Part 2: The Crystal Brick – What effect will a double dip do to the sectors of property?

Carrying on from my previous views on the short term casualties of a second recessionary slide, the second half of the “Big W”, our attention turns to those in peril in the next 6 to 18 months, or what we see as the medium term.

Firstly Shopping Centres – although arguably these are just consolidated high streets, they are managed in such a way that a small number of units can be vacant without upsetting the overall revenue streams too much. Indeed, a healthy churn rate can be viewed as a positive overall contributor as lower grade brands or low revenue generators can be replaced by more preferential tenants. However, just as a babbling brook at the bottom of the garden is considered a domestic bonus, a raging torrent outside the back door is not! Any significant chain closures, and their resulting distress sales, do nothing for the shopping centre owner and therefore investor. If there is simply not the demand or availability of new tenants to fill the voids – you can do the math!

The other factor in this sub-sector is the continued polarisation in the market, with the further development of the Westfield style mega malls having a demonstrable effect on the smaller regional siblings, where a further decline in footfall is all too self evident.

The widely reported fall in the Nationwide Building Society Consumer Confidence Index last week with its cautionary statement that “…the cost of living continued to rise at more than twice the rate of underlying wage growth, putting pressure on household budgets” was not very encouraging. Even less so, when added to last Friday’s Red Flag Alert report on the number of companies in financial distress from consultants Begbies Traynor, which highlighted a 24% increase in companies experiencing critical levels of financial distress compared with the same period in 2010. Together these seem to point to further uncomfortable times ahead – the unanswered question is though, when will we reach the bottom of the recessionary phase, and when can we look forward to some significant and sustainable economic growth? The answer is certainly not yet clear.

This brings me to the next area which starts to hurt, the Industrial / Distribution market. Arguably as soon as retail takes a nose dive, bearing in mind to maintain the highest levels of efficiency they operate extremely short supply chains these days, the effect on this distribution dominated market should be fairly rapid. However, long leases and clever legal contracts should delay the arrival of any pain, at least into the 6 to 18 month period.

Finally for this piece we turn to the regional office market. If you can afford to take a 10+ year view and have bought wisely, you should be able to sleep easily waiting for the cycle to return. However, if your redemption is earlier than that or you bought prior to the Lehman brothers collapse, significant external factors come into the mix. One prayed for solution would be that packages of government backed financial stimulus, direct and indirect, come to pass in the locality of your investment.

If one looks at the numbers who have aped Norman Tebbit’s rallying cry and got “on their bikes”, the increased levels of economic migrancy arriving in and around Greater London are not just arriving to escape the Euroland crises in the PIIGS and elsewhere including the former Eastern Bloc nations, they are actually starting to arrive by the bus load from other parts of the UK – perhaps now is the time to be regionally afraid.

As we have not perfected the art of teleportation, not least of humans but of office buildings too, a simple slow down or cessation of demand will have a negative affect on rents, capital values and any new development in the regions. The regional economic picture has been trading in challenged times for some years, and sadly has not followed the traditional gleeful “yellow brick road” cycle of London’s comparative prosperity as it has in the past. This is even more applicable to the secondary market, despite increasingly attractive pricing, for painfully obvious reasons. However a glimmer of hope here could be the trend towards conversion of certain office and industrial premises into residential use, but as it seems to be only economically viable on pre-1970s structures, those built in the heyday of the 1980s may well have to fester for the moment.

The final look into the 18 months plus category will be posted shortly.

Read my previous blog on the Short Term effects

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The Crystal Brick – What effect will a Double Dip have on the sectors of property?

By way of introduction, it is important to mention that this is written in light of many economic commentators recently coming out and claiming we are heading into that famed double dip – “The Big W”.  Although it was mentioned some months if not years ago, the volume of the clamour means, if nothing else, it could be a self fulfilling prophecy!

The first casualty of economic slowdown is normally consumer spending, which in turn affects goods and services, and then corporate prosperity, which leads to higher unemployment and thus the effect grows exponentially.

Over my next few blogs I want to explore the commercial casualties in the short, medium and long term. Let’s first look at the short term effects, by which I mean the next six months.

The first victim will be leisure, not just the attractions, but also hotels, pubs and clubs – the latter for whom are as much under the mercy of large celebratory gatherings such as Christmas and World Cups. It is the same for certain retailers such as supermarkets, but at least the Sainsbury’s of this world have food as an underlying and robust revenue line, and we all need to eat. Put simply the reduction in the money in a consumer’s pocket means less across the bar for their beloved pint.

Everyone has noticed a shop that has failed to re-open its doors since the Christmas rush. News of the demise or fall from grace of high street brands infiltrates our media on a regular basis. A couple of years ago the great British public was up in arms about the death of its much loved Woolworths, whereas more recent news is accepted as a sign of the economic times. There undoubtedly will be more casualties to follow with worrying trading statements coming out of many retailers, including some previously thought bulletproof brands.

This theme continues as consumers decide to make-do and mend, and not replace larger capital items such as cars and white goods, or pursue cosmetic upgrades such as new kitchens – cue the depressed look on the Out of Town Retail Park where window shopping becomes the daytime activity and the main out of hours pursuit becomes racing by joyriders – more headaches for the beleaguered owner!

Hotels remain a mixed bag, with the Diamond Jubilee and Olympics coming up, those that are located to take advantage will reap the rewards of visiting foreign nationals. However as virtually all summer Olympic host cities have slipped into recession within a year of the closing ceremony, their profitability thereafter maybe brought into question. Hotels in rural locations may too suffer from the consumer spending slowdown as will hotels that rely on the business traveller as corporate budgets get cut. Those who rely on the UK based tourism market could also suffer from the increased competition by overseas tour operators and low-cost airlines as they all vie for our holiday spending money, and tempt us to forget our domestic woes.

Student accommodation will face a number of issues, notably the restrictions on UK study visas, which will reduce the number of University’s cash cows – foreign students. We are all aware of the government’s announcement, and have seen footage of the subsequent protests in response to the rise in university tuition fees – the most blatant consequence will be that domestic students may now need to choose a course and university that is commutable from their parents home as a result, rather than their own digs in proximity to their seat of learning. Finally, as an investment, institutions have dived hell for leather for a piece of this UNITE dominated market, with serious concerns about oversupply and the high prices paid starting to surface.

I’ll look at the effect on other sectors in the Medium (6-18 months) and Long (18 months+) term including Shopping Centres, offices and Residential in my next blogs.

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Mill Group to give evidence to CLG Select Committee

Submission to CLG Select Committee – Financing New Housing Supply

Following advice from a number of CLG Select Committee members, we submitted a paper to the Committee to demonstrate how Co-investment makes an immediate and direct contribution to housing supply. We understand that the paper was well received and have been invited to give Oral Evidence to the Committee on 30th January 2012, which we are looking forward to. Our submission can be viewed here.

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Tipping the Balance in 2012

A Happy 2012 to you all.

We have an exciting few months ahead of us. The Greater London Authority’s (GLA) independently commissioned due diligence for our Investors in Housing proposition is soon to be completed, and should be available to all interested London boroughs. If you would like to discuss this with me, please do get in touch. We are also in advanced discussions with a number of segregated mandate investors and expect to reach a close within the next couple of months.

We are also pleased to support the annual British Property Federation dinner as one of the main sponsors. The annual residential dinner will be held in the splendid Gladstone Library at One Whitehall Place on the evening of 28 February 2012. Sir Bob Kerslake will be the guest speaker at the dinner. If you would like to attend and are not a member, a mention of Mill Group as a contact will get you the members rate. I look forward to seeing many of you there.

Our own event last September, saw Investors, experts and leaders in field come together to discuss the feasibility of ‘Residential Investment and the Institutions’.  Due to its success, we hope to hold another event for thought leaders to discuss how we can make some of the ideas that came out of the debate into a reality.

In March we will also be attending MIPIM to continue gathering support for Investors in Housing. Our focus is on innovation and change. We have a sound investment proposition, finally offering a way for investors to benefit from stable, long term returns from the UK Housing market through our product, whilst changing the face of residential investment.

We thank all our supporters to date. This year, it’s about tipping the balance.

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New Build Indemnity Scheme Should be Extended to Investors

Our ears pricked up on first hearing about the Government’s New Build Indemnity Scheme last week. The good news is that this sets a precedent in Government support /active encouragement for long term finance providers to help get Britain building again.

The new build indemnity scheme, led by the Home Builders Federation and Council of Mortgage Lenders, is expected to deliver both an increase in housing supply, and access to affordable mortgages for those without large savings who wish to purchase a new home. Any measures to stimulate supply are welcomed! Lenders are not the only solution here though, and this is why Mill Group are lobbying hard for the scheme to be extended to investors – on the same terms.

Lenders have finite new money for lending and at best this will mean lending reallocation, rather than new funds. To quote the CML website, it “will not increase the flow of funds available to lenders. Conditions in funding markets are likely to remain challenging. But the funding shortage has reinforced a strong preference for risk-averse lending, which has sharply restricted the availability of mortgages at higher loan-to-value (LTV) ratios.”

Mill Group have a number of advisers closely associated with both the mortgage and building industry and there are unresolved issues we feel around lending under the scheme.

Lending decisions will continue to require consumer affordability to be assessed under stress test scenarios rather than be reliant on security pool size. The focus on repayment mortgages are likely to remain. It is our understanding that the costs /risk and capital weighting required under this new security structure have not been agreed with the FSA or determined under Basel III.  The 95% loans even with 9% cash cover for 95% of loss are still considered risky lending given the current economy (uncertain job market and house price outlook etc).  Other deals like FirstBuy are far better for lenders (though not for the builders).

So we envisage limited mortgage availability offerings at 95%, with those offered, at a higher interest rate. Our Co-investment model will remain 10% cheaper at 95% investment than the cost of servicing comparable 90% LTV.

The new build indemnity scheme will be open to all builders and all lenders operating in England who wish to participate and will apply to all new build properties, with mortgages expected to be available under the scheme from March 2012.  It is expected to provide a guarantee for up to 100,000 new mortgages at up to 95 per cent loan to value for new build properties in England- that’s less than 10% of the current levels of demand. Co-investment will look to help fill that gap, offering access to new and existing properties.

On paper, it’s a big win for builders – but the question is – will the lending be forthcoming?  We certainly hope it is, as a buoyant housing market is much preferred to a moribund one. 2012 will be an interesting year indeed!

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Mill Group Sponsors Annual BPF Residential Conference

Mill Group are pleased to be one of the key sponsors at the BPF Residential Dinner and Conference 2012 on the 28th & 29th February 2012.

At the British Property Federation’s Residential Dinner and Conference, investors, developers and landlords will meet the decision makers shaping the future of the residential sector.

The dinner will be held in the Gladstone Library at One Whitehall Place in London, and the conference at the New Street Square offices of Deloitte.

This year’s event will look at the prospects for the economy, new models of residential investment, successful property public relations, the sustainability agenda, and a revisitation of the Barker Review.

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8 Radical Solutions to the Housing Crisis?

An excellent article on the BBC website today headed 8 Radical Solutions to the Housing Crisis.   As more and more reports are published highlighting the crisis, the solutions seem to become more and more bizarre.

Here are the 8 solutions featured, all serious suggestions from a number of eminent people and bodies:

  1. Encourage the elderly out of big houses
  2. Freestyle planning
  3. Contain population growth
  4. Force landlords to sell of let empty properties
  5. Ban second homes
  6. Guarantee mortgage payments
  7. Live with extended family
  8. Build more council homes

Just 134,000 homes were built in the UK in 2010, the lowest number since World War II, despite 230,000 new households being formed every year. According to the IPPR, by 2025 there will be a housing shortfall of 750,000 in England alone.  

Of course, it is the younger generation that will suffer the most. A fifth of 18-to-34-year-olds have been forced to live with their parents because they can’t afford to rent or buy a home, according to the charity Shelter.

There are simpler solutions than numbers 1 – 7 listed above!

The volume of mortgage approvals has fallen to 40% of 2006/07 levels. It is no surprise that the volume of house building has suffered accordingly, as mortgages have always been the primary source of funding for housing supply.

What we are proposing is a new source of funding for first time buyers, which comes from the institutional investor market rather than the mortgage lenders. This new source of funding will have exactly the same impact on the housing market as an increase in mortgage supply.

It does not burden aspiring home buyers with debt, has no risk of negative equity and costs less than a mortgage and, in many cases, is less than renting. Investors will access the residential property market with a realistic, scalable, low risk and higher yielding investment strategy.

It has to be a better solution than kicking granny out onto the streets!

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First Time Buyer Show highlights housing scheme

 The First Time Buyer show, now in its second year, will be sponsored by Barratt Homes, and will showcase many new properties in the new government backed FirstBuy scheme. 

First Time Buyers need all the help they can get, and we don’t just mean in terms of legal and financial advice. Not everyone will fit into the FirstBuy government scheme.

Those looking for ways to get on the property ladder for the first time and have been priced out of the London market because of the large deposits required, may be interested to check out the Investors in Homes proposition which allows FTBs to buy whatever property they want – where they want, with as little as 5% deposit and no mortgage needed. www.investorsinhomes.co.uk

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Local Authorities and other Pension Funds consider Investment into Residential

It’s good to see that more and more Local Authorities and other pension funds and investors are considering investment in residential housing in London as a key part of their overall pensions strategy.

Mill Group’s proposition should definitely be on the agenda. It’s also being widely considered in political circles too, as the solution to London’s 2nd housing crisis.

That’s no real surprise. According to Chesterton Humberts/CEBR House Price Poll of Polls for September 2011,  amidst the doom and gloom of recent prophecies for the international economy and turbulence in financial markets, house prices in the UK remain roughly stable. The average price of a house in the UK rose by 0.2% in September, which is  -1.6% lower compared to the same month last year.

However, this figure masks a significant difference between homes in the North and South of England. For example, house prices in London have risen by 2.5% over the year compared to a fall of -5.2% in the North West. Taken together, this means that the national average is being heavily supported by the desirability of homes in the capital.

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Investors in Homes in the Sunday Times

This article first appeared in the Sunday Times, 2 October 2011

Unable to save up for a deposit? A new shared ownership scheme may help.
By Ruth Bloomfield

With the average age of the first-time buyer heading, apparently inexorably, towards 40, there is no shortage of schemes to help people onto the first rung of the housing ladder. Until now, however, they have been almost exclusively for new-build homes and are often only for those on smaller incomes.

Today, the Mill Group, a property and investment firm, is launching a new scheme to help would-be homeowners buy any property — even a period one. To qualify, they will need a minimum of 5% of the value of the property in cash, with the remainder paid by the firm.

In return, they will pay what is described as a monthly “co-investment” charge — roughly equivalent to the cost of a 5.5% repayment mortgage. After five years, by which time, it is assumed, they will have had a chance to save up and hopefully enjoyed a few pay rises, they can purchase the rest of the property for 95% of its market price. The purchase must be completed by the end of year seven if they want to benefit from the discount; alternatively they can continue with the scheme.

The company, which aims to raise £100m from institutional investors to fund the scheme, is inviting expressions of interest. It envisages the first homes will be bought next spring. David Toplas, the Mill Group’s chief executive, says: “Co-investment is designed for those who can afford a mortgage, but don’t have access to the huge deposits required by the mortgage lenders.”

The scheme will initially target about 400 London buyers with an annual household income of £60,000 or more — unlike other schemes (see panel, below) that typically consider only people earning less than that figure. As with a mortgage application, they will be required to pass various financial tests. If the scheme is successful, Toplas hopes to roll it out nationwide, targeting other groups, perhaps divorcing couples or second-steppers trapped in small first homes.

So, does it make financial sense? Yolande Barnes, director of residential research at Savills estate agency, thinks the scheme would be of particular benefit to the “intermediate market”: that is, the large number of people who could afford to service a mortgage, which, in many cases, would be less than the rent they’d have to pay for the same property, but cannot scrape together the deposit.

“It just means you have a kind of sleeping partner in the house,” she says. “I can’t see any reason why it wouldn’t work — it is really the bank of other people’s mum and dad.”

To register interest in the scheme, visit www.investorsinhomes.co.uk 

The full article can be read at The Sunday Times or on the Mill Group website

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