their clients in the headlong desire to make ever increasing profits from a "business" that should only be marginal at best.

When you run a business that has its hands in your pockets, the tendency is for it to help itself.

John Burke

Tuesday, 29 July 2008

Recession Problems

Economic View: Our best chance of staying out of recession may be to back the Treasury against the Bank

By Sean O'Grady
Sunday, 27 July 2008

Housing crashes are always worse than expected. A mood in which people believe that property prices only ever go up is usually a reliable leading indicator of a crash. The psychological factor in housing booms (and busts) is too little noticed, presumably because it is difficult to pin any kind of numbers on a zeitgeist. Still, it matters greatly.

An only mildly muted state of irrational exuberance was, roughly, where we stood at the start of this year. The consensus among observers – City economists, the CBI, the mortgage banks and the academics – was that property prices over the next 12 months would be "broadly flat".

The team at the Halifax, for example, put out a press release in the following confident terms: "The UK economy is in sound shape. Strong market fundamentals, a structural housing supply shortage and pent-up demand from a large number of potential first-time buyers will support house prices, preventing a sustained and significant fall." Even allowing for a vested interest, that was a truly brave face.

Well, as we journalists sometimes say of the stories that somehow don't quite come true, the Halifax may have been "right at the time". However, a few short months on, those "fundamentals" do not seem half as sound. The economy grew by a rather sluggish 0.2 per cent in the last quarter, after a similarly lacklustre 0.3 per cent in the first three months of 2008. A recession next year is perfectly feasible.

The biggest single contributor to the slowdown is the collapse in the construction industry, and in particular in private housing starts. Perversely, that may mean a bounce in prices a few years out, when we would have the odd confluence of an end to the credit crunch (one hopes) plus a drying-up in the supply of new homes, since Barratt, Persimmon and the others have almost frozen their building projects. But for now, the overhang of unsold properties and a glut of inner-city regeneration flats are going to stymie things. Values are falling catastrophically in some parts of the country. Add in the effects of consumers being able to borrow less on the shrinking equity in their homes, the "feel-poor" factor that will depress their spending further and the decline in demand for furniture, new carpets and household appliances, and you can easily see the property slump knocking 1 to 3 per cent off economic growth.

And we all know what is holding the real estate market back: the "pent-up demand" among first-time buyers that the Halifax identified at the beginning of the year is staying pent-up, thanks to the refusal of the Halifax, among others, to lend them any money. The credit crunch has ensured the disappearance of the 100 per cent mortgage. Buyers aren't even looking around, or bothering to try to take out a loan. They may well have judged, rightly, that the next move in house prices will be down, and decided they can afford to wait. (Here is that psychological effect in reverse – "house prices will never rise".)

The Royal Institution of Chartered Surveyors confirms this. New buyer enquiries – people popping into the estate agents to check out the scene – have collapsed. Transactions are down by a half, driven by the absence of those first-time buyers. The scale of the collapse in new mortgage approvals for house purchases is astonishing.

Economists are wary of extrapolating short-term trends, so we shouldn't get too hysterical. But after a two-thirds drop in a year in bank lending on prop- erty, as reported by the British Bankers' Association, it would not take long for new mortgage lending by the banks actually to cease, killed by a combination of low supply of funds and low demand from pessimistic buyers. Cash buyers, a few lucky souls, will be in an extraordinarily advantageous position when the market hits rock bottom.

What will rock bottom be? Anyone's guess. House prices have fallen about 8 per cent since their peak last year. Just as some of the earlier estimates were wildly optimistic, perhaps we should be careful about some of the more bearish forecasts now. Adding a little inflation on to nominal falls of 30 to 40 per cent leaves house prices in real terms perhaps 50 per cent off their 2007 peak, resulting in millions of households in significant negative equity – that's on the gloomiest outlook. Unlikely, but possible – and worrying.

Which is where Sir James Crosby comes in. Soon this former chief executive of HBOS will hand in his report to the Chancellor on strategies to revive the market for mortgage-backed securities, and, thus, help the banks raise the money to lend to homebuyers (at its peak, about 30 or 40 per cent of our new mortgages were funded in this way). By far the easiest way of doing this would be to extend the Bank of England's Special Liquidity Scheme.

So far, the Bank has swapped £50bn of older mortgage-backed securities, which no one else wants, for gilts, albeit at a penal rate of interest. New mortgages are not eligible. It has helped. Now, if the Bank were to offer a similar facility for new, high-quality mortgages, that might have a similarly beneficial effect. Then the mortgage market could return to normal, house prices stabilise and the economy escape recession. Ministers would be pleased, not least for the political dividend. The snag? The Governor, Mervyn King, doesn't seem keen on the notion. Stand by for another scrap between the Treasury and the Bank. The stakes couldn't be higher.

Tuesday, 10 June 2008

Wednesday, 12 December 2007

Lenders Tighten Up

In the last 4 weeks I have that many "changes to terms" coming across my desk that I think that lenders are giving up.

Time and again we are seeing reductions in loan to value. From 95% to 90% then on down to 85%. It has to be panic -- but on two fronts.

Worries about the ability to service loans
Concern that valuations are falling!

Yes that's right values are falling. Not prices advertised. I mean who wants to accept less on their main (only) investment. Lets listen to Estate Agents, when they talk about business being slow they mean volumes are reducing. This means that less instructions to sell are coming in. But this has happened in the past back to the 1970's. It means that potential vendors are less confident about prices it means they feel they cannot get their price. So they don't sell or withdraw their property.

Throw in the impotent HIPS debacle and it means less chance of a transaction. All in all it's a dip in the prices of property. Masked by vendors who now will not go to market.

Time to see property as a place to live for the next 10 years. I mean what is going to provide a recovery (demand) first time buyers are only getting 2% pay rises or less. Banking bonus will collapse after they greedily ramped up derivatives engineered with fresh air and bull.

Buy to Letters getting less than 6% return on the full value of their property are insolvent, and will either try to sell, or subsidise their mortgage. Tenants in these properties now have the upper hand.

Only London with the 2012 and a never ending stream of inhabitants could buck the inevitable. And even there signs of the bubble are evident.

Now if the lender tighten up all hope of a property recovery in the medium term are gone. I mean overly competitive lenders actually added to the inflationary problem.

With them taking the heat from the market along with all the other factors it has to be a recession. So time to look at real investment for a change, wealth and job creation in the UK has been neglected for a decade and the chickens are coming home to roost.

Wednesday, 28 February 2007

More Sub Prime Loan Fears

By Richard Beales and Saskia Scholtes in New York

Published: February 27 2007 20:23 Last updated: February 27 2007 23:18

The market for home loans made to Americans with patchy credit histories suffered another blow on Tuesday as Freddie Mac, the US government-chartered mortgage finance group, said it would no longer buy several risky types of subprime mortgages.

The move, billed as a way of protecting borrowers from predatory lending practices, follows a sharp sell-off in the subprime mortgage world that threatens to spill over into the broader $8,000bn US mortgage market.

Defaults on home loans to subprime borrowers have spiked in recent months, exposing a loosening of lending standards in the past two years and forcing more than 20 small subprime lenders to close their doors.

Together with losses at big institutions, including HSBC and New Century Financial, this has prompted lenders to impose tighter criteria for risky borrowers. “The steps we are taking today will provide more protection to consumers and enhance the level of underwriting standards in the market,” said Richard Syron, chief executive.

Freddie Mac, which buys mortgages from lenders and guarantees bonds backed by pools of home loans, is traditionally seen – along with Fannie Mae – as a mortgage buyer of last resort.
But the company said that from September it would stop buying “no income, no assets” mortgages, in which borrowers are not asked to provide financial information; “stated income, stated assets” products, for which borrowers’ incomes are not easily verifiable; and certain kinds of mortgages offered with teaser rates.

The move could put further pressure on the battered subprime market. The ABX index tracking the credit risk on subprime mortgage-backed bonds rated BBB- has ballooned from 250 basis points about three months ago to about 1,400bp on Tuesday.

Jeffrey Rosenberg, head of credit strategy research at Bank of America, said that the “erosion” in the ABX had also “bled” into the highly rated AAA version of the index, suggesting investor concerns are broadening.

This indicator of less-risky mortgage credit risk has jumped from about 10bp at the beginning of February to approach 30bp.

Analysts say a tightening of mortgage-lending standards could damp any recovery in the housing market. Mr Rosenberg said: “Even a slight potential for housing-led weakness to grow into larger systemic concerns would lead spreads wider.”

Existing home sales data released on Tuesday suggested slightly stronger activity than expected last month. But the supply of unsold homes held steady at a high 6.6 months.

With this kind of turmoil in the housing market in the US and UK, stock market instability, a good place for cash right now is in Gold Bullion and the New Gold 4 Gold Trading Platform

Thursday, 15 February 2007

Real Estate for Dummies

Although this article and books were written in the US the simalarities are so striking that it has to be taken seriously. John Burke

By Susan Barretta

The publication of Real Estate for Dummies in November 2004 indicated that real estate has "arrived" in the public consciousness. The complete idiot’s guide to success as a real estate agent followed in 2006.

It was no longer a matter of buying a house to shelter yourself and your loved ones -- instead, it was about putting your money to work in "hard assets" by buying second and vacation homes, creating streams of income in rental properties, and fixing up properties for a quick flip.

What does the S&P 500's ascent mean?

In Wednesday's (Feb. 14) Short Term Update, editor Steven Hochberg noted that just because the S&P 500 climbed to 1455.33 on Wednesday doesn't mean that it's going to keep soaring: "Each time it appears that the S&P is finally set to confirm a reversal, prices turn up from trendline support." Yet each time this happens, the advance weakens, today's gain being the smallest. Learn more here.

The mania even reaches a point where speculators do not even have to put any elbow grease into a fixer-upper; they merely buy under-construction properties from a builder and sell 'em once they're built.

"Everybody should have the opportunity to own their piece of the American dream, no matter their income level, race, religion, or gender." On the other side of this is the haunting thought, "If I don’t get in now, I may never be able to afford it!"

"You’ve got to live someplace. They aren’t making more land!"

"[Comparable] houses have gone up ... Now I feel like we will never be able to afford a house."

Thwarted home buyer, Los Angeles Times, August 4, 2002

"We've got -- home ownership rate is at an all-time high. And a particularly important part of that statistic is minority home ownership rates are at an all-time high ... When I'm talking about ownership, I'm talking about ownership for all people, not just -- not just a certain type of person. We want ownership to be a part of every neighborhood."

President George W. Bush, July 2, 2004

The real surge in home ownership came in the post war years. Between 1960 and 1990 ownership rates were between 60% and 65%. Even with the push to improve home ownership rates for even the most disadvantaged groups, one would think that the rates would have surged past 75% by now. In 2004, when President Bush made those remarks, the home ownership rate stood at 69%. It declined slightly in 2005 to 68.9%. Perhaps slick lending tricks have been run to exhaustion.

Even children are part of the audience in the real estate sales pitch. Some realty agencies have sponsored school essay contests for students to write about what the word "home" means. One national home builder offered coloring books to the kids while the parents were in the sales gallery of the latest condo development. The subject of the coloring book? Moving into a new house, of course.

"Did you see the movie about those crazy home buyers?" Not content to just live in a house, we experience real estate through games, books, comics, TV shows, and movies.

Monopoly, the classic real estate game first released by Parker Brothers in 1935, is still the most popular board game on the planet. In the United States, city specific editions started appearing around 1994. A Mega edition, released in 2006, takes players back to the game’s origin (Atlantic City, NJ) and now has players erecting skyscrapers. The properties in the United States Here and Now edition, also released in 2006, cover the entire United States, ranging from Jacobs Field in Cleveland to Times Square in New York.

For Sale signs resembling Monopoly game boards have been spotted. The California Department of Real Estate has a link on its website directing children to a Monopoly page, to teach children about real estate.

In the amazon.com book listings, not only are there scores of published books on real estate speculation, but the number of books scheduled for future publication is climbing.

In 2006, David Lereah, chief economist of the National Association of Realtors (NAR), released Why the real estate boom will not bust – and how you can profit from it. Other books published in 2006 are:

Wise women invest in real estate
The insider’s guide to tax-free real estate: retire rich using your IRA
Weekend warrior’s guide to real estate

Titles due out in 2007 include:
All real estate is local: why understanding the housing trends in your area is essential to building wealth (also by NAR’s economist)
Successful real estate investing in a boom or bust market
Nothing down for women: the smart woman’s quick-start guide to real estate investing An insider’s guide to real estate hot spots
Rent to own: use your rent money to get started owning real estate
The real estate entrepreneur
Be a real estate millionaire: secret strategies to lifetime wealth today

If residential housing is not your cup of tea, you can always wait until 2008 for the release of How to retire fast investing in commercial real estate.

In June 2005, the nationally syndicated cartoon Cathy ran a humorous but truthful story arc in which the characters got hit with "sticker shock" while looking for a new home, and then went through the stressful process of buying a house.

Characters in the role of real estate professionals have appeared in movies and television series since these entertainment genres have come into existence. But few television programs or movies have focused on the buying, improving, and selling real estate as its central theme.

Until recently, that is. There is a real estate glut on the airwaves and in film.
Among the crop of reality TV shows are The Apprentice (2004), in which contestants seek the opportunity to work for real estate icon Donald Trump; Extreme Makeover, Home Edition (2003), in which volunteers remodel or rebuild the house of a family facing hardship; The Adam Carolla Project (2005), in which the comedian fills in as contractor and carpenter on a housing project; Flip This House (2005), in which real estate developers rapidly turn eyesores into "profitable beauties"; House Hunters International (2006), in which buyers and their agents try buying real estate overseas; and one show not yet aired as of this writing but in the works is Real Estate Confidential (2007), which presents stories on successfully buying or selling a house.

Some recent documentaries and movies on the subject include House Hunters (1999), which "focuses on the emotional experience" of buying a home; Crazy Like a Fox (2004), in which victims wage war against evil real estate speculators; and Closing Escrow (2006), a comedy about real estate in which different couples try outbidding each other for the same property. If one wants to go back far enough, Glengarry Glen Ross (1992) is about the lives of high-pressure of real estate salesmen.

An acquaintance from a family of realtors recently joked that he was hoping this market bubble would pop, "so these TV shows will go away."
"I guess it's going pretty good…I love California."
Homeowner whose house value has tripled since 1997, L.A. Times, November 12, 2006

It’s time for a trend change. In the next article, we’ll look at what kind of behavior we would expect to see as the housing bubble deflates.