Investors eye real estate after tough 2007

Business Times – 11 Mar 2008

Asian property and niche sectors are attracting assets

(LONDON) Many investors in alternative assets plan to invest more in real estate after poor returns from the sector in 2007, a PricewaterhouseCoopers (PwC) survey showed yesterday.

John Forbes, UK real estate leader at PwC, said some investors had been lured back to UK property after prices fell sharply.

Growth areas such as Asian property and niche sectors such as student housing were also attracting assets, he said.

PwC’s global survey, which polled 226 institutional investors and alternative investment providers in the fourth quarter of 2007, showed a gross 41 per cent of investors plan to increase real estate allocations over the next three years.

That compares with 40 per cent for private equity, 35 per cent for commodities and 33 per cent for hedge funds.

However, 21 per cent of investors planned to reduce their allocations to real estate, compared with  6 per cent for hedge funds, 15 per cent for commodities and 11 per cent for private equity.

Forbes said: ‘UK real estate capital values are down perhaps 20 to 25 per cent from the top of the market. For some types of investors that will discourage them.

‘But for opportunistic investors, who have been out of the UK market for the past two to three years, the UK is starting to look cheap so they are coming back.’

UK commercial property delivered a total return, which combines rental income and capital growth, of -3.4 per cent in 2007, as the credit crisis bit and investor sentiment soured.

The survey also showed less than half of respondents were satisfied with the performance of hedge funds, while nearly a fifth were dissatisfied.

That compares with private equity, where two- thirds were satisfied and only 7 per cent dissatisfied, or real estate, where 57 per cent were happy with performance and 11 per cent unhappy.

The survey follows a strong year for hedge funds. According to Credit Suisse/Tremont they returned 12.56 per cent in 2007.

Rob Mellor, UK financial services tax leader at PwC, said hedge funds had to become better at managing investor expectations and explaining how they achieved returns, especially when conditions turn.

Some may have feared the credit crisis would hit hedge fund returns harder than it eventually did, he said\. \– Reuters

Opportunistic investors recoil from Asia property

Business Times – 11 Mar 2008

They see more scope for picking up cheaper properties in US, Europe; loans in Japan tougher

(HONG KONG) Opportunistic investors are pulling back from Asian property because they see more scope for picking up distressed assets in the United States and Europe, and loans are harder to get in Japan, one of their favourite markets.

Hedge funds have stopped dabbling in property in the region, fund managers say. And although private equity players will continue to develop property in India and China, they are more likely to buy buildings on the cheap in the West than in Asia.

‘Six months ago, it was quite straightforward. We didn’t have to answer questions about why to invest in Asia,’ Guy Cawthra, Asia fund strategist at Morley Fund Managers, told a recent conference in Hong Kong. ‘Now investors say ‘we might not want to invest in Asia; we want to invest in Europe, the UK and the US’.’

In the wake of the 1997-98 economic crisis, Asia – in particular, Japan and South Korea – drew a raft of investment from funds run by the likes of Morgan Stanley, General Electric and private equity firms such as Carlyle Group .

Many made fat profits on a revival by Asian property markets, which are now mostly strong because of a shortage of new supply and still buoyant economies.

Researchers at consultants Jones Lang LaSalle forecast Tokyo office prices will steady this year after a 28 per cent jump in 2007, while Seoul, Hong Kong, Singapore and Shanghai are still on the up.

Better opportunities now lie elsewhere for investors who think they can spot a market trough and  ride a recovery.

Because of tight credit and a worsening economy, US commercial real estate values could fall by 20 per cent in the next five years from their 2007 peak, JPMorgan analysts forecast, causing losses of about US$120 billion, including on commercial mortgage-backed securities.

London office values have dropped 12 per cent from a peak in the middle of last year, and they will be pressured further by forecasts of a 10 per cent decline in rental values through 2009.

‘I think a lot of investors will return to home markets,’ said Bart Coenraads, head of real estate at Fortis Investments. ‘Some will try to buy distressed core and refinance it. They could make good returns.’

Last year, total direct investment in the Asia-Pacific region jumped 27 per cent to US$121 billion – a sixth of the global total – with about half invested in Japan, which has been popular for its rock- bottom interest rates.

However, Japanese banks are getting cold feet on property, analysts say, giving loans worth only 60- 70 per cent of a building’s value, compared to 80-90 per cent a couple of years ago.

Lower debt gearing is likely to crimp returns for equity investors. But having spent years setting up teams, private equity funds are unlikely to withdraw completely from Asia, said Tim Bellman, global head of strategy for ING Real Estate.

Many, such as Morgan Stanley Real Estate Funds, no longer see themselves as ‘opportunistic’, and are in Asia for the long haul.

‘Funds have been raised and platforms are set up, and they don’t want to unwind them overnight,’ Mr Bellman said. ‘But at the margin, opportunistic investors who looked at Asia are finding those opportunities back home.’

Morgan Stanley is building housing in China and taking stakes in Indian developers in a high-risk, high-return strategy. But the US investment bank also bought the Tokyo headquarters of Citigroup last month, indicating it is still interested in ‘core’ assets that are low risk but give modest returns\. \–Reuters

Property investors set sights on market trough in US, Europe

March 11, 2008

HONG KONG – OPPORTUNISTIC investors are pulling back from Asian property because they see more scope for picking up distressed assets in the United States and Europe.

Hedge funds have stopped dabbling in property in the region, fund managers say.

Although private equity firms will continue to develop property in India and China, they are more likely to buy buildings on the cheap in the West than in Asia.

In the wake of the economic crisis from 1997- 1998, Asia, in particular Japan and South Korea, drew a raft of investment from funds run by the likes of Morgan Stanley, General Electric and private equity firms such as the Carlyle Group.

Many have made fat profits on a revival by Asian property markets, which are now mostly strong.

Researchers at Jones Lang LaSalle forecast Tokyo office prices will steady this year after a 28 per cent jump last year, while Seoul, Hong Kong, Singapore and Shanghai are still on the up.

Better opportunities, however, now lie elsewhere for investors who think they can spot a market trough.

Because of tight credit and a worsening economy, US commercial real estate values could fall by 20 per cent in the next five years from their peak last year.

London office values have dropped 12 per cent from a peak in the middle of last year, and they will be pressured further by forecasts of a 10 per cent decline in rental values through next year.

‘I think a lot of investors will return to home markets,’ said Mr Bart Coenraads, head of real estate at Fortis Investments.

‘Some will try to buy distressed core and refinance it. They could make good returns.’

Last year, total direct investment in the Asia-Pacific region jumped 27 per cent to US$121 billion (S$167.8 billion) – a sixth of the global total – with about half invested in Japan, which has been popular for its rock-bottom interest rates.

However, Japanese banks are getting cold feet on property, only giving loans worth 60 per cent to 70 per cent of a building’s value, compared to 80 per cent to 90 per cent years earlier.

But having spent years setting up teams, private equity funds are unlikely to withdraw completely from Asia.

‘Funds have been raised and platforms are set up, and they don’t want to unwind them overnight,’ said Mr Tim Bellman, global head of strategy for ING Real Estate.

‘But at the margin, opportunistic investors who looked at Asia are finding those opportunities back home.’

REUTERS

Source: The Straits Times

Property valuations in focus amid Spanish angst

(LONDON) Spanish property developers, having enjoyed what once seemed an unstoppable boom, could face a severe mauling unless they bow to more realistic pricing as the economy slows and banks rein in lending.

The true value of real estate is a growing bone of contention as more debt-doped property firms get into trouble, leaving creditors and opportunistic buyers to squabble over assets, as in the on-off takeover saga engulfing property firm Colonial.

James Preston, who heads the Madrid office of European property funds firm Rockspring, sees international banks and investors losing confidence in the absence of an improvement in property market transparency in Spain.

‘It can only prolong the pain and result in a protracted, ‘U-shaped’ recovery,’ he said. ‘It is doing a disservice to this market which is at the aperitif stage of a very long, foul meal.’

‘I don’t believe valuers are marking to market, full stop,’ Mr Preston said. ‘And I don’t believe valuers are reflecting the reality for any property company, quoted or otherwise, in particular in relation to land banks.’ Such scepticism is shared by other real estate experts.

‘Spanish property values are lower than people think,’ said JPMorgan analyst Harm Meijer here.

Mr Preston sees a parallel, in terms of lack of transparency, with the US sub-prime crisis, which has so far led to banks writing off up to US$160 billion and resulted in a global debt logjam as confidence in the value of mortgage-related debt collapsed.

Spain’s relatively conservative banking industry bears few US sub-prime scars. It churned out 31.6 billion euros (S$66.9 billion) in residential mortgage-backed bonds in the second half of last year, as other markets seized up, according to Moody’s. But it could yet face more trouble as an unprecedented construction boom – accounting for almost a fifth of Spain’s economic growth – slows sharply.

Across Spain, unemployment is rising faster than anywhere else in Europe. Consumer confidence is at its lowest level since Spain’s last housing crisis, in the early 1990s, according to Eurostat and Bank of Spain data.

It is not just smaller-scale builders of coastal holiday homes or speculative owners of land banks with dubious planning rights that may be vulnerable, though these are seen by analysts as most overvalued in the current climate.

Several Spanish property developers have filed for creditor protection in the last few months, while Barcelona-based Habitat last week staved off bankruptcy at the eleventh hour by refinancing 1.6 billion euros of debt.

Some of Spain’s biggest property firms – including Colonial, Metrovacesa, Martinsa Fadesa, and Realia – have also bulked up on debt, which until recently was paid back with steady cash flow in a rising market.

Unlike in the United States and other parts of Europe – where there is a clearer demarcation between housebuilders and commercial property landlords – these firms have both housing and commercial property and so are exposed to any weakness.

The Bank of Spain has said Spanish homes may be up to 30 per cent overvalued. The government, which faces general elections on March 9, expects house price growth to ease to low single digits but not turn negative. But it is no longer just housing which could be a problem.

Commercial property – pricey by regional standards – could suffer too since a slower economy will undermine corporate demand for space and drag on rental growth.

Office rental yields – a valuation measure which moves inversely to price – are 4.5 per cent in Madrid and Barcelona, a percentage point less than in London’s City district, according to data from CB Richard Ellis (CBRE).

CBRE says yields in Spain’s top two cities have risen about a quarter percentage point since the third quarter of 2007. But the correction has been more acute in Britain, which like Spain is coming off one of Europe’s biggest, longest property booms.

Office, industrial, and retail property valuations in Britain have been cut by 13-14 per cent since the summer.

Source: Reuters (Business Times 6 Mar 08)

UK housebuilders face hard times

Fewer houses built as higher interest rates, credit crunch drive away buyers

(LONDON) Britain’s housebuilders are building fewer homes in the face of tighter mortgage lending and an uncertain price outlook, but slashing volumes and costs may not be enough to lure back investors to the battered sector.

Britain’s major builders completed fewer homes last year – about 76,000, down around 10 per cent on 2006 – as higher interest rates and the global credit crunch drove away buyers.

And things are set to get worse, with analysts predicting 10-16 per cent fewer new homes this year, a price fall of around 3 to 5 per cent and a drop of some 20 per cent in transactions.

Such worries have pushed shares of major housebuilders including Barratt and Taylor Wimpey down more than 50 per cent in the past six months.

The stocks have recouped some of the losses since mid-January, as value investors entered the market, but analysts warn of tougher times ahead and prolonged volatility, as data so far sends mixed signals on the market conditions.

‘Tighter credit is the major constraint, and this is unlikely to change for a while. So no one is expecting that a short, sharp shock will be followed by a swift, V-shaped recovery,’ Charles Stanley analyst Tom Gidley-Kitchin said.

Citigroup and KBC analysts agree the sector is cheap, but they caution that any revaluation is unlikely until late April and May when more solid data on the spring selling season is available.

‘A lot of this (macroeconomic and liquidity risk) is already in share prices . . . (but) our preference is to wait for another three months or so of data, as by then there will be much more evidence of either a stabilisation in the market or a clear drop in activity,’ Citigroup analysts said.

Housebuilders, in the midst of reporting 2007 results, are divided on whether the market is showing signs of recovery after its sharp downturn in the final few months of 2007.

Barratt chief executive Mark Clare, on the one hand, said last week the market was improving more quickly than he had expected.

He pointed to a 36 per cent rise in property viewings from the second half of 2007 and a return in the number of people cancelling reservations to the usual level of about 20 per cent.

These signs of hope were given a tentative boost last week by official figures. While reporting the smallest rise in mortgage lending for 21/2 years, the Bank of England also said that mortgage approvals – an indication of future lending – unexpectedly picked up in January.

But other builders such as Galliford and Redrow turned more cautious, as they prepare to spend more on incentives such as part-exchange deals and mortgage assistance to restore falling sales.

Persimmon reported a 19 per cent fall in presold homes last week versus a 14 per cent drop in January, while Barratt’s forward sales decline was 7 per cent versus 6 per cent in January.

A further weakening in house prices – which in January recorded their biggest quarterly fall in at least a decade – would be a big blow to builders, which are under additional pressure from high prices for raw materials.

Builders’ drive to cut costs, which has been so far centred on reducing labour costs, closing branches and renegotiating terms with subcontractors, will also have only limited impact on improving margins without house price rises, analysts say.

‘We see the new build sector having difficulties cutting costs as land within cost of sales is essentially fixed or rising, materials costs look likely to rise and the hoped for 5-10 per cent cut in labour costs looks hard to achieve,’ KBC analysts said.

Cazenove analysts estimate the impact of lower house prices on builders’ bottom line is four times bigger than a volume change, with a one per cent drop in prices cutting operating profits by 4 per cent.

They believe after a recent recovery, the shares of housebuilders no longer adequately price in the possibility of a recession.

UK housebuilders trade at 9.5 times forecast earnings, versus the overall market’s 11 times.

For longer-term investors, however, builders still appear a good bet, with tight supply of new stock set to continue and a massive discount to their asset values such as land.

The number of households in England is currently estimated to outgrow housing stock by 38,000 a year due to immigration and a growing number of single-member households, according to the government.

Britain already has one of the slowest rate of housing starts across Europe, ahead of only Slovakia, Poland and Germany – a fact which builders, and many industry analysts, blame on the government’s tight planning laws.

‘With an ongoing restrictive planning regime, it is unlikely that enough homes will be built to catch up demand. This is not a problem that will ease over the next few years,’ Panmure analysts said.

Source: Reuters (Business Times 6 Mar 08)

London luxury-home prices jump again

1.1% rise in average price of units costing £2.5m or more; overall market unchanged

(EDINBURGH) Luxury-home prices in London, the world’s most expensive city for prime real estate, rose at the fastest rate in four months as the overall UK market stagnated, industry reports showed.

The average price of houses and apartments costing at least £2.5 million (S$6.96 million) climbed 1.1 per cent in January from December, Knight Frank LLC said in a statement on Tuesday. There was no change in the average cost of homes across the country, HBOS plc said in a separate report.

‘It is being totally led by the purchase of properties of £10 million or more,’ Liam Bailey, head of residential research at Knight Frank, said in an interview. ‘The number of deals done at that level in the past three months was double a year ago.’

The wealthiest property buyers don’t need to borrow money to make purchases, so they’re not dependent on lenders that have made it more difficult and costly to obtain mortgages, Mr Bailey said.

Britons are now buying between 40 and 50 per cent of all London homes priced at more than £10 million, up from 30 per cent a year ago, according to Knight Frank, a real estate broker based in the city.

London’s most expensive new- built home was sold for £50 million last month to Hourieh Peramaa, a 75-year-old real estate entrepreneur from Kazakhstan, Sunday Times reported on Jan 27.

The house on Bishops Avenue in Hampstead, northwest London, has nine main bedrooms, 16 bathrooms and five reception rooms, and was acquired from Turkish businessman Halis Toprak.

Ms Peramaa plans to spend another £30 million extending and redecorating the property, the newspaper said.

Earlier in January, Lev Leviev, an Israeli diamond billionaire, paid £35 million for a house in the same district as Ms Peramaa, according to Daily Telegraph.

Indian steel entrepreneur Lakshmi Mittal owns the UK’s most expensive home. He paid £57 million in 2004 for a home close to Kensington Palace in central London. Both Kensington Palace Gardens and Bishops Avenue have been dubbed ‘Billionaires Row’.

January’s increase in luxury-home prices was the biggest since September, when prices advanced 1.2 per cent.

For the year ended Jan 31, the gain was 26 per cent, the smallest since October 2006.

Across Britain, prices in January were 4.5 per cent higher than a year earlier, according to HBOS, the country’s largest mortgage provider. Lenders are selling fewer mortgages as they contend with losses stemming from the collapse of the US sub-prime mortgage market.

Properties at the lower end of Knight Frank’s prime index are now moving more in line with the UK market, said Mr Bailey.

Bonus-earners in the UK’s financial industry will invest £2 billion in homes this year, compared with £5.5 billion in 2007, as they look for higher returns, Savills plc said in November. Savills and Knight Frank are the biggest brokers for prime London properties.

This year, top-quality dwellings in the UK capital will appreciate about 3 per cent, Knight Frank said on Tuesday, reiterating an October forecast. The Bank of England’s ability to cut interest rates to ward off an economic slowdown may be hindered by inflationary pressures, said Knight Frank.

‘It is fair to say that the issues of confidence and affordability that have so far dogged the main market may now promote a more cautious purchasing environment in the prime sector too,’ Mr Bailey said.

Britain is home to about 68 billionaires, according to the Sunday Times 2007 Rich List. Many are investors from China, India and Russia who have bought homes in London for its schools, stores, theatres and restaurants.

The most expensive houses can fetch as much as £4,000 a square foot, CB Richard Ellis Hamptons International estimates. That compares with about £2,075 a square foot in New York, the broker said.

Purchasing at such prices so far isn’t being inhibited by the prospect that the UK may impose an annual tax of £30,000 on wealthy individuals who live in the UK and keep their residence elsewhere for tax purposes, said Mr Bailey.

‘There is a lot of interest in deals being done by super-rich foreign buyers,’ he said.

 

Source: Bloomberg (Business Times 7 Feb 08)

 

Banks hold key to City office market

Lenders holding off expansion plans as credit mess lingers

(LONDON) The difference between a correction and a major slump in London’s City office market could turn on a few key tenants such as Deutsche Bank and JP Morgan, Knight Frank LLP said on Tuesday.

But record rents were likely to hold up in London’s West End district, the haunt of hedge funds, media companies and tourists, where very low vacancy rates will continue falling, the property services firm said.

Leasing activity across London fell 44 per cent in the last three months of 2007 from the previous quarter as key tenants like banks grew nervous about a global credit crunch and reassessed their City office needs, Knight Frank said at a presentation.

How soon that nervousness evaporates will depend on the state of financial markets, and will determine how much of the UK capital’s growing pipeline of new skyscrapers is absorbed.

‘The issue is all about what has gone from active (demand) to potential (demand), and then what will go from potential back to active, and then hopefully transact,’ John Snow, Knight Frank’s head of central London offices, told Reuters.

Australia’s Macquarie Bank and South African-owned Investec INVP.L are among the firms that have recently put expansion plans on hold, accounting for just over 300,000 square feet of City demand.

More pivotal, though, could be JP Morgan’s 1 million square feet City redevelopment – a deal yet to close – and the 1.5 million square feet of office space that Knight Frank said Deutsche Bank was likely to need in the future.

Deutsche and JP Morgan are among the few major investment banks that have yet to consolidate the bulk of their London operations into a single building, having so far also resisted the lure of a shift further east to Canary Wharf.

A spokeswoman for Deutsche Bank said that its London office requirements were still under review, while a spokesman for JP Morgan declined to comment on its plans for new City headquarters.

Knight Frank said total ‘active demand’ in the City at the end of 2007 was 3.9 million square feet, which included JP Morgan, while ‘potential demand’, which included Deutsche Bank’s projected needs, was another 5.4 million square feet.

Almost 14 million square feet of office space is currently under construction in central London, according to data from Knight Frank. More than 8 million of that is in the City, of which more than three-quarters is classed as ’speculative’ because it is not prelet.

Mr Snow said Knight Frank had adopted a ‘cautious and realistic approach’ in its projections, which saw ‘net effective rents’ in the City easing by £4.5 (S$12.50) to £59 per square foot per year after an extended period of double-digit rental growth.

City office vacancy rates were likely to rise above 10 per cent this year to 2005 levels from 7.9 per cent at the end of last year as new buildings came onstream and banks shed jobs, Knight Frank said.

The Centre for Economics and Business Research has forecast a loss of about 8,000 City jobs by the end of 2008, while data provider Experian puts the number between 10,000 and 20,000.

Knight Frank said the contrast could not be greater with London’s West End, which benefited from a more eclectic mix of tenants and a tighter control of new developments.

It said the core West End districts of Mayfair and St James would likely cement their position as the world’s most expensive office locations, with prime benchmark rents rising by 8 per cent to £118 per square foot per year by end-2009 as the area’s vacancy rate dipped below 4 per cent.

 

Source: Reuters (Business Times 7 Feb 08)

British house prices fall in January

(LONDON) UK house prices declined for a third month in January, reviving interest among prospective buyers after a slump in viewings late last year, Rightmove plc said.

The average asking price fell 0.8 per cent to £230,428 ($647,908) from December, compared with a 3.2 per cent drop the previous month, Britain’s most-used property website said yesterday. While the annual price gain slowed to 3.4 per cent, the lowest since 2005, the average time for a house on the market declined and Internet traffic on Rightmove’s site picked up.

‘Enough sellers seem to have dropped their prices to encourage potential buyers to look in larger numbers, suggesting we might see a more active market at this lower price level,’ said Miles Shipside, commercial director of Rightmove, in a statement.

‘Now is a good time for bargain hunters to press those committed winter sellers for a deal.’ The UK’s decade-long property boom withered in October as higher borrowing costs and forecasts for slowing economic growth deterred buyers. The Bank of England cut its benchmark interest rate for the first time in two years in December and economists predict another reduction next month.

The average time on the market for a property fell to 95 days in January from a record 98 days in December. Realtors reported greater interest from buyers and Rightmove’s website received 20 per cent more visitors in the first two weeks of 2008 than in the same period a year ago, yesterday’s report showed.

‘The first signs of recovery are there,’ Bob Jones, a real estate agent at Intercounty in Bishop’s Stortford, a town in Hertfordshire close to Stansted Airport, said in an interview. ‘People are beginning to look again now, whereas in the three months up to Christmas viewings had dried up.’

In London, prices rose 3.6 per cent to an average £398,476 after a 6.8 per cent drop the previous month.

Asking prices advanced in all but two of 32 boroughs, while time on the market reached a record 94 days this month, Rightmove said.

‘While we expect the London market to be more buoyant than the rest of the country in 2008, it remains to be seen if these higher asking prices can be achieved on top of last year’s rises,’ the report said.

December was the worst month for the housing market since the aftermath of Britain’s last recession in 1992, the Royal Institution of Chartered Surveyors said recently. HBOS plc, the country’s largest mortgage lender, said that prices dropped in Q4, the first three-month decline since 2000.

British consumers, with total debt of £1.4 trillion, are struggling with higher loan costs after contagion from the United States sub-prime-mortgage collapse froze lending between banks. The average rate offered by lenders on a mortgage for 95 per cent of the price of a property, fixed for 24 months, rose to 6.53 per cent in December from 6.44 per cent, the Bank of England said recently.

The decline in property values has contributed to a drop in consumer spending. Retail sales unexpectedly fell 0.4 per cent in December, the most in 11 months, the statistics office said on Jan 18.

The economy is still creating jobs after the fastest expansion in three years in 2007. Unemployment fell to the lowest since 1975 in December and jobs growth in the quarter through November was the strongest in a decade. ‘Affordability should continue to improve as average wages rise and interest rates fall,’

Rightmove said yesterday. It predicts that average house prices will be unchanged this year after almost tripling in the past decade.

 

Source: Bloomberg (Business Times 22 Jan 08)

UK home mortgages slip in Dec

(LONDON) British customer-owned lenders approved fewer loans for house purchase in December as falling house prices hurt the confidence of prospective buyers, a report by the Building Societies Association said.

Mortgage approvals fell 20 per cent from a year earlier to £pounds;4.1 billion (S$11.5 billion), said the BSA, which represents 59 building societies in the UK. On the month, approvals declined 9 per cent.

The UK’s decade-long property boom is withering as higher borrowing costs and forecasts for slowing economic growth deter buyers. The Bank of England cut its benchmark interest rate for the first time in two years in December.

House prices declined for a third month in January, Rightmove plc said yesterday. December was the worst month for the housing market since the aftermath of Britain’s last recession in 1992, the Royal Institution of Chartered Surveyors said on Jan 16.

Building societies attracted a record £16.1 billion pounds in savings last year as consumers withdrew deposits from Northern Rock plc in the first run on a UK bank in more than a century, the BSA said.

 

Source: Bloomberg (Business Times 22 Jan 08)

Israeli tycoon moves into record London mansion

LONDON – One of Israel’s wealthiest men has bought the most expensive new house in Britain, a home in north London complete with cinema and nightclub, costing 35 million pounds (S$99.4 million), reports said on Tuesday.

Billionaire Lev Leviev, who made his fortune in diamonds, plans to move in to the house in Hampstead with his wife Olga and two of their nine children, said London’s Evening Standard newspaper.

The 51-year-old has joined other wealthy foreigners setting up home in Britain, where they are exempt from paying tax on income earned abroad, added the Independent newspaper.

He is a friend of Roman Abramovich, owner of Chelsea Football Club, and is famous as the man who broke up a cartel controlled by diamond giant De Beers by buying mines in Russia, Angola and Namibia, the paper said.

Mr Leviev is worth 3.25 billion pounds, and gives 25 million pounds a year to charity, according to the Evening Standard, which printed pictures of the seven-bedroom house including an ornate pool with colonnades.

The Independent said that Mr Leviev, whose family arrived in Israel penniless from Uzbekistan in 1971, now has homes in Israel, Russia and the United States, and was classified until recently as Israel’s richest man.

The front door of his new London mansion is armour-plated, weighs half a tonne and cost 50,000 pounds, the paper said, citing a real estate source as saying the house represented a record for newly built property in Britain.

Mr Leviev’s family will make their home in a private road where the Beatles’ Ringo Star, the Bee Gees’ Maurice Gibb and British singing veteran Lulu have all had homes, it said.

 

Source: AFP (The Straits Times 9 Jan 08)

Spain’s Colonial seeks to sell assets

(MADRID) The Spanish stock market regulator suspended trade in beleaguered Spanish property firm Inmobiliaria Colonial yesterday, as papers reported it was seeking more asset sales to relieve its heavy debt load.

The suspension comes on the heels of a turbulent week for Spain’s second- largest real estate company after chairman Luis Portillo quit last Friday and its stock lost around 40 per cent of its value in two days’ trade.

Colonial has one of the highest debt ratios in the Spanish real estate sector, with a financial leverage of net debt against gross asset value at 77 per cent, compared with 45-50 per cent average in the European real estate sector, according to Banesto bank.

A squeeze on global market liquidity, a cooling property market in Spain and rising interest rates have conspired to make that debt much harder to service.

Net debt stood at 8.9 billion euros (S$18.8 billion) at the end of the third quarter, nearly triple its market capitalisation at end of trade on Friday of 3.1 billion euros.

Colonial hopes to sell around 24 per cent of French property firm Societe Fonciere Lyonnaise (SFL), 84.4 per cent owned by Colonial, Cinco Dias newspaper reported on Wednesday, citing sources close to the board of the company.

The property firm is also open to offers above market value for its 15 per cent stake in Spanish construction firm FCC, the paper said.

FCC shares were trading 0.88 per cent higher at 51.85 euros by 0900 GMT, a discount to the 78 euros per share paid for the stake just over a year ago.

A Colonial spokeswoman said she was not able to comment on the report.

The firm sold warehouse and logistics facilities for 201.6 million euros on Monday and a Barcelona tower block for 107 million euros on Tuesday as it seeks to lighten its debt burden.

Cinco Dias also said Colonial would seek further talks with Gecina, the French unit of Spanish real estate firm Metrovacesa, about a possible merger of the two companies.

Press reports say Colonial shareholders have put a deal on hold as they try to halt the slide in the share price.

Colonial closed trade at 1.88 euros, around a third of its year high of 6.08 euros.

 

Source: Reuters (Business Times 3 Jan 08)

Slumping Spanish market may reverberate through Europe

Banks in Spain are aggressively curbing loans in fallout from US sub-prime woes

(MADRID) Julia Gavin sold more than a house a week as the Spanish real-estate boom peaked last year. Now that business is drying up, she’s sharing leads with competitors, reckoning a partial commission is better than none at all.

‘We’re up to our ears with work, but no sales,’ said Ms Gavin, 52. ‘It’s horrible.’

Spain is suffering collateral damage from the collapse of the US market for mortgages to the riskiest borrowers and the swoon in US real estate. Spanish banks have exceeded their European peers in tightening lending standards, prompting a plea from Prime Minister Jose Luis Rodriguez Zapatero not to strangle growth.

Nowhere in Europe are the stakes higher. The country in the past two years has produced a third of the new jobs in the 13 nations that use the euro, adding 22 per cent of the region’s new demand, according to calculations by Lombard Street Research Ltd in London. That’s more than Germany, whose economy is about triple Spain’s size.

‘The end of Spain’s ‘fat’ years will hit the whole region,’ said Ralph Solveen, an economist at Commerzbank AG in Frankfurt.

Spanish economic growth is in the process of outpacing the euro region for the 13th year, as soaring property prices spurred a spending boom. Consumer debt surged to 130 per cent of incomes in June, from about 70 per cent in 2000, and with home values rising by 176 per cent over the same period, construction has accounted for one in every five new jobs. The current-account deficit demands two billion euros (S$4.24 billion) a week to finance.

The International Monetary Fund in October cut its growth forecast for Spain to 2.7 per cent next year, the slowest pace since 2002, from 3.4 per cent. It forecasts an expansion of 3.7 per cent this year.

Spain’s economy is facing ‘a prolonged period of weak growth’, said Stephane Deo, chief European economist at UBS AG in London. ‘They need to clean up the balance sheet and reduce the size of the construction sector.’

Others aren’t as downbeat, saying that immigration would spur demand for new housing while increased corporate investment would boost productivity. Spain’s largest companies will also be shielded from any slowdown by their expansion overseas.

The benchmark Ibex-35 stock index hit a record 16,040.40 last month. It is up 12 per cent this year – making it the second-best performer in Europe’s 10 largest markets this year, behind Germany’s DAX index – thanks to gains from investments in Latin America. Companies such as Telefonica SA, Europe’s second-biggest telephone company, which gets almost two-thirds of its earnings outside of Spain, helped lead the advance.

‘There’s now an important difference between what the Spanish economy does and how Spanish stocks perform,’ said Jordi Padilla, head of equities at Atlas Capital.

Spanish policymakers and executives are girding for a slowdown. Banks have four times the provisions of their rivals across the European Union to cushion against defaults, according to Banco Bilbao Vizcaya Argentaria SA.

While that may succeed in protecting capital, the cash hoarding is squeezing credit.

Three-quarters of Spain’s 60,000 property companies may end up bankrupt, according to Fernando Rodriguez de Acuna M, an analyst at RR de Acuna & Asociados, a real estate research firm. ‘They’ve been caught by the two things at once, the demand problem and the liquidity problem,’ he said. ‘Everyone is going to have problems.’

A third of Spanish banks curbed financing in the third quarter, compared with 4 per cent across the whole euro area, according to a Bank of Spain survey of lenders. With the credit shortage threatening economic growth and a general election looming in March, Mr Zapatero on Oct 15 called on banks to keep the funds flowing.

‘The strength of the economic system should encourage financial institutions, while maintaining their caution, to continue providing a reasonable amount of credit for our country, especially for the real estate sector,’ he said.

It may not help. Spanish banks’ own borrowing costs are rising – when they can borrow at all.

Banco Bilbao, Spain’s second-largest bank, was able to sell just a quarter of a 6.3 billion euro bond issue backed by mortgages and corporate loans last month. Bankinter SA pulled a sale of at least 500 million euros of mortgagebacked notes on Nov 23.

Banco Santander SA, the euro-region’s biggest bank, faces an extra 1.7 million euros a year in interest payments on a similar-sized sale made on Oct 30. That was the first such issue by a Spanish lender in three months.

Ms Gavin and her clients are paying the price. In one case last month, she said, she thought she had a sale after three months of negotiations among buyer, seller and mortgage lender. Then Ibercaja SA, a Spanish savings bank, refused her client a loan covering the 168,000 euro purchase price. The bank said that it had concluded that the client was overpaying for the property in El Escorial, near Madrid.

‘The banks are coming up with a million excuses not to give loans,’ Ms Gavin said. ‘They don’t want to take any risks.’

 

Source: Business Times 13 Dec 07

Trouble looms for a third of UK mortgages

Self-employed and those who move house frequently open to risk

(LONDON) Up to one in three or 5.5 million mortgage holders in Britain could face serious financial difficulties as a result of the US sub-prime crisis and the tougher lending climate it has created, a study showed.

According to a report published by consumer research group Mintel yesterday, people with poor credit records were not the only ones at risk.

Those who are self-employed or had moved house frequently were also in the firing line. ‘The focus over the last few months has very much been on sub-prime borrowers, but they are only the tip of the iceberg,’ Toby Clark, a senior finance analyst at Mintel, said in a statement.

Mintel said 9 per cent of British mortgage holders were classed as sub-prime, while a further 24 per cent were ‘nonstandard’ and relatively high risk because they had irregular incomes.

‘In today’s more conservative lending climate, the unconventional financial situation of these homeowners means that they will now face higher repayments and increased lenders’ fees when remortgaging or moving house,’ Mintel said.

The Council of Mortgage Lenders (CML), whose members accounted for 98 per cent of all UK residential mortgage lending, said Mintel’s figures were too high.

In an e-mail, the CML said preliminary data showed around 5 to 6 per cent of all outstanding mortgages were held by people with blemished credit records, while around 16 per cent of mortgage loans in the last year had been extended to the self-employed.

Mintel said demand for non-standard mortgages – a £125 billion (S$373.1 billion) market – was set to grow as people’s financial circumstances become more complicated due to rising divorce rates and the growing popularity of self-employment, but supply was unlikely to keep up.

Nearly two fifths of the UK adult population, or some 18 million people, probably now qualified as non-standard consumers and that figure was set to rise to 20 million by 2012, Mintel said.

‘But ironically as lenders become increasingly cautious, these non-standard mortgages will become harder to come by, leaving more adults without the finances needed to buy property,’ Mr Clark said.

Based on a survey of almost 2,000 adults, Mintel said one in five who were interested in getting a mortgage in future already foresaw some problems with their applications because of their income, working status or personal circumstances.

That figure could grow in the years ahead if banks become more cautious in their lending.

 

Source: Reuters (Business Times 29 Nov 07)

Segro buys property worth £400m in H2

(LONDON) British property firm Segro plc cautioned about continued weakness in Britain’s property markets, but it bought £400 million (S$1.19 billion) of property in its second half as it took advantage of good buying opportunities. In a trading update yesterday, the firm said financial market turmoil was taking a toll on the UK property market, increasing the likelihood of asset writedowns and reducing the number of active participants in the market.

But it said its pro-forma cash and undrawn debt facilities of £875 million would enable it to take advantage of ‘good buying opportunities’ forged by the market conditions. ‘The UK investment market has seen very few transactions in the second half of the year, with . . . the shortage of credit available to leveraged buyers dramatically reducing the volume of transactions,’ chief executive Ian Coull said.

‘Whilst this will inevitably result in professional valuers writing down the book values of properties, we believe it will create a number of opportunities for well-capitalised companies such as Segro,’ Mr Coull added. Segro shares, which have fallen 45 per cent in the year so far, rose 2.23 per cent to 424.75 pence at 0813 GMT.

The real estate investment trust achieved more than 83,000 square metres of UK lettings in the second half of the year to end-October; an increase of 65 per cent on last year’s levels. It said vacancy levels in the UK and continental Europe were still broadly unchanged from the half-year position at 11.5 per cent and 6 per cent respectively and that 36 per cent of its 394,000 square metre development pipeline had already secured tenants. The firm still saw modest rental growth across its portfolio and its full-year dividend expectations remained unchanged at around 23 pence per share.

 

Source: Reuters (Business Times 29 Nov 07)

Nakheel to buy UK property, set up Reit

Developer sees value in assets, may sell shares in US$700m trust in S’pore in ‘08

(DUBAI) Nakheel PJSC, the Dubai, United Arab Emirates-based developer of the world’s biggest manmade islands, will buy UK real estate investment funds and start a real estate investment trust, or Reit, as it expands into property asset management.

‘UK Reits are trading at a 30 per cent to 40 per cent discount now and that’s a huge opportunity,’ chief financial officer Quek Kar Tung said in an interview in Dubai on Sunday. ‘There’s no Reit market in Dubai yet, so we’ll be looking to build an international portfolio.’

Nakheel plans to start its first US$700 million Reit in the first or second quarter. The company will put homes from its Gardens and International City projects in Dubai into the trust, Mr Quek said. The trust will probably sell shares in Dubai and Singapore, he said.

State-owned Nakheel, which has US$30 billion of projects under way in Dubai, is seeking to diversify its sources of income away from domestic construction projects by expanding overseas and into fund management. A unit of Dubai World, the company has about US$7 billion of assets for its fund venture and will acquire more in January when it takes control of fellow Dubai World company Istithmar Real Estate, according to Mr Quek.

The UK benchmark FTSE All-Share Real Estate Index slumped by 38 per cent this year on falling commercial property values, higher borrowing costs and stricter controls on credit. Land Securities Group plc, the biggest British Reit, on Nov 14 said that it will split itself into three companies after its shares slumped. The stock trades at about 30 per cent below the company’s net asset value, according to Lehman Brothers Holdings Inc.

Dubai properties yield as much as 12 per cent to investors, more than double the yield in Singapore, Mr Quek said.

Listing Nakheel’s first Reit in Singapore would allow the company to take advantage of the Asian city state’s experience in trading land trusts and the ‘low cost of funding’ there, he said.

Since it was founded in 2003, Istithmar has bought New York properties including 280 Park Avenue, 450 Lexington Avenue, W Hotel Union Square and the Knickerbocker Hotel at 6 Times Square. In November 2006 it bought London’s Adelphi building for US$567 million as part of a plan to capitalise on surging demand for hotel rooms and office space in major Western cities.

 

Source: Bloomberg (Business Times 27 Nov 07)

UK house prices fall in Nov for second month running

Values down 0.2% from October but housing shortage seen limiting declines

(LONDON) UK house prices fell for a second month in November as a jump in credit costs sapped confidence among buyers and sellers, a survey by Hometrack Ltd showed.

The average cost of a home in England and Wales fell 0.2 per cent from October to £175,700 (S$524,400) following a 0.1 per cent drop the previous month, the London-based research group said yesterday. From a year earlier, prices increased 3.6 per cent, the least since July 2006.

Analysts predict the weakest housing market in a decade next year, with borrowing costs at a six-year high and a slowdown in economic growth after contagion from the US sub-prime mortgage market. The central bank signalled this month that the economy may need at least one interest-rate cut in 2008.

‘The fallout from the credit squeeze, along with relatively high interest rates, is resulting in widespread caution among homeowners,’ said Richard Donnell, director of research at Hometrack. ‘It is hard to see the catalyst for any short-term turnaround in market confidence other than interest- rate-cuts early in the new year.’

Property prices fell the most in the East Midlands, where they dropped 0.3 per cent, followed by Greater London’s 0.2 per cent decline. In central London, home values fell 0.5 per cent, Hometrack said yesterday.

Rightmove plc, HBOS plc and the Royal Institution of Chartered Surveyors have also said that house prices fell this month. Sellers should not hesitate to lower the asking price because a more protracted slowdown is on the way, Rightmove, the UK’s most-used property website, said on Nov 19.

Prices may fall next year as a ‘toxic mix’ of higher interest rates, overvaluation and record debt deters property investors, Citigroup Inc predicted on Nov 9.

A housing shortage may limit a decline in values. Construction of new homes stagnated at 148,000 units a year on average between 1989 and 2005, down from a peak of 425,000 in 1968. The economy is also on course to grow at the fastest pace in three years in 2007, buoying demand for property.

‘Values are being supported by a continued tightening in supply,’ said Mr Donnell of Hometrack. ‘But the underlying market conditions remain weak with new buyer registrations down by 26 per cent over the last five months.’

As US sub-prime-mortgage losses spread to Europe, London banks and investment companies may cut jobs and bonuses, which had helped to fuel house prices over the past decade. Workers in the City, London’s financial district, will invest only £2 billion in homes next year, compared with £5.5 billion in 2007, real estate agents Savills plc said on Nov 5.

Britons are shouldering the highest interest rates since 2001 and have amassed record debt of £1.4 trillion. The US sub-prime mortgage slump has also prompted banks to lift mortgage rates, hurting affordability.

Home loans with a fixed rate for two years, the most popular type in the UK, cost an average 6.37 per cent in interest last month, compared with 5.41 per cent a year ago, central bank data showed on Nov 9.

Bank of England deputy governor Rachel Lomax said last week that there are signs that the slowdown in the housing market ‘is gathering pace’. Economists predict that the central bank will cut the benchmark rate in the first quarter, according to the median of 15 estimates in a Bloomberg News survey from Nov 22.

 

Source: Bloomberg (Business Times 27 Nov 07)

World’s most expensive office rentals in London, Mumbai

Singapore rents grew the fastest at 83%, says survey by CB Richard Ellis

(SEATTLE) London and Mumbai tenants paid the most for high-quality offices this year, while Singapore rents grew the fastest as economic growth lured international banks to Asia, said CB Richard Ellis Group Inc, the world’s largest commercial real estate broker.

London’s West End led with average annual rents of US$328.91 per square foot (psf) this month, compared with US$180.80 for the UK capital’s main financial district.

Mumbai had the second-most expensive leases at US$189.51, CB Richard Ellis said in its semi-annual Global Market Rents survey.

Asia’s booming economies drove up demand for financial and computing services in the region, catapulting Mumbai to second spot and fuelling Singapore’s 83 per cent growth in rents.

The US currency’s decline also drove up costs in dollar terms, while a dearth of new space bolstered London rents, CB Richard Ellis said.

‘Markets that moved up that quickly had the highest growth rates based on the economy’ as well as a scarcity of space, said Ray Wong, director of research operations for the Americas for Los Angeles-based CB Richard Ellis.

‘In the most expensive markets, if they’re close to their peak, the expectation for increase is marginal, but other markets, especially resource sectors, are enjoying an increase in demand so they’re going to move up a lot quicker.’

Mumbai’s rents rose 55 per cent, driven by computer related tenants, according to CB Richard Ellis.

Midtown Manhattan was the most expensive North American market, with rents averaging US$100.79 psf, 12th highest worldwide. Downtown New York ranked 46th globally at US$53.47.

Moscow rents jumped 65 per cent after crude oil prices tripled in the past five years, bolstering the economy of the world’s second-biggest exporter of the fuel.

Rents in the oil hub of Edmonton, Canada, rose 43 per cent, the ninth- fastest worldwide, as energy companies leased more space to house expanding workforces, the survey showed. Edmonton did not rank in the top 50 markets by rental prices.

Eighty-five per cent of the 171 cities included in the survey saw rental increases in the year ended Sept 30, according to CB Richard Ellis. This bodes well for investment returns, Mr Wong said.

The survey measures the most expensive rents based on US dollars. Rental growth rates were measured in local currency terms.

 

Source: Bloomberg (Business Times 22 Nov 07)

VastNed rejects IEF Capital bid

(AMSTERDAM) Dutch property group VastNed Retail rejected a 70 euro per share, 1.15 billion euro (S$2.4 billion) intended bid from a group led by IEF Capital, saying that it was well below its real value.

VastNed Retail said in a statement that it saw no reason for further talks with IEF Capital about its plans for a bid, which was 24 per cent above VastNed’s closing price of 56.65 euros on Tuesday.

VastNed shares jumped to just above the bid price at 70.02 euros in early trade before easing, and were up 19.4 per cent at 67.65 euros by 0845 GMT, making them the biggest gainer on the Amsterdam exchange.

IEF Capital said late on Tuesday that it was preparing a bid for VastNed Retail and said that Dutch pension fund PGGM, which holds more than 20 per cent of VastNed shares, was willing to support the offer and pledge its shares under certain conditions.

IEF Capital said that it expected to get financing for the bid and needed to do only limited due diligence on the target.

 

Source: Reuters (Business Times 8 Nov 07)

Gramercy stock sale raises US$100m

(EDINBURGH) Gramercy Capital Corp, a US investment trust that specialises in commercial loans, has raised US$100 million in a share sale to Morgan Stanley’s real estate unit.

Gramercy sold 3.81 million shares at US$26.25 to an affiliate of Morgan Stanley Real Estate Special Situations Fund III, New York-based Gramercy said in a statement yesterday. Gramercy plans to use the money for ‘additional investment activity and to fund its future growth’, according to the statement.

Gramercy agreed to buy American Financial Realty Trust, a real estate investment trust that specialises in property leased by financial institutions, for about US$1.1 billion in cash and stock, The Wall Street Journal reported yesterday, citing an unidentified American Financial executive.

 

Source: Bloomberg (Business Times 6 Nov 07)

UK counting cost of housing ills

Run on Northern Rock signals boom may be ending

(LONDON) Nick Collins, an independent London real estate broker who has had record profits every year since 2003, took a hit in September – and that may be bad news for a UK economy built on a housing bubble. Five of his 50 buyers pulled out of purchases, spooked by a run on mortgage lender Northern Rock plc that left it £2 billion (S $6 billion) poorer.

‘It’s undermined people’s confidence,’ says Mr Collins, 38, who sells homes worth as much as £5 million. ‘The market’s not as frothy and competitive as it was.’

Northern Rock, which cratered after investors baulked at buying its debt, is one of several signs that the UK’s property boom may be ending. The average home almost tripled in value in the past decade, helping to fuel the country’s 15-year economic expansion – the longest in two centuries – and buoying the governments of Tony Blair and Gordon Brown.

Now, with mortgage lending cooling and house prices falling for the first time this year in September, the economy may be in the early stages of a slowdown.

‘UK house prices are significantly overvalued and extremely vulnerable to a correction,’ says Danny Gabay, a former Bank of England economist and a director of London-based Fathom Financial Consulting Ltd. ‘The downside risks to economic growth over the next 12 months are significant.’

The UK economy had been the envy of Europe, outpacing Germany and France almost every quarter from 2001 through 2005. Germany surged past the UK last year, and for 2008, Europe’s largest economies are forecast to run in a pack. The UK will probably grow 2.3 per cent next year, while Germany and France will each expand 2 per cent, the International Monetary Fund said on Oct 17.

Britain’s expansion has been spurred by a borrowing spree, thanks to interest rates at 40-year lows from 2001 to 2006. By the end of 2006, the British owed £1.37 trillion, or 1.61 times their income – the highest rate in the Group of Seven nations, according to the London-based National Institute of Economic and Social Research. By June 30, the ratio had grown to 1.66. The US rate remained at 1.42 during that period.

Britons poured the borrowed money into housing – and then used their new homes as collateral to take on even more debt. Residential property prices soared 189 per cent in the past 10 years, almost twice the increase for singlefamily homes in the US, according to HBOS plc, the UK’s biggest mortgage lender, and US government figures.

Consumers have spent some of these gains and loans on goods such as new kitchens and cars they otherwise could not afford, said Alan Clarke, a London-based economist for BNP Paribas SA, France’s biggest bank.

‘The only thing that has been supporting consumer spending growth is wealth gains from house price inflation,’ Mr Clarke says. ‘This is about to disappear.’

Lehman Brothers Holdings Inc economists in London predicted in 2005 that the surge in housing prices would begin to sputter that year. The housing deflation may have just begun.

In September, banks approved the fewest mortgages in 26 months. The decline came after the Bank of England raised its benchmark lending rate to a six-year high of 5.75 per cent in July.

The average cost of a home fell 0.6 per cent in September after growing at an average monthly rate of 0.89 per cent in 2007, according to HBOS. Banks foreclosed on 14,000 properties in the first half of the year, the highest number since 1999.

David Miles, Morgan Stanley’s chief UK economist in London, says shocks to confidence like the run on Newcastle-based Northern Rock may cause house prices to fall further.

‘Optimism about rising house prices has been an important driver of value in the UK,’ Mr Miles says. ‘Those expectations are potentially quite volatile and can turn round.’ In October, the average cost of a home in England and Wales dropped 0.1 per cent to £176,100 from September.

 

Source: Bloomberg (Business Times 1 Nov 07)

First decline in British home prices in 2 years

LONDON – BRITISH house prices fell for the first time in two years this month, led by declines in central London, a survey showed.

The average cost of a home in England and Wales fell by 0.1 per cent to £176,100 (S$527,400) from September, a poll of 6,000 real estate agents by Hometrack found.

Prices in central London and the financial district fell by 0.5 per cent, the most of any part of the country. The report adds to evidence that a decade-long property boom is petering out.

Consumers are struggling to shoulder a record debt burden of £1.4 trillion after interest rates rose to a sixyear high and a worldwide increase in credit costs threatened jobs and bonuses at banks.

The interest rate on a mortgage fixed for two years was 6.33 per cent last month, compared with 5.41 per cent a year earlier, according to the Bank of England. The central bank has raised its benchmark rate five times since August last year to 5.75 per cent, the highest among Group of Seven industrial nations.

As United States sub-prime mortgage losses spread to Europe, London banks and investment firms may cut jobs and bonuses, which helped to fuel a tripling of house prices over the past decade.

About 6,500 bankers and fund managers may lose their jobs next year in the biggest cuts since 2000, and bonuses may fall by almost a fifth to £7.4 billion, the London-based Centre for Economic and Business Research said.

Source: BLOOMBERG NEWS (The Straits Times 30 Oct 07)

Global property investment expected to fall

Mortgage defaults in US may prompt lenders to tighten credit, says JLL

(TOKYO) Global direct real estate investment may fall this year as concerns about defaults on US mortgages prompted lenders to tighten credit, said Jones Lang LaSalle Inc, the world’s second-largest commercial real estate broker.

Asia may be the only market to experience an increase in investment in the second half of this year, Jane Murray, Asia-Pacific head of research at Jones Lang LaSalle, said in Tokyo yesterday. Global direct property investment rose 41 per cent in 2006 to US$699 billion, advancing for a third-straight year.

‘The highly leveraged players who were very active earlier in the year are certainly sitting on the sidelines at the moment,’ Ms Murray said.

The four-year boom in real estate is threatened after the US housing slump raised concerns about the value of mortgages and bonds linked to those loans. Investors are finding it harder to borrow money when they want to fund property acquisitions.

Japan, Singapore, China and India are among the markets offering the best opportunities for investors, according to Jones Lang LaSalle research.

Grade A office rents in Japan have gained 80 per cent in the past three years and have more than doubled in Singapore, Ms Murray said. Grade A buildings are no more than 25 years old, with total leasable floor area of more than 10,000 square metres and more than 800 square metres a floor, according to Jones Lang LaSalle.

Japan features strong economic growth in a large market and is the only country where returns on office buildings exceed local interest rates, also known as a positive yield spread, Ms Murray said.

Morgan Stanley raised a record US$8 billion for a real estate investment fund in June. In April the firm agreed to buy 13 Japanese hotels from All Nippon Airways in the country’s biggest real estate deal.

Japan offers a positive yield spread of 1.56 per cent, compared with negative spreads in other major cities including London, Paris, Frankfurt and New York, said Takeshi Akagi, local director in Japan for Jones Lang LaSalle.

Investment in China rose 23 per cent in the first half of the year even after the government sought to curb property investment to cool gains in housing prices. India, where more than half the population is under the age of 25, doesn’t have enough offices, shops and houses to meet demand, Ms Murray said.

‘It will require major additions to the stock base across every sector over the coming years to accommodate its rapidly growing services sector and the increasing wealth of its population,’ Ms Murray said.

‘When the Indian government begins to deregulate investment for foreign players, we will see a flood of money pouring into that market.’

 

Source: Bloomberg (Business Times 25 Oct 07)

CDL makes first venture into Russia

Its $92m stake in Amtel unit will allow it to capitalise on acute hotel shortage in Moscow

PROPERTY developer City Developments (CDL) is using a joint venture to make its entry into Russia.

It will pay US$62.5 million (S$91.7 million) for a 50 per cent stake in Soft Proekt, a company that owns land and properties in Moscow, CDL said in a statement yesterday.

The Amtel Group, which has diverse businesses within the Commonwealth of Independent States, is the other owner of Soft Proekt.

Soft Proekt owns a nine-storey service apartment building and the Iris Congress Hotel in Moscow. There are plans for CDL’s London-listed hotel arm, Millennium & Copthorne, to manage the 200-room hotel and rebrand it as a Copthorne property.

The CDL-Amtel venture also plans to build a complex on an empty plot next to the hotel. It will house conference and business facilities, food and beverage areas, and a carpark, CDL said.

The land owned by the venture occupies about 287,550 sq ft at a site on Korovinskoye Chaussee, 15km north of Moscow’s city centre.

‘Russia is fast becoming an important East European market and Moscow is the perfect place to establish our first footprint,’ said Mr Kwek Leng Beng, CDL’s executive chairman.

‘There is strong interest in the tourism and business sectors, so it is a good time to invest in hospitality and real estate.’

An acute shortage of hotels in Moscow has led to soaring rates and ‘greater demand than supply’ for rooms, CDL said. Revenue per room for Moscow hotels is among the highest in Europe, it added.

‘CDL strongly believes that there is a ready market of hotel guests who are willing and able to spend on upscale accommodation.’

CDL is Singapore’s second-largest developer after CapitaLand. The latter also recently entered Russia, to develop logistics parks.

CDL yesterday said it is also interested in building homes in Moscow and other key Russian cities, including St Petersburg. It is likely to focus on mid-tier and luxury residences, which are already its strengths in Singapore.

The joint venture is not the first time CDL and Amtel have been linked. Amtel’s founder and chairman, Dr Sudhir Gupta, bought three floors and a penthouse at CDL’s Sail @ Marina Bay in 2005.

Dr Gupta, an Indian-born businessman, has also bought other luxury homes in Singapore, including a Marina Bay Residences penthouse and a Binjai Park bungalow.

He was ranked by Forbes magazine as Singapore’s 13th-richest man last year, but he dropped off the list this year.

 

Source: The Straits Times 18 Oct 07

World’s wealthy still eyeing property

They are undeterred by the market turmoil triggered by the US sub-prime crisis

(GENEVA) The wealthy have lost none of their appetite for property despite the market turmoil triggered by the sale of risky sub-prime mortgages in the US, according to some of the world’s top private bankers.

Clients of wealth managers are, however, on the lookout for the next big areas of growth and want products that will enable them to reduce their exposure to any one property or market.

‘We’re seeing heavy levels of investment in property in Hong Kong (and) throughout Asia,’ said Peter Flavel, global head of private banking at Standard Chartered. ‘You can’t get office space in Singapore, you can’t get it in Dubai.’

Speaking at the Reuters Wealth Management Summit, Mr Flavel said there was a ‘group of Asians that love real estate’ and that their ardour showed no sign of fading. ‘They’d see the situation in America as specific to America and the situation in the UK as specific to the UK,’ he added.

Samir Raslan, head of Citibank’s wealth management operations in central and eastern Europe, Middle East and Africa, said his clients also remained alive to potential opportunities in world real estate markets.

‘We haven’t seen any change in our clients,’ he told the summit held at Reuters offices here.

Nicolas Cagi Nicolau, global head of structured product solutions at SG Private Banking, said demand so far in 2007 had been particularly strong.

In Ireland, where fortunes have been made on the back of the country’s decade-long property boom, a fast-cooling domestic market and recent global market turmoil may have had a short-term impact, but investors’ love of property is intact.

‘All that we may be seeing is that people are just waiting to see what may well happen either domestically or internationally, but the appetite for further investment is undoubtedly there,’ said Mark Cunningham, managing director of Bank of Ireland Private Banking.

He said his main problem was persuading Ireland’s growing ranks of self-made millionaires to diversify into assets other than real estate. ‘The first love has always been property and will continue to be property for a lot of these people.’ In Spain, which like Ireland is experiencing a rapid cooling in its property market, the wealthy remain committed to real estate, although not necessarily in their own country.

Daniel de Fernando, head of asset management and private banking at Spain’s BBVA , said a new product offering clients a chance to invest in the Mexican property market had proved particularly popular. ‘People are asking us for more ideas on that front,’ he said of a fund bought into by 60 people within two weeks of its launch at a minimum investment of 2.5 million euros (S$5.2 million) each.

In the Netherlands, property also continues to be popular, according to Bernard Coucke, deputy chief of private banking at ING Groep. ‘On the contrary, more and more programmes are being set up, not only in residential but also commercial. Why? Because, for instance in the Netherlands, demand is high . . . and I think it will continue to go up.’

For some rich investors, however, there is a growing belief that other assets can offer better returns.

‘I think that the appetite for real estate is decreasing a lot,’ Paolo Molesini, head of private banking at Italy’s Intesa Sanpaolo said of a country where up until now the wealthy have held about 70 per cent of their assets in property.

‘Property costs a lot and gives you a very, very low revenue . . . There is no equilibrium from the price of the asset and the earnings that you can get out of it.’ Mr Molesini said his clients were looking to invest in foreign property, particularly in Germany, eastern Europe and Paris.

 

Source: Reuters (Business Times 11 Oct 07)

City office mart seen riding out forecast job cuts

But if redundancies are higher, supply overhang could lead to recession: players

(LONDON) The City of London is set to lose enough jobs next year to empty its landmark ‘Gherkin’ skyscraper twice over, putting pressure on the office market in this global financial hub.

The industry expects prices and rents to fall, but consistent tenant demand suggests that the market in the capital’s main financial district will survive such a slowdown. Deeper job cuts, though, could spell trouble.

Britain’s Centre for Economics and Business Research (CEBR) foresees 6,500 London financial service sector redundancies in 2008. Based on industry estimates of between 100 and 150 square feet per employee, available office space could surge by as much as 975,000 sq ft, increasing pressure on City property prices and rental income growth.

‘The loss of 6,500 jobs will naturally slow down the market . . . but the supply side is still tight enough to stomach such an eventuality,’ said Alastair Hilton, partner at property services firm Cushman & Wakefield.

The City has capacity of about 58 million sq ft, equivalent to over 100 times the floor space of the so-called ‘Gherkin’, a distinctive 180-metre tower completed in 2004.

Industry figures put the City-wide vacancy rate at 10.7 per cent.

Players say that if job losses escalate beyond the expected level, an overhang of supply could tip the district into a more severe commercial property recession.

And with more than half a dozen developments due to spring out of London’s crane-filled skyline by 2010, they accept that the market has entered its most risky phase.

Mr Hilton said that banks were unlikely to vacate great swathes of space even after the layoffs as many took a contra-cyclical view to maintaining presence in the supply-constricted Square Mile.

But take-up has slowed sharply in recent weeks, as would-be tenants delayed decisions amid financial market volatility. Data from property services firm Ingleby Trice Kennard showed that occupiers took up a total of 230,000 sq ft in the City of London in September against August take-up of 420,708 sq ft, leaving around 6.2 million sq ft of offices empty.

While the glut of space is putting pressure on rental and capital growth, Mr Hilton said, investors were reassured by the fact that much of the current nine million sq ft development pipeline was already pre-let, in contrast to the early 1990s when the City office market collapsed under the burden of around 18 million sq ft of unoccupied space.

Developer Land Securities recently announced a City pre-let of 120,000 sq ft to law firm Kirkpatrick & Lockhart Preston Gates Ellis, despite concerns about a deteriorating global economy.

City development programmes or acquisition drives to coincide neatly with an upturn in occupier demand has always been a gamble, but Duncan Owen, chief executive of City Landlord Invista Real Estate Investment Management, said that tenants were still queuing up for quality accommodation.

‘We’re negotiating 83 lettings across our London portfolio right now. Not one of them even looks like it might fall through and all of them are at business plan rental increases,’ he said.

Mr Hilton said that the loss of 10,000 jobs would seriously threaten rental growth, the profitability of several developments and office investment yields – already vulnerable as UK commercial property sector prices fall.

 

Source: Reuters (Business Times 11 Oct 07)

UK’s Local Shopping Reit eyes takeovers

It intends to use its tax-efficient status to boost portfolio

(LONDON) The Local Shopping Reit, Britain’s first specialist start-up real estate investment trust (Reit), says it is hunting for corporate acquisition opportunities to boost its retail property portfolio.

In a trading update yesterday, the company – which buys neighbourhood and convenience retail properties in urban areas – said it would continue to use its tax-efficient Reit status to help secure corporate acquisitions that increased the size and value of its portfolio most efficiently.

Since its admission to the London Stock Exchange on May 2, the company has bought 150 properties in 106 separate transactions for £47.8 million (S$143.2 million), bringing the total size of its portfolio to 633 assets.

This includes the £14.6 million of properties acquired when Local bought the entire share capital of privately owned Gilfin Property Holdings in August.

‘Our Reit status means we are well-placed to offer competitive prices and tax- efficient solutions to private property owners with an unrealised capital gains position,’ joint chief executive Nick Gregory said.

The company said the instability of the market was likely to provide greater opportunities in the current financial year.

In the period since its flotation, Local Shopping Reit said it had let 29 vacant properties and carried out 65 rent reviews, which increased its rental income by £417,097.

‘For the past two-and- a-half years, we have been focused on building the size of the portfolio. Now that we have turned our attention to asset management, we are beginning to see the rewards through good levels of rental growth,’ Mr Gregory said.

The company said it had a long-term debt facility of £120 million from HSBC which could be used to finance acquisitions.

 

Source: Reuters (Business Times 11 Oct 07)

UK developer confidence down

(LONDON) British commercial development activity experienced a modest increase in September but developer confidence has fallen to its lowest point since May 2003, data showed yesterday.

UK property services firm Savills said developers were still struggling to regain optimism in the wake of credit market turmoil, with 20 per cent of respondents predicting a drop in retail and leisure construction activities.

Nonetheless, overall activity rose gently in September with a positive net balance of 5.4 per cent of UK commercial developers surveyed reporting an increase in activity, compared with plus 4.9 per cent in August. September data showed further growth of private sector construction, particularly for new-build projects, but levels of development activity in the South East (excluding London) tailed off at the quickest pace since Savills started to collate the data in March 2003.

The average net balance of respondents reporting growth during the third quarter fell to plus 8.9 per cent growth against plus 18 per cent in the second quarter 2007.

 

Source: Reuters (Business Times 11 Oct 07)

UK house prices fall in September

Concerns raised over outlook for consumer spending

(LONDON) House prices in Britain unexpectedly fell for the first time since December last month, according to HBOS plc’s Halifax house price survey last Thursday, in a firm sign that the property market is coming off the boil.

Rising interest rates and a global lending squeeze have been expected to weigh on house market sentiment in Britain and the latest decline in prices will encourage the view that interest rates could fall in the coming months.

Halifax said house prices fell 0.6 per cent, down from a downwardly revised 0.3 per cent gain in August and well below forecasts for a 0.4 per cent increase.

‘This could well prove to be the beginning of the end for the boom in the UK housing market,’ said George Buckley, chief UK economist at Deutsche Bank.

Nonetheless, the annual three-month rate of house price inflation remains in double digits at 10.7 per cent, although that was below expectations for a 11.1 per cent rise and down from 11.4 per cent last month. The average house price fell to £198,500 (S$595,479).

‘September’s price fall is consistent with the normal behaviour of the market during a slowdown. A mixed pattern of monthly price rises and falls is a typical feature of a more subdued housing market,’ said Martin Ellis, Halifax chief economist. Halifax said the annual rate should decline further in the coming months but noted that the British economy looked strong.

Many economists also argue that Britain’s housing market is not yet on the verge of collapse. ‘We currently believe it is unlikely that annual house price inflation will turn sharply negative, given that a lack of supply means that vendors in many areas still have some pricing power,’ said Howard Archer, an economist at Global Insight.

However, falling house prices on a monthly basis raise concerns over the outlook for consumer spending, especially as a global lending squeeze grips financial markets and fuels fears of a broad economic slowdown.

‘Since house prices gains have stalled, we believe it is highly likely that spending growth will also hit the wall in the months ahead,’ said Alan Clarke, an economist at BNP Paribas.

 

Source: Reuters (Business Times 9 Oct 07)

Fresh sub-prime concerns in Europe?

Local session turns more sober with ST Index down 41.9 points and a weak broad market

IT’S possible to argue that since the Straits Times Index had rocketed by almost 117 points on Wednesday, it would be reasonable to expect some kind of pullback yesterday. This, indeed, was the case, with the index dropping 41.9 points to 3,552.46.

On the other hand, it must have been troubling on some level to some observers that activity yesterday was very heavily concentrated in penny stocks and warrants, and that the focus as far as blue chips were concerned was narrow – support for the index came almost exclusively from DBS, while the main drag was exerted by SingTel.

For those who subscribe to the first point of view, which is that Tuesday’s 50-basis-point US interest rate cut is sufficient to kickstart the bull market, then yesterday’s dip would best be described as the market ‘taking a breather’.

This is the phrase most commonly used to describe a fall in prices, a seemingly innocuous term but one actually laden with meaning, since it implies that once the breather is over, the upward push will resume.

However, those who were troubled by the lack of breadth, depth and follow-through would undoubtedly have found grounds to fret over the fall, since it came despite a follow-through rise in Hong Kong and Japan.

Instead of the former British colony setting the pace as it traditionally does, the local market most probably drew its inspiration – or lack of it – from a fall in the US futures market and a soft opening for Europe.

One possible reason for Europe’s slip was a plunge in the shares of the UK’s embattled mortgage lender Northern Rock and a warning by Deutsche Bank that its Q3 profit has been adversely affected by the recent market turmoil, both serving as reminders that the US sub-prime crisis may not have fully played out yet.

All told, it was a much more sober session than that which preceded it, resulting in the broad market recording 145 rises versus 341 falls excluding warrants.

Meanwhile, DBS Vickers (DBSV) recommended an ‘overweight’ on the banks, mainly because it expects topline growth to remain robust.

On the ongoing and controversial subject of the local banks’ exposure to US collateralised debt obligations (CDOs), DBSV said that ‘as CDO investments are generally held as available-for-sale and/or held-to-maturity securities, mark-to-market losses would be recorded in reserves rather than the profit-and-loss account unless it is deemed permanently impaired’.

‘Nevertheless, the upcoming release of Q3 results will clearly reveal how banks treat their respective CDO investments, and we believe this would ultimately seal back investor confidence over time.’

Morgan Stanley, on the other hand, reminded investors that good times don’t last forever.

‘Singapore banks have enjoyed very low loan loss charges for the last four years. Current earnings and ratings don’t capture underlying risk tendency in our view,’ said Morgan Stanley. It called an ‘underweight’ on OCBC and an ‘equal weight’ on DBS and UOB.

In a preview of its upcoming global investment strategy to be released today, BCA Research said it recommends staying positive on equities since policy reflation will lift prices. In addition, BCA recommends overweighting emerging markets, raising the weighting of US stocks to ‘neutral’, and that investors stick to larger caps instead of small caps.

 

Source: Business Times 21 Sept 07

WORLD HOUSING MARKETS – Bubble trouble

By Robert J. Shiller

THE future of the housing boom, together with the possible financial repercussions of a substantial price decline in the coming years, is a matter of mounting concern among governments around the world.

I learnt this first-hand while attending this year’s Jackson Hole Symposium in the remote wilderness of Wyoming where, ironically, there are almost no homes to buy. The howls of coyotes and bugling of elk rang out at night. But, by day, everyone was talking about real estate.

This conference has grown to be a major global event for government monetary policymakers, with governors or deputy governors of 34 central banks attending this year. Roughly two-thirds of these countries have had dramatic housing booms since 2000, most of which appear to be continuing, at least for the time being. But there was no consensus on the longer-run outlook for home prices.

Of all these countries, the United States appears to be the most likely to have reached the end of the cycle.

According to the Standard & Poor’s/Case-Shiller US National Home Price Index, US home prices rose 86 per cent in real, inflation-corrected, terms from 1996 to last year, but have since fallen 6.5 per cent – and the rate of decrease has been accelerating.

That looks like the beginning of the end of the boom, though, of course, one can never be sure. I presented a bearish long-run view, which many challenged, but no one obviously won the argument.

Nevertheless, an outside observer might have been struck by the weight given to the possibility that the decade-long boom might well suffer a real reversal, followed by serious declines.

Weaker standards

THERE seems to be a general recognition of substantial downside risk, as the current credit crisis seems to be related to the decline in US home prices that we have seen.

The boom, and the widespread conviction that home prices could only go higher, led to a weakening of lending standards. Mortgage lenders in the US seem to have believed that home buyers would not default, because rising prices would make keeping up with their payments very attractive.

Also, the boom resulted in some financial innovations, which may have been good ideas intrinsically, but which were sometimes applied too aggressively, given the risk of falling prices. Mortgage- backed securities were urged onto investors for whom they were too risky. As with homebuyers, all would be well, the reasoning went, on the premise that home prices continue to rise at a healthy pace.

At the Jackson Hole conference, Mr Paul McCulley of Pimco, the world’s largest bond fund, argued that in the past month or two we have been witnessing a run on what he calls the ’shadow banking system’, which consists of all the levered investment conduits, vehicles and structures that have sprung up along with the housing boom.

The shadow banking system, which is beyond the reach of regulators and deposit insurance, fed the boom in home prices by helping to provide more credit to buyers.

Bank runs occur when people, worried that their deposits will not be honoured, hastily withdraw their money, thereby creating the very bankruptcy that they feared. It is no coincidence that this new kind of bank run started in the US, which is the clearest example of falling home prices in the world today.

When home prices stop rising, recent homebuyers may lose the enthusiasm to continue paying their mortgages – and investors lose faith in mortgage-backed securities.

Loose policy

THE US Federal Reserve is sometimes blamed for the current mortgage crisis, because excessively loose monetary policy allegedly fuelled the price boom that preceded it. Indeed, the real (inflation-corrected) federal funds rate was negative for 31 months, from October 2002 to April 2005. The only precedent for this since 1950 was the 37-month period from September 1974 to September 1977, which launched the worst inflation the US had seen in the last century. What then helped produce a boom in consumer prices now contributed to a boom in home prices.

Loose monetary policy is not the whole story. The unusually low real funds rate came after the US housing boom was well under way. According to the Standard & Poor’s/Case-Shiller US National Home Price Index, home prices were already rising at almost 10 per cent a year in 2000 – when the Fed was raising the federal funds rate, which peaked at 6.5 per cent. The rapid rise thus appears to be mostly the result of speculative momentum before the interest-rate cuts.

Former Fed chairman Alan Greenspan recently said that he now believes speculative bubbles are important driving forces, but at the same time, the world’s monetary authorities cannot control bubbles. He is mostly right: The best thing that the monetary authorities could have done, given their other priorities and concerns, is to lean against the real estate bubble, not stop it from inflating.

Today’s fall in home prices is linked just as clearly with waning speculative enthusiasm among investors, which is likewise largely unrelated to monetary policy. The world’s monetary authorities will have trouble stopping this fall, and much of the attendant problems, just as they would have had stopping the ascent that preceded it.

The writer is professor of economics at Yale University and author of Irrational Exuberance And The New Financial Order: Risk In The 21st Century.

 

Source: The Straits Times 19 Sept 07

US is the No 1 risk to world economy: US prof

Other sources of political threats are China, Iraq and oil prices: US economist

(SINGAPORE) By far the greatest risk to the global economy is the United States – not least because some of its foreign policy decisions could well drive oil prices past US$125 a barrel, says an American political economist.

Marvin Zonis, a professor at the University of Chicago’s Graduate School of Business, places the US at the top of his list of threats to the global economic boom, ahead of China, Iraq and oil prices, in that order.

Speaking to BT during a visit here last week, he cited the US invasion of Iraq, ‘failure in Iraq and massive failures in dealing with its own economy’ as evidence of US policy disasters.

‘The reality is that the US government has been managing its affairs in the worst possible manner for many years,’ he said.

Prof Zonis heads a political risk consultancy, Marvin Zonis & Associates, in Chicago, and is a member of the board of advisers to the US Government Accountability Office (GAO), the investigative arm of Congress that scrutinises government spending.

Citing figures gleaned from his GAO role, in 2001, the present value of the US government’s unfunded liabilities amounted to US$20 trillion, he said.

In other words, the US government owed Americans US$20 trillion in terms of future pensions, social security and medical benefit payouts as at 2001.

By 2007, the present value of the sum has ballooned to US$50 trillion.

‘And that’s because the President, and the Republican-controlled Congress, increased all the benefits without any commensurate increase in taxation,’ Prof Zonis said.

‘And so the US, which has a GDP of US$14 trillion, has unfunded liabilities worth US$50 trillion in the same dollars. This is a country that is going bankrupt. That is reality. And people in America don’t want to hear this.’

And more than half of the US government’s outstanding obligations are owned by non-Americans. That, plus the ballooning US current account deficit, which is running at around US$900 billion a year, can only spell a weakening greenback.

China – with its myriad short-term and long-term ‘very serious’ problems – poses the second most important source of political risk in the world, Prof Zonis said.

While the US ‘and every rich economy in the world’ are driven by personal consumption, China, the world’s biggest factory, spends 45 per cent of its GDP on capital investment – the highest proportion anywhere in the world, ever. Consumer spending accounts for only about 40 per cent of the Chinese economy.

In Prof Zonis’s view, China has built its economy on capital investments, but at some point it will have to ’stop building more new factories, and start closing down the factories’. That will pose major socio-political problems in employment and urbanisation – and ultimately, possibly derail economic growth.

In any case, China faces the huge challenge of managing inflation in the face of growing food prices, ‘without powerfully slowing down the economy’.

Prof Zonis, who has been studying Middle Eastern affairs since the 1960s and who used to go to Iraq every two years for years, describes the third big risk – Iraq ‘and everything that comes from Iraq’ – as another US-inspired problem.

‘The invasion of Iraq is already the greatest disaster in the history of US foreign policy,’ he said, maintaining that it is a non-partisan remark.

And if the US does go on to attack Iran, there is the chance that oil prices – which hit a high past US$80 per barrel last week – could spiral into the US$125-US$150pb range, which would be ‘really devastating for the global economy’, he said.

 

Source: Business Times 18 Sept 07

More pain looms for British home owners

(LONDON) Britain faces higher interest rates and inflation, according to an interview published here yesterday.

Former US Federal Reserve chairman Alan Greenspan said there are ‘difficulties’ ahead for British home owners as rising interest rates put the brake on house price growth.

‘Can (the boom) last? No, you’re already beginning to see the mortgage rates are moving; a lot of the two year fixes are beginning to unwind and the teaser rates are going,’ Mr Greenspan said in an interview with the Daily Telegraph, referring to mortgage rates that rise after an introductory period.

Confidence in the UK’s economic outlook was dimmed last Friday when a survey by property website Rightmove pointed to a sharp slowdown in Britain’s property market.

Many investors have recently abandoned expectations of another hike in the Bank of England’s 5.75 per cent policy rate, as tensions in UK money markets show no signs of letting up and the housing market appears to be peaking.

However, the Daily Telegraph said Mr Greenspan w1arned that UK interest rates may have to hit double figures in the coming years to keep inflation at its current low level.

‘In Britain, the housing (market) hasn’t turned yet, and the consumer households are more subject to interest rate changes than in the US,’ Mr Greenspan said.

 

Source: Reuters (Business Times 18 Sept 07)

UK house prices rise for 8th month in a row: report

August average up 0.4% at £199,700, says lender HBOS

(LONDON) UK house prices rose for an eighth month in August, a sign that five interest rate increases have yet to curb demand for property, a report from HBOS plc showed.

The average cost of a home climbed 0.4 per cent last month to £199,770 (S$613,000), compared with 0.8 per cent in July, the UK’s biggest mortgage lender said in a statement on the Regulatory News Service. Prices rose 11.4 per cent in August from a year earlier, up from an 11.2 per cent annual gain the previous month.

The report adds to evidence of resilience in the property market as a shortage of housing offsets the impact of higher borrowing costs. The Bank of England may keep the key interest rate at a six-year high tomorrow as policy makers gauge the effects of previous increases and financial market turbulence on the economy.

‘A sound economic background, together with an on-going shortage of both new house building and secondhand properties for sale, should continue to support house prices,’ HBOS said.

The central bank, which announces its decision at noon in London today, will keep the key rate at 5.75 per cent, according to all 60 economists in a Bloomberg survey.

Prime Minister Gordon Brown is trying to spur home building after house prices tripled in a decade. Building stagnated at 148,000 new units a year on average between 1989 and 2005, down from a peak of 425,000 in 1968, government figures show.

Demand for property has yet to show signs of cooling. UK banks approved 115,000 mortgages for house purchase in August, more than economists forecast and the same as the previous month.

House price reports have been mixed. The cost of a home rose 0.6 per cent in August, up from a 0.1 per cent in July, Nationwide Building Society said last week.

Hometrack, a property research company based in London, said that prices stagnated for the first time in 20 months in August.

 

Source: Bloomberg (Business Time 6 Sept 07)

Biggest UK property firm mulls break-up

(LONDON) Paul Myners, chairman of Britain’s biggest listed property firm Land Securities, has ordered the group to examine a possible break-up, the Daily Telegraph said yesterday.

The move is one of the options being looked at as part of a wider strategic review in response to poor share price performance, the paper said, without citing sources.

A break-up is likely to involve the demerger of the firm’s property outsourcing business Trillium, it said.

Its chief executive Francis Salway said in June at the Reuters Real Estate Summit that he would not rule out spinning off some of its units, including Trillium, whose contribution to group earnings was likely to grow to 20-30 per cent from around 16 per cent now.

But he said then that the company would stick to a diversified business model, with its emphasis on both office and retail property, despite a view among some fund managers that Reit shareholders were better served by firms that specialised by property type.

Land Securities shares have fallen around 20 per cent so far this year.

 

Source: Reuters (Business Times 6 Sept 07)

Sub-prime rout less severe than in ‘98: BIS

Swiss body’s view contrasts with grim outlook of S&P

(BASEL, Switzerland) The market fallout from the sub-prime mortgage slump is less severe than in 1998 after Russia’s default and the collapse of Long-Term Capital Management (LTCM), the Bank for International Settlements said.

The assessment from the BIS, which monitors financial markets for central banks and regulates lenders, contrasts with analysis from Standard & Poor’s, which last week said that the outlook for securities firms is worse than in 1998.

‘Some investors began to draw parallels with the autumn of 1998, when the collapse of LTCM had triggered fears of instability in the banking system as a whole,’ the BIS in Basel, Switzerland, said in a report published yesterday.

‘However, the recent rise in US 10-year swap spreads was less sharp than at the time of the LTCM crisis.’

Investors are demanding a yield premium over 10-year Treasury notes of 70 basis points to swap floating-rate interest payments for fixed rates, up from 54 basis points in May. The premium, which increases as the perception of risk deteriorates, had more than doubled in 1998 to 97 basis points.

Bank stocks dropped as much 17 per cent this year, half the 35 per cent decline in 1998, according to the Standard & Poor’s Banks Index.

Declines in stock markets ‘largely reflected investors’ anticipation of losses related to speculation in the sub-prime market and other credit products, as well as expected declines in bank profits due to lower M&A-generated fees’, the BIS said.

‘Despite such losses, the overall decline amongst US banks had not by late August been as severe as in 1998.’ Bank Revenue S&P, based in New York, last week said that revenue from investment banking and trading may fall 47 percent in the final six months of this year, compared with a 31 per cent decline nine years ago. Moody’s Investors Service on Aug 16 said that a hedge fund collapse on the same scale as LTCM was possible.

LTCM, the Greenwich, Connecticut-based fund run by John Meriwether, failed after Russia defaulted on US$40 billion of debt in August 1998 and investors sought the safest securities, including US Treasury notes.

LTCM had been betting on financial markets becoming less risky, borrowing from Wall Street banks to make wagers of about US$125 billion that global bond prices would converge, according to accounts of the debacle including When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein.

The BIS, formed in 1930, polled 62 institutions for its semi-annual report.

Separately, China said yesterday that none of its massive foreign exchange stockpile was invested in the teetering US sub-prime mortgage sector, while a top EU official predicted the crisis would not choke off economic recovery.

European Union Economic and Monetary Affairs Commissioner Joaquin Almunia told newspaper El Pais that lower credit growth and tighter credit conditions were ‘very possible’ but that Europe’s economic recovery would continue.

‘There is no reason that financial turbulence … will put an end to a phase of economic recovery which is solidly based,’ he said.

A senior Chinese foreign exchange agency official helped sentiment by saying none of Beijing’s US$1.33 trillion stash of foreign exchange reserves – the world’s largest – was in US sub-prime mortgage-backed securities, underscoring China’s earlier assertions that it had only limited exposure.

 

Source: Bloomberg (Business Times 4 Sept 07)

Accor profit doubles on H1 asset sales

(PARIS) Accor SA, the world’s second-largest hotel company, said first-half profit more than doubled on the sale of properties and higher revenue in Europe at the Sofitel luxury chain.

The Paris-based owner of Novotel and Ibis hotels said net income climbed to 596 million euros (S$1.2billion), or 2.66 euros a share, from 241 million euros, or 1.06 euros, a year earlier. That beat the 237 million euro median estimate from eight analysts in a Bloomberg survey.

‘The net profit included a number of non-recurring items we didn’t expect to be reported this time,’ said Jean-Marie L’Home, an analyst at Paris-based Aurel-Leven, who rates Accor stock a ‘buy.’ He had expected profit of 275 million euros.

Accor sold real estate in the UK and Germany and the Go Voyages travel business to focus on running hotels and expanding a service-voucher unit after Gilles Pelisson became chief executive officer in January last year.

In the first six months this year, Accor agreed to sell two US Sofitel outlets for US$255 million and 91 German and Dutch hotels for 863 million euros. The company also sold 30 UK properties for 711 million euros and Red Roof Inn for US$1.32 billion and disposed of Go Voyages for 281 million euros.

Accor continues to benefit from increased tourism in Paris, where it operates 155 properties including the 134-room Sofitel Arc de Triomphe. The number of visitors to the city will rise by 2 per cent to 15.6 million in 2007, the Paris Tourism Office predicted this week.

Accor plans to spend up to 25 million euros in the second half on promoting its upscale hotels and introducing a new chain of economy hotels in Europe, Mr Pelisson said. The company will invest on boosting services at Sofitel and reviving the luxury chain Pullman which caters to business travellers.

‘We expect to open about 300 Pullman hotels throughout the world by 2015,’ Mr Pelisson said.

Accor’s service unit, which issues vouchers for restaurants or child care that companies can award to their employees, had a 2.4-point increase in profit margin from operations to 41.9 per cent.

 

Source: Bloomberg (Business Times 30 Aug 07)

Unibail-Rodamco H1 earnings rise 11%

Market values Europe’s largest property trust at 15.3 billion euros

(Edinburgh) Unibail-Rodamco SA, Europe’s largest real estate investment trust, said first-half profit rose 11 per cent as rents and property values increased.

Net income rose to 1.1 billion euros (S$2.3 billion), or 24.79 euros a share, from 1.03 billion euros, or 22.46 euros, a year earlier, the Paris-based company said in a statement on its website yesterday. Net asset value rose 14 per cent to 159.7 euros a share at June 30.

Unibail, which owns offices, malls as well as conference centres in France, bought Rotterdam-based Rodamco Europe NV, Europe’s largest shopping-centre owner, in June for 9.2 billion euros.

The aim was to expand outside France. ‘Integration efforts are on track,’ the company said in the statement.

Net rental income rose 9.1 per cent to 228.7 million euros. Valuations rose by 714.4 million euros, 2.6 per cent less than the 733.7 million euro gain a year earlier. The results were reported on a pro-forma basis as if the takeover had occurred more than a year ago.

Unibail-Rodamco’s shares rose 3.55 euros, or 1.9 per cent to 187.49 last Friday, valuing the company at 15.3 billion euros. The stock has gained 1.3 per cent this year.

 

Source:  Bloomberg (Business Times 28 Aug 07)

BNP to reopen frozen funds in sub-prime mess

Paris – FRENCH banking giant BNP Paribas has said it plans to unblock three of its investment funds, whose suspension earlier in the month sparked turmoil on global stock markets.

On Aug 7, BNP Paribas suspended the funds, which had made investments linked to risky sub-prime home loans in the United States, because of difficulties in valuing them.

In a statement on Thursday, the bank said ‘conditions had been met’ for valuing them, and that the funds would be unblocked on Tuesday and Thursday.

‘BNP Paribas Investment Partners has drawn up a methodology allowing, as it committed itself at the outset to do, to resume the process of subscriptions and redemptions,’ the subsidiary said.

The funds – BNP Paribas ABS Euribor and BNP Paribas ABS Eonia – will be unblocked on Tuesday, while Parvest Dynamic ABS will be unfrozen on Thursday.

The funds hold asset-backed securities – complicated financial instruments that are linked to sub-prime borrowers with poor credit histories in the US.

Defaults by these borrowers have led to losses for many banks and investment funds, and appetite for assetbacked securities linked to sub-prime loans has dried up.

This led BNP Paribas to declare a total lack of liquidity in the market for asset-backed securities, which meant it was impossible to value the assets.

BNP Paribas said it expected the value of ABS Euribor to be 2 per cent to 3 per cent lower compared to its value on Aug 7. ABS Eonia is seen down by 2.5 per cent to 3.5 per cent, while Parvest Dynamic ABS is seen down between 4 per cent and 5 per cent.

The estimated value of the total assets under management by the funds had dropped between July 27 and Aug 7 from around two billion euros (S$4.1 billion) to 1.6 billion euros partly due to withdrawals by investors.

BNP Paribas chief executive Beaudoin Prot told a French newspaper it was too early to assess the impact of the US sub-prime market crisis on BNP Paribas accounts, but that the decision to freeze and then reopen the funds underlined its prudent investment approach.

Source: AGENCE FRANCE-PRESSE, REUTERS (The Straits Times 25 Aug 07)

BNPP: Sub-prime risk limited, manageable

(PARIS) France’s biggest listed bank, BNP Paribas (BNPP), said that its exposure to sub-prime risk was limited and manageable as it moved to reassure investors a week after rattling markets by freezing three of its funds.

French Economy Minister Christine Lagarde also sought to calm nerves yesterday, saying that the country’s banks were in good shape, but added that she would ask BNPP chief executive Baudouin Prot about the way the bank had handled news of its problems.

‘Of course, I will ask Mr Prot for explanations as to how they managed that moment,’ she told RTL radio. ‘I think they are looking again at how they communicate and manage this type of question.’

BNPP announced on Aug 1 that it was not directly impacted by problems in the US sub-prime mortgage market, but on Aug 9, it said that it was freezing 1.6 billion euros (S$3.3 billion) worth of funds hit by the crisis, triggering a global drop in stock markets.

The bank had no immediate comment on Ms Lagarde’s remarks.

BNPP’s shares have fallen nearly 10 per cent over the past week, but Alain Papiasse, the bank’s head of asset management and services, played down worries over its sub-prime problems.

‘The direct exposure to sub-prime appears limited, and any losses should be manageable for the bank,’ he said yesterday on a conference call monitored in South Korea. ‘We should be one of the most resistant institutions to sub-prime.’

Mr Papiasse said that BNPP expected no risk to quarterly earnings from the potential exposure of these funds to sub-prime debt, since any potential risks were being held by investors.

 

Source: Business Times 17 Aug 07

Foreign buyers fuel boom in Swiss property

Top-end homes in and around Zurich surge to record levels

(KUESNACHT, Switzerland) While home prices have exploded in cities like London and Madrid in recent years, a quieter but nonetheless significant boom is taking place in the normally staid property market in Switzerland.

Foreign buyers are flooding into places like the town of Kuesnacht, just a few minutes by car from the banking and insurance centre of Zurich, driving prices for top-end properties to record levels.

‘We are looking at this situation with concern,’ said Kuesnacht’s local council president, Max Baumgartner. ‘The price of apartments is rising fast. You can’t create more space so it’s getting harder to find affordable places.’ Rich Germans, Russians, Britons and Americans have all recently snapped up homes in Kuesnacht, which offers tidy houses and pricey restaurants and a top-band income tax rate of just 10 per cent.

Villas and apartments along the sunny bank of Lake Zurich, Switzerland’s Gold Coast, command a premium.

Buyers shell out anything from around three million Swiss francs (S$3.8 million) for a Gold Coast house, as opposed to a starting price of around 800,000 francs for a city centre apartment.

At the end of June, the price of large apartments on the Gold Coast was 70 per cent higher than at the start of the century, according to Zurich-based property consultancy Wuest and Partner. Prices for large houses were up 60 per cent.

But Kuesnacht is not the only place experiencing a boom. Prices for large houses in the city of Zurich itself rose over 50 per cent in the past seven years while sizeable apartments gained 82 per cent in value, say Wuest and Partner.

According to Fredy Hasenmaile, a property analyst at Credit Suisse, the price increases have not yet reached the kind of growth seen in Madrid, London or Paris in recent years.

And yet they are significant because of the relatively static nature of the property market in Switzerland, where over 70 per cent of the population rent the roof over their heads.

Mr Hasenmaile said: ‘The Gold Coast especially is an area where real estate is in high demand and therefore prices are rising.’ With hundreds of banks registered in Zurich alone, not to mention the extensive insurance and wealth management industries, there is plenty of money sloshing around.

‘We are currently seeing increases in salaries and high bonuses being paid, as the economic situation, especially in the financial sector, is sound,’ Mr Hasenmaile said. ‘So there are a lot of people with high increases in total compensation.’ A recent relaxation in Switzerland’s restrictive immigration laws has led to an increase in the number of foreigners, particularly Europeans, seeking employment in Switzerland.

‘There are a lot of people, especially from Germany, pouring into Switzerland and getting good jobs,’ Mr Hasenmaile said. ‘They tend to be highly qualified workers with high incomes that allow them to buy residential property even when prices are high.’

Many Zurich-based firms are run by foreigners and several multinationals have their European headquarters there.

Google recently located its European engineering centre there.

Germans, in particular, top the charts. Around 6,000 Germans moved to Zurich in 2006, significantly more than any other nationality. The majority came to work in insurers or pharmaceutical companies, according to data from the canton of Zurich.

But it’s not only workers: German pensioners, keen to avoid inheritance taxes and any future changes to it introduced by German Chancellor Angela Merkel’s government, are also arriving.

‘We also have many so-called Merkel refugees who are trying to escape inheritance tax in Germany,’ said estate agent Claude Ginesta, who deals in Gold Coast properties. And these buyers are interested only in the very best.

Mr Ginesta attests to his clients’ deep pockets: ‘There are very few properties in this area that sell for over 15 million Swiss francs but recently we had interest from buyers looking to pay 20 to 25 million Swiss francs for the right place.’

 

Source: Business Time 16 Aug 07

Netherlands floats new housing idea

Many towns plan to accommodate floating homes in face of climate fears

(AMSTERDAM) The Dutch answer to fears over climate change and lack of space is a modern three-storey luxury villa with a roof terrace, large living room, three bedrooms and, crucially … a water-proof hull.

Dozens of Dutch municipalities are planning new districts with room for floating homes and, as more and more socalled water lots become available, the market is experiencing a boom.

‘There is this idea that it’s reassuring that these houses will stay afloat even if the Netherlands is flooded,’ Yvonne de Korte of the Amsterdam architecture centre Arcam told AFP.

In the Netherlands, a densely populated country where one third of the land is below sea level, the threat of rising sea levels is a constant one.

‘We are no longer only worrying about global warming, we are now actively looking for solutions for the consequences of climate change,’ climatologist Rik Leemans of the Wageningen University said.

‘There has been a real change in the Dutch mentality … Before we were hiding behind our dykes. Now we are finding ways to create space for rising water levels and looking upon it as a chance to develop new ideas,’ he added.

The Dutch government is not only keeping up the maintenance on its impressive system of dykes and flood dams, but has also launched plans to divert rivers and create designated delta areas that can be flooded in case of a sudden rise in water levels.

The luxury floating villa by ABC Arkenbouw on show in Amsterdam together with the exhibition ‘Living on Water’ is a prototype aimed at people who buy so-called water lots in IJburg.

IJburg is a new housing development built on an artificial island in the east of Amsterdam and is expected to house 45,000 people between now and 2020.

The water lots in the new neighbourhood are on sale for between 110,000 and 140,000 euros (S$228,000 and S $290,000) and allow people to moor a floating house on a special landing.

‘It is a great new market, we are building 40 floating homes this year and plan 60 next year,’ said Marian Spenkeler of ABC Arkenbouw.

The company is specialised in building houseboats, the classic barge type that you see in the canals of Amsterdam, and is now turning more and more to constructing boathouses that look like floating villas.

‘It attracts all kinds of buyers from young families with kids to pensioners,’ Mr Sprenkeler said.

The floating villas cost around 250,000 euros. Taken with the price of the lot, this is a little lower than the prices for comparable family homes on IJburg.

The boathouse is built with the latest technology with all modern conveniences and floats on a concrete pontoon that doubles as a partly submerged basement with bedrooms.

For most of the 20th-century houseboat dwellers were, according to architecture expert De Korte, considered ‘a fringe group, poor people who did not have enough money to buy a real house on firm ground’.

In the 1970s houseboats become a popular choice for hippies as the ultimate sign of rejecting the bourgeois lifestyle.

In the last 10 years, that has changed as living on water has become increasingly fashionable and a number of housing projects started including water houses in their development plans.

To give an idea of the different forms of living on water Arcam has organised an exhibit in Amsterdam with models and real houseboats, including one over 80 years old.

 

Source: Business Times 14 Aug 07

Sub-prime mess just a Chicken Little flap

Recent global market tremors are a disturbing commentary on the power of fear

THE job of an economist, among many other duties, is to put things into perspective. So, because I am an economist, among other duties, here is a little perspective on the recent turmoil in the stock and bond markets.

First, when the story of this turbulence is reported, the usual explanation mainly has to do with some new loss in the sub-prime mortgage world – the universe of mortgages and mortgage-backed instruments related to buyers with poor credit histories or none at all.

Here is the first instance in which proportion tells us that something is out of whack: The total mortgage market in the United States is roughly US$10.4 trillion. Of that, a little over 13 per cent, or about US$1.35 trillion, is subprime – certainly a large sum. Of this, nearly 14 per cent is delinquent, meaning late in payment or in foreclosure.

Of this amount, about 5 per cent is actually in foreclosure, or about US$67 billion. Of this amount, according to my friends in real estate, at least about half will be recovered in foreclosure. So now we are down to losses of about US $33 billion to US$34 billion.

The rate of loss in sub-prime mortgages keeps climbing. In time, perhaps it will double, maybe back to US$67 billion. This is a large sum by absolute standards, and I would sure like to have it in my bank account.

But by the metrics of a large economy, it is nothing. The total wealth of the United States is about US$70 trillion.

The value of the stocks listed in the United States is very roughly US$15 trillion to US$20 trillion. The bond market is even larger.

Much more to the point, the fears and terrors about sub-prime mortgages have helped knock off about 6 per cent of the stock market’s value in recent weeks. This amounts to about US$1.1 trillion or more than 30 times the losses so far in the sub-prime market. In other words, these sub-prime losses are wildly out of all proportion to the likely damage to the economy from the sub-prime problems.

The disconnect goes even further. The Dow Jones industrial average has been heavily moved by fears about the sub-prime market. But how are most of the Dow 30 affected by sub-prime mortgages in any meaningful way? No Dow company is short of liquidity, and consumer spending is still strong.

Foreign stocks, especially in developing countries, have been hard hit, and this is supposedly connected with a ‘repricing of risk’, which in turn is connected with sub-prime mortgages. But how are the risks in Thailand or Brazil or Indonesia closely related to problems in a housing tract in Las Vegas? The developing countries are fantastically strong and liquid.

Why would problems at a mortgage company in Long Island have anything to do with them? European stocks have also been hard hit, and this has to do with relatively small amounts of sub-prime in some European banks. On a global scale, the numbers in Germany and France are minuscule for sub-prime exposure. For European markets to fall on sub-prime issues makes no sense.

News last Thursday that a small amount of unpriceable sub-prime mortgages was in a BNP Paribas fund in France sent the markets in Europe and the US sharply lower. Why? The losses in France are at most in the single billions, while the losses in US markets alone were in the hundreds of billions on the BNP news.

Then there is the supposed ‘drying up’ of credit for private equity deals because of fears of risk. But this is also puzzling. I can’t think of a single recent major private equity deal in which the bonds have defaulted.

Major hits

More to the point, suppose that all private equity deals were stalled for a year. Why would this affect the Dow?

None of companies in the Dow 30 is having trouble raising cash. And suppose that all private equity deals went away for good.

Taken together, they are not all that big a piece of the US economy. Why should they put the markets of the richest nation in the world, as well as all of the world’s other markets, into turmoil? Then let’s take a peek at Bear Stearns.

This venerable and clever financial house has taken some major hits on sub-prime mortgages lately. That is sad for the stockholders (I am a very small stockholder), and the price of Bear Stearns stock has tumbled.

A little over a week ago, news about Bear Stearns’ liquidity issues lowered the market value by more than US$1.2 billion.

That is a big hit to a single company, to be sure, but then came the shocker: that news also helped wipe out hundreds of billions of dollars off the total value of US stocks.

My point is this: I don’t know where the bottom is on sub-prime. I don’t know how bad the problems are at Bear. Yet I do know that the market reactions are wildly out of proportion to the real problems that have been revealed or even hinted at. Maybe there is some giant thing hiding in the closet that might rationalise the market’s fears.

But if it’s hidden, how can the market be reacting to it in the first place? More will be revealed, as the saying goes.

But recently investors have been selling out of all relation to what we know.

Reassurances in word and deed from Ben Bernanke, chairman of the Federal Reserve, helped calm the markets on Friday.

But recent events are a disturbing commentary on the power of fear.

This economy is extremely strong. Profits are superb. The world economy is exploding with growth. To be sure, terrible problems lurk in the future: a slow-motion dollar crisis, huge Medicare deficits and energy shortages. But for now, the sell-off seems extreme, not to say nutty.

Some smart, brave people will make a fortune buying in these days, and then we’ll all wonder what the scare was about.

 

Source: Business Times 14 Aug 07

Portfolios take a ’sub-primal’ beating

HOW quickly investment sentiment can sour. Up till a few weeks ago, punters were still betting on penny stocks like there was no tomorrow. But the turning point came last month when a US bank, Bear Stearns, spooked the markets with news of major losses and accounting difficulties with its investments linked to risky US housing loans.

Losses by other banks and investment funds have led to what has been termed the ‘US sub-prime housing crisis’ – the source of turbulence and uncertainty in global financial markets in the last couple of weeks.

How these financial losses will trickle down to the real economy – the consumers and companies – remains to be seen.

Meanwhile, banks are now setting aside cash as a precaution against further losses from their bad investments and have become far more cautious about lending.

This is known as a ‘credit squeeze’, but the fear is that this could become a veritable ‘credit crunch’ in which companies and consumers have inadequate access to loans, according to an AFP report.

‘As private sector banks, in a time of uncertainty, set aside more funds for their own funding needs, we are seeing a shortage of liquidity in the money markets,’ AFP quoted Societe Generale’s chief Asia economist Glenn Maguire as saying.

A shortage of liquidity would restrict the ability of companies, and eventually consumers, to borrow, potentially slowing economic growth worldwide.

In an attempt to avert a crisis of confidence in global credit markets, central banks in the US, Europe, Japan, Australia and Canada last week added about US$136 billion to the banking system.

The Federal Reserve, in a second day of action in concert with the European Central Bank (ECB), provided US$38 billion of reserves and pledged more ‘as necessary’, in a statement unprecedented since after the Sept 11, 2001 attacks.

Money market rates had risen worldwide in the previous two days on evidence that the sub-prime crisis is spreading.

By the end of Friday, the central bank actions helped spark a turnaround in American stocks and drive the US overnight bank lending rate below the Fed’s target.

The Dow Jones Industrial Average recovered from a 210-point deficit to end just 31 points lower.

‘They accomplished their short-term mission to make sure the market stabilised ahead of the weekend,’ Bloomberg quoted David Resler, chief economist in New York at Nomura Securities International Inc, as saying. ‘It remains to be seen how much more they’ll have to do.’

Our portfolios declined by an average of 7.5 per cent last week. The one which fell the least – the analysts’ upgrades portfolio – is also the one with the highest cash component. This illustrates the truth of the saying ‘cash is king’ in a turbulent market.

It slid only 2.2 per cent. It had about 30 per cent cash as at last week due to the privatisation of companies like MMI and Amtek, and Want Want Holdings soon.

Meanwhile, small-cap stocks with dubious fundamentals which have been carried along in the wave of euphoria until a few weeks ago have seen the biggest declines.

The one-month top winners portfolio and the one-year top losers portfolio shed the most last week. Each fell by 9.4 per cent.

Big losers included General Magnetics, JK Technology and China Education. The lowest forward PE portfolio and the lowest price-to-book portfolio were down by 8.5 per cent and 7.9 per cent respectively.

 

Source: Business Times 13 Aug 07

Sub-prime domino hits Asia again

Painful pattern takes shape as US ripples exact their toll

(SINGAPORE) For the fourth time in two weeks, stock markets in Asia plunged following steep losses in the United States and Europe the previous trading day.

As the fallout from rising defaults in US sub-prime mortgages continues to spread, the Straits Times Index fell 53.99 points or 1.6 per cent to end at 3,359.18.

Earlier in the day, the index was down as much as 3.8 per cent before clawing back some ground.

A distinct pattern – that seems set to continue for some time – has been unfolding of late. Each new piece of bad news related to the US sub-prime mortgage market has been followed by a plunge in the Dow Jones Industrial Average. This has invariably been mirrored the following trading day in Asia.

Fears of a global credit crunch hung over the US for the second day running as, shortly after opening yesterday, the Dow Jones index was down 124.8 points at 13,145.9.

Europe reflected the strain, too, as in London the FTSE 100 fell 3.1 per cent in morning trade, the Paris index was down 3 per cent and German shares slumped 1.6 per cent as fear of more bad news to come in credit markets gripped investors.

On Thursday, the trigger had been provided by French banking group BNP Paribas, which stopped withdrawals from three of its funds which own US sub-prime mortgages citing a ‘complete evaporation’ of liquidity.

Central banks across the globe have since been pumping in doses of liquidity to ease the crunch.

Here, the Monetary Authority of Singapore said it is monitoring developments in the markets and is ready to inject additional liquidity ‘if the situation so warrants’.

Meanwhile, Fullerton Fund Management, a unit of Temasek Holdings, told Bloomberg that it has no direct exposure to US sub-prime loans and its investments in collateralised debt obligations or CDOs amount to less than one per cent of its total assets under management.

Over the past week, banks and asset managers here have sought to reassure analysts and investors by releasing details of their exposure to US sub-prime property loans through their investments in CDOs.

The sub-prime woes in the US have already caused several hedge funds to suspend withdrawals by investors, usually seen as a sign that the value of the assets they hold may not be enough to repay investors in full.

‘The markets will remain volatile for a few more weeks. More hedge funds are going to have some terrible announcements to make,’ said economist David Cohen at Action Economics. But he added: ‘I wouldn’t get too upset by the fact that the central banks were injecting liquidity today – they were just accommodating the public want to hold cash rather than stocks.

‘That would have caused some cash-flow problems in the banking system, so they added some reserves. It’s not as if they’re bailing out the economy.’

In Asia-Pacific, stocks were again battered as all major markets in the region suffered losses.

South Korea saw the worst fall in percentage terms with a 4.2 per cent plunge, followed by Australia, where shares fell 3.6 per cent.

In Japan, the Nikkei 225 lost 2.4 per cent, while Hong Kong’s Hang Seng Index fell 2.9 per cent. China’s CSI 300 index slid 1.1 per cent.

In South-east Asia, the Kuala Lumpur Composite Index ended 2 per cent lower, while key indices in Thailand, Indonesia and the Philippines also lost 0.9-3.1 per cent.

 

Source: Business Times 11 Aug 07

BNP suspends 3 funds with sub-prime assets

It says US crisis has made it impossible to gauge fairly the value of their assets

PARIS – FRENCH bank BNP Paribas has suspended three of its funds as problems in the United States subprime mortgage sector are preventing it from calculating their value.

BNP Paribas, France’s second-largest bank, will temporarily suspend the calculation of net asset value for the funds, which are called Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia, the Paris based company said in an e-mailed statement on Thursday.

The French bank follows Union Investment Management and Frankfurt Trust in stopping redemptions from such funds.

Late payments on US sub-prime mortgages to borrowers with poor credit histories have reached their highest level since 2002, driving down the value of bonds backed by home loans.

The BNP Paribas funds had about two billion euros (S$4 billion) worth of assets as at July 27, including 700 million euros in US sub-prime mortgages rated ‘AA’ or higher.

‘The complete evaporation of liquidity in certain market segments of the US securitisation market has made it impossible to value certain assets fairly, regardless of their quality or credit rating,’ BNP Paribas said in the statement.

When the company reported a 20 per cent increase in second-quarter net income last week, chief executive Baudouin Prot said the bank’s exposure to the US sub-prime meltdown was ‘absolutely negligible’.

Union Investment, Germany’s third-largest mutual fund manager, stopped redemptions from one of its funds last Friday after investors pulled about 10 per cent of the assets.

Frankfurt Trust, the mutual fund manager of Germany’s BHF-Bank, did likewise after after withdrawals surged, with clients withdrawing 20 per cent of their money since the end of last month. The ABS Euribor fund’s assets dropped 18 per cent to 850 million euros between July 24 and Aug 7, according to data compiled by Bloomberg. The ABS Eonia fund’s total assets dropped 7 per cent to 73 million euros over the same period.

Euribor, or the Euro interbank offered rate, is an interest rate that measures how much Europe’s biggest banks charge to lend each other euros. Eonia is an index that measures inflation in the countries that use the euro.

Sub-prime mortgages are the riskiest property loans, often extended to people who have payment difficulties or a bad credit history.

Several major US companies have announced losses from exposure to these sub-prime loans, sending jitters across the financial services sector.

Source: Straits Times 10 Aug 07