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

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)

UK lenders lost £700m to mortgage fraud

(LONDON) UK mortgage lenders probably lost £700 million (S$1.9 billion) last year to organised fraud that inflated real estate prices, according Britain’s Association of Chief Police Officers.

Mortgage fraud for profit ranges from overvaluation of newly constructed homes to deliberate ramping of commercial real estate prices, often involving mortgage brokers, appraisers and attorneys, the association said in an e-mailed statement yesterday.

Fraud for profit differs from fraud for property, where individuals inflate salaries or savings to qualify for loans.

Concerns about mortgage fraud are mounting among banks as the UK housing market cools, ending a decade of gains during which property values tripled. Mortgage approvals fell to a nine-year low in January, after lenders granted £370 billion of mortgages last year.

Mortgage fraud ‘remains a significant element of the UK’s annual fraud losses’, said Mike Bowron, commissioner of the police department of the City of London district in the UK capital. His comments accompanied a release on the report’s findings.

In one instance an individual made a profit of more than £10 million through fraud, the police association said. The release didn’t provide details of frauds committed.

Lenders should make more identity checks and seek to establish a central database to flag areas where fraud is more prevalent, police recommended in the report.

Criminal gangs use mortgage fraud as a way of laundering money and making ’significant’ incomes, the report found, because of the ‘current low risk of detection and high profit opportunities’.

London, the UK’s most expensive property market, was the most active area for fraud, the report found, accounting for 46 per cent of cases.

‘Victims of mortgage fraud range from those who purchase a newly built property only to find that their home is worth considerably less than they paid for it through to those on low incomes who, through the actions of corrupt professionals, take on a debt they simply cannot afford,’ the association said in the report.

The report was based on evidence from 47 UK police forces, government departments, insurance companies, the Financial Services Authority, lending associations and 45 mortgage providers, who represent more than 75 per cent of the market.

Source: Bloomberg (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)

 

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)

UK housing market falls in Dec

Worst performance since aftermath of 1992 recession

(LONDON) UK real estate professionals said that December was the worst month for the housing market since the aftermath of Britain’s last recession in 1992.

The number of real estate agents and surveyors saying that prices fell exceeded those reporting gains by 49.1 percentage points, the Royal Institution of Chartered Surveyors (RICS) said yesterday. That compares with 40.6 points the previous month. In the capital, confidence in prices fell to the lowest since 2003.

An end to the UK’s decade-long housing boom may threaten economic growth as falling home values discourage consumers from spending. Economists forecast that the Bank of England will cut the benchmark interest rate for a second time next month after a reduction in December to guard against fallout from the collapse of the US subprime mortgage market.

‘The housing market is clearly feeling the pinch from the credit crunch and the round of interest rate hikes in 2007,’ Ian Perry, a spokesman for RICS, said in a statement. ‘The Bank of England may have to cut rates further if the market is to remain in a stable condition.’

A measure of expected prices slid to minus 62 from minus 47 in November, both the lowest since RICS started collecting data on the outlook in October 1998, the report showed.

All 12 regions represented in the survey showed price declines. Northern Ireland and East Anglia posted the worst results, with balances of minus 82 and minus 81, respectively. London’s reading fell to minus 54 from minus 27 in November.

‘Very quiet in December, with little to give the market confidence, unless we see another drop in interest rates,’ Christopher Philpot, real estate agent at Lacy Scott & Knight in East Anglia, said in the statement.

Other reports have also shown a weaker property market. HBOS plc, the country’s biggest mortgage lender, said on Jan 8 that house prices fell 0.8 per cent in the three months through December, the first quarterly drop since 2000.

Nationwide Building Society said that values fell 0.5 per cent in December.

‘The case for a rate cut is clearly pretty strong for February,’ said Simon Rubinsohn, chief economist at RICS, in a Bloomberg television interview yesterday.

The Bank of England last month reduced its benchmark to 5.5 per cent as consumer spending showed signs of weakening, and a Bloomberg News survey on Jan 4 showed that most economists forecast the rate to fall to 4.75 per cent by the end of 2008. Tesco plc and Marks & Spencer Group plc reported a slump in retail sales over the

Christmas holidays as shoppers reined in spending, prompting both to call on the central bank for more rate cuts.

Chancellor of the Exchequer Alistair Darling, concerned that economic growth is beginning to slow, has urged financial institutions to pass on lower interest rates from the central bank to customers. Banks raised rates on mortgages fixed for two years last month even as the central bank lowered borrowing costs, the Bank of England reported on Jan 10.

‘The housing market is in the throes of a significant correction,’ said Richard McGuire, an economist at Royal Bank of Canada in London. ‘We don’t see a collapse, but there will be a pronounced downturn that will weigh on consumption.’

The central bank forecast in November that UK growth would slow this year to about 2 per cent from about 3 per cent in 2007. The bank will publish new growth and inflation forecasts on Feb 13.

RICS, which lobbies for about 150,000 property surveyors, said in a Dec 20 statement that pent-up demand and interest rate cuts will prevent a slump in the UK property market this year.

First-time buyers had been shut out of the market as prices tripled in a decade and supply dwindled. Construction of new homes in Britain stagnated at 148,000 units a year on average between 1989 and 2005, down from a peak of 425,000 in 1968.

‘Supply would have to loosen considerably before prices experience a significant dip,’ Mr Perry said. Yesterday’s report shows that stocks on the books of real estate agents rose to an average 76.9 from 71.8 the previous month.

 

Source: Bloomberg (Business Times 17 Jan 08)

Property devt in UK hits a low

(LONDON) Property development activity in the UK fell for the first time in four-and-a-half years in November as worries about a weakening property market outlook spread to the commercial building trade, data showed yesterday.

In a monthly survey of industry professionals, property services firm Savills said around 22 per cent reported a drop in activity in November, compared with 12 per cent reporting a rise.

That left the Total Commercial Development Activity Index with a negative net balance for the first time since May 2003, Savills said.

Commercial property developers and building contractors were also increasingly pessimistic about future work prospects, with a third of those surveyed forecasting a fall from current levels of activity in the next three months.

 

Source: Reuters (Business Times 13 Dec 07)

British home prices fall for a third month in November

Average cost of a home declines 1.1% to £194,895 from a month earlier

(LONDON) UK house prices fell for a third month in November, the worst performance in more than a decade, and consumer confidence slumped – signs that rising credit costs are hobbling growth in Europe’s second-largest economy.

The average cost of a home in Britain declined 1.1 per cent to £194,895 (S$581,820) from a month earlier, after a 0.7 per cent drop in October, a report by HBOS plc said yesterday.

Prices last fell for three months in a row in 1995. Consumer optimism declined the most in at least three years, Nationwide Building Society said.

‘It’s looking pretty grotty out there,’ said Geoffrey Dicks, chief UK economist at Royal Bank of Scotland Group Plc in London. ‘This is yet another indicator that the economy has taken a sharp turn for the worse.’

The pound dropped after the reports, which came a day before the Bank of England’s interest rate decision. While policymakers said that they are still concerned about inflation, the Financial Services Authority said on Tuesday that credit markets may deteriorate next year and banks including Merrill Lynch & Co forecast that the central bank will be forced to cut rates today.

The pound fell as much as 0.9 per cent against the US dollar to touch a two-week low, and traded at US$2.0407 as at 9.01 am here.

House prices rose 6.3 per cent in the quarter through November from a year earlier, HBOS said.

The Bank of England is watching for signs that tighter credit conditions are cooling economic growth as consumers brace for the property market’s worst year in more than a decade. House prices may fall 10 per cent next year, Morgan Stanley forecasts.

While 44 of 61 economists still expect the central bank to keep its main rate at a six-year high of 5.75 per cent today, the rest forecast a cut of 25 basis points, the biggest split since June 2004.

‘There are clearer signs that the slowdown in the housing market is gathering pace,’ Bank of England deputy governor Rachel Lomax said on Nov 23. The bank ‘faces a tricky period’.

Nationwide Building Society said yesterday that its consumer confidence index fell 12 points to 86, the biggest drop since the index was introduced in May 2004, as faster inflation hurts households’ purchasing power. A measure showing willingness to spend fell 14 points to 63, the lowest recorded.

‘Uncertainty about the effects of the credit crunch, together with rising oil and food prices, seem to be affecting feelings about jobs and the future economic situation,’ said Fionnuala Earley, chief economist at Nationwide. ‘It is natural that consumers would think about tightening their belts.’

A decade-long boom in house prices has helped fuel the country’s longest stretch of growth since World War II.

Credit costs have risen after losses from the collapse of the US sub-prime mortgage market caused lending between banks to seize up. Three-month Libor rates, a measure of the cost of borrowing for banks, climbed to 6.65 per cent on Tuesday, the most since Sept 18.

British banks have raised the average rate on a mortgage for 95 per cent of the price of a property, fixed for 24 months, to 6.37 per cent in October from 6.32 per cent the previous month, according to the central bank’s website.

‘There is a very real prospect that conditions will worsen further into next year, in terms of both liquidity and credit risks,’ Clive Briault, an official at the Financial Services Authority, said on Tuesday.

Bank of England governor Mervyn King said on Nov 29 that tighter credit conditions may curb household demand.

‘With borrowing more expensive, and less easily available,’ he said, there may be ’slower growth of consumer spending’.

Slowing growth is already hurting sales at UK stores. Moss Bros Group plc, Britain’s third-largest suit retailer, said yesterday that full-year profit probably won’t meet analysts’ estimates.

 

Source: Bloomberg (Business Times 6 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)

Bankers bought fewer luxury London homes in past 4 mths

(LONDON) Bankers and money managers purchased fewer luxury homes in central London in the past four months as turmoil in the credit markets escalated, real estate broker Savills plc said.

Purchases of homes costing £2 million (S$6 million) to £4 million by financial services employees declined almost 26 per cent between August and last week, London-based Savills said in a report on Tuesday.

‘We’re going to see a similar picture for at least another six months,’ said Lucian Cook, a director of Savills’ residential research department. ‘There’s a reasonable likelihood’ that the slowdown will deteriorate, he added.

Sales are slowing as bank losses incurred from US$40 billion in writedowns on US mortgage investments have heightened concerns about job cuts and lower annual bonuses. Bonus-earners in London’s financial services industry accounted for more than half the sales of homes this year in this segment of the ‘prime’ central London residential market, Savills estimated.

Since the end of July, the proportion of purchasers employed in finance or business services declined to 44 per cent for the 27 properties in this price bracket sold by Savills. In the first seven months of the year, 60 per cent of the 60 properties Savills agents sold were to bonus-earners.

Companies in the City of London, the British capital’s main financial hub, may cut 6,500 jobs and reduce bonuses by 16 per cent this year, the Centre for Economic and Business Research said last month.

For the past two years, most of the bonus money has been spent on real estate, fuelling demand for homes in neighbourhoods like Chelsea, Kensington and Notting Hill. Prices climbed by about 34 per cent in October from a year earlier.

 

Source: Bloomberg (Business Times 22 Nov 07)

UK home prices may decline in ‘08: Citigroup

(LONDON) UK house prices may fall next year as a ‘toxic mix’ of higher interest rates, overvaluation and record debt deters property investors, Citigroup Inc said.

‘We suspect that the number of buy-to-let home purchases will fall outright in 2008, hence contributing to a sharp drop in overall housing turnover’ and a price decline of between one per cent and 2 per cent, said Michael Saunders, chief western European economist at Citigroup, in an e-mailed note. ‘There is a sizeable risk that the outturn will be worse.’

The UK’s housing boom has been driven in recent years by so-called buy-to- let investors, who purchase properties to rent them to tenants, Citigroup says.

With rental yields declining and buy-to-let mortgage lenders finding it more expensive to raise funding in the money markets, house prices may lose that prop.

The number of new buy-to-let mortgages, which have more than doubled since 2002, may drop 45 per cent in 2008, Citigroup says.

Loans for first-time buyers have dropped 31 per cent in the past five years and may be little changed next year, the bank said.

Britons are shouldering a record £1.4 trillion (S$4.2 trillion) in debt and trying to cope with five interestrate increases in a year from the Bank of England.

The US sub-prime mortgage slump has also pushed mortgage rates higher, further hurting affordability.

Citigroup said house prices may also fall as the government’s decision to cut capital gains tax encourages owners to sell.

The new levy came into effect in April and will lower the tax on second-home sales to 18 per cent from as much as 40 per cent.

‘Buy-to-let investors may be tempted to sell soon in case the government, as it often does, reverses the tax change in a year or two,’ said Mr Saunders.

UK house prices, which have tripled in the past decade, are already showing signs of falling. Values dropped for a second month in October, the first back-to-back decline since May 2005, mortgage lender HBOS Plc said last week.

Higher prices have made it harder for investors to profit from letting out their properties.

Rental yields on houses and apartments are now about 5 per cent, says Citigroup, which compares with the 6.37 per cent average rate offered by lenders this month on a two-year mortgage for 95 per cent of the property price.

 

Source: Bloomberg (Business Times 13 Nov 07)

Value of Liberty’s malls slides in Q3

Higher borrowing costs and stricter credit controls hurt commercial property

(LONDON) Liberty International plc, owner of MetroCentre and other UK malls, says the value of these properties fell in the third quarter as higher borrowing costs and stricter credit controls hurt the commercial property market.

The London-based company’s 14 shopping centres were valued at £6.11 billion (S$18.5 billion) as at Sept 30, down from £6.12 billion three months earlier, according to a statement on Tuesday. Net asset value dropped to 1,369 pence a share from 1,385 pence, said Liberty, which owns eight of Britain’s 21 largest retail centres.

The decline in the value of Liberty’s properties was less than the 2.9 per cent drop for UK retail-related real estate in the third quarter, according to figures compiled by Investment Property Databank Ltd. Retail property prices in the UK may drop in 2007 for the first time in 12 years.

‘The commercial market is getting some of the backwash of the problems in the banking sector and the domestic US housing market,’ CEO David Fischel said on a conference call.

Liberty shares declined 8 pence to 1,119 pence in London. The stock has fallen almost 20 per cent this year, reducing the company’s market value to about £4 billion. The FTSE 350 Real Estate Index has dropped 34 per cent during that period.

Profit excluding the value of Liberty’s properties and derivatives declined to £28.5 million in the third quarter from £32.1 million in the previous three months. Net rental income gained 6 per cent to £87.3 million in the third quarter from three months earlier.

Liberty’s British shopping centres, which account for three quarters of its assets and have a vacancy rate of 1.5 per cent, would generate an annual rental income of £303 million if they were leased at current market rates. That’s a 0.4 per cent increase in estimated rental value since June 30.

‘The key, going forward, is going to be rental growth and these were quite weak,’ said Harm Meijer, an analyst at JPMorgan Chase & Co. Mr Meijer said he expects no more rental growth and further declines in values of UK shopping centres.

Nine-month net income amounted to £407 million, Liberty said, without providing a comparable figure for the year-earlier period, which included the value of its real estate investments. It was the first time Liberty released third-quarter figures.

Mr Fischel took advantage of the peak in property prices in the second quarter to sell a 36 per cent stake in the Gateshead MetroCentre, Europe’s largest mall, to the Government of Singapore Investment Corporation (GIC).

That provided additional funds for acquisitions in London and other cities.

Liberty acquired Covent Garden in August 2006, a 50 per cent stake in London’s Earls Court and Olympia exhibition centres, and formed a venture to develop offices in London’s West End district, the world’s most expensive business location.

 

Source: Bloomberg (Business Times 8 Nov 07)

Average UK lease term getting shorter

(LONDON) Challenging UK retail trading conditions have forced commercial real estate landlords to slash lease lengths to attract and keep tenants in their properties, data showed yesterday.

The 10th Annual Lease Review, published by the British Property Federation (BPF) and Investment Property Databank, showed that the average length of a lease fell from 6.2 years in 2005/2006 to 5.7 years in 2006/2007.

The survey draws from detailed evidence of 75,000 tenancies, encompassing a full analysis of lease lengths, break clauses, review cycles, rent free periods and income profiles.

The data showed that 67 per cent of leases struck in 2006/2007 were for five years or less, while less than 3 per cent of leases agreed in the same period were for more than 15 years. Retail leases fell from an average of 7.8 to seven years and office leases fell from an average of 5.7 to 5.2 years. Industrial leases remained the same as the previous year’s survey at 4.2 years.

The BPF said that the increase in shorter lease terms reflected the industry’s improved ability to offer flexible lease terms to occupiers.

 

Source: Reuters (Business Times 6 Nov 07)

London luxury home prices lose momentum

Homes worth at least £2.5m pounds up just 0.3% in Oct, slowest pace since July ‘05

(LONDON) Luxury-home prices in London rose last month at the slowest pace since July 2005 as the prospect of job cuts and smaller bonuses deterred investment bankers and other buyers, Knight Frank LLC said.

The average price of houses and apartments costing at least £2.5 million (S$7.55 million) increased 0.3 per cent in October from the previous month, according to an index compiled by the London-based property broker. Prices gained about 34 per cent from a year earlier.

Companies in the City of London financial district may cut 6,500 jobs and reduce bonuses by 16 per cent this year, the Centre for Economic and Business Research said on Oct 8. For the past two years, most of the bonuses have been spent on real estate, fuelling demand for apartments in London neighbourhoods such as Chelsea, Kensington and Notting Hill.

‘The impact of the credit crunch and a weaker City economy have contributed to a more sober market,’ said Liam Bailey, head of residential research at the London-based firm.

Bonus-earners in the city will invest only £2 billion in homes next year, compared with £5.5 billion this year, as they seek assets that offer higher returns, according to Savills plc estimates. Savills and Knight Frank are the biggest brokers for prime London properties, the most expensive in the world.

The lack of investment will restrict the gain in luxury-home prices to 3 per cent in 2008, less than a tenth of this year’s rate, Knight Frank forecast this week. The company cut its estimate from 10 per cent.

For homes costing more than £5 million, the average price increase will probably be about 8 per cent next year compared with the estimated 2007 gain of 34 per cent, Knight Frank said. The main customers for the most expensive houses and apartment are wealthy investors from Russia and the Middle East, according to the broker.

The contrast with the rest of the London market ‘illustrates the strength of the super-prime market with demand from international buyers remaining very strong,’ Mr Bailey said.

 

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)

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)

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)

Jumeirah to open its first European resort

(DUBAI) Jumeirah Group, the hotel management company owned by Dubai’s government, leased a property being built in Mallorca, Spain from a German real estate fund to gain its first European resort and spa.

The 120-room Jumeirah Port Soller resort is held on a ‘long-term’ lease from the WestInvest Interselect fund, Jumeirah said in a statement posted on its website yesterday.

The resort, due to open in 2010, is being built by WingField Corp and was bought for WestInvest by Deka Immobilien GmbH, according to the statement.

Jumeirah is expanding outside Dubai, where it manages the sail-shaped Burj al-Arab hotel. The company has urban hotels in London and New York, and aims to expand its network five-fold to 57 properties by 2011, chairman Gerald Lawless had said in May.

Spanish hotel prices rose the most in four years last month, led by rate increases on the Balearic islands including Mallorca, the Spanish government said in a report yesterday.

 

Source: Business Times 25 Sept 07

Credit fallout to hit London office building

CBRE sees 2.5m sq ft of new space instead of 4.5m forecast earlier

(LONDON) The equivalent of two to four skyscrapers per year are now unlikely to be built in London in 2009 to 2011 due to fallout from the US subprime crisis, property services firm CB Richard Ellis (CBRE) said yesterday.

CBRE said it expected 2.5 million square feet (232,300 sq metres) of new office space per year to be built in central London in 2009 through 2011, instead of a previously forecast 4.5 million square feet.

But that could help to extend London’s commercial property cycle by reducing the risk of too many new offices going up in the crane-dotted UK capital, Peter Damesick, head of UK research at CBRE, said. He said the decision to slash his estimate for London’s development programme by 44 per cent was the result of higher funding and construction costs and because financial market turbulence had cast a pall over the UK capital’s jobs outlook, potentially holding back rental growth. ‘Funding for office developments has become harder to obtain and got more expensive,’ Mr Damesick told Reuters, citing anecdotal evidence which showed lending margins doubling in some cases to 175 basis points over benchmark interest rates. J’There is also a feeling that the strength of (occupier) demand in the short-term will be less than was expected six months ago due to the impact of potential financial dislocation on London’s financial services,’ he said. In addition, the regeneration of a large area of London before the 2012 Olympics was likely to push up construction costs even further, he said.

But a degree of self-regulation now would benefit the property industry going into the next decade, even though the supply of office space was near a record low in central London, with an average vacancy rate of 3.3 per cent at the end of August, according to CBRE data.

‘It will reduce the risk, which was beginning to appear in the pipeline, of medium-term oversupply and enhances the prospects for rental stability,’ Mr Damesick said. ‘So we’ll probably see slower rental growth in the short-term but less risk of a rental downturn in the medium term.’

Excessive office building helped to extend and deepen a downturn in London’s property market in the early 1990s.

Among the ambitious office development projects that have come into question in recent weeks is the 72-storey London Bridge Tower – nicknamed the Shard of Glass – which is due for completion in 2010/11 and lies on the city’s south bank. Property investment firm CLS Holdings plc, one of the joint venture partners behind the Shard project, said financing options were under review and demolition works were still due to begin before the end of the year.

 

Source: Reuters (Business Times 25 Sept 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

Surveyors see 10% chance of UK crash

RICS revises earlier forecast of 3% rise in house prices to flat over 12-15 mths

(LONDON) There is a ‘one-in-10 chance’ of a 1990s-style UK housing market crash, the Royal Institution of Chartered Surveyors (RICS) said on Tuesday, after scaling back its expectations for British house price inflation.

Simon Rubinsohn, RICS’s chief economist, said his base case was for flat house prices across Britain in the next 12-15 months, down from an earlier forecast of 3 per cent growth.

He also said there was a ‘20 per cent chance of a 10 per cent’ decline in London house prices over the next 12 months, and said talk of a looming ‘crash’ was legitimate and not irresponsible.

But like other housing market experts, he said homeowners were unlikely to see a repeat of Britain’s previous housing slump, when average prices fell by an inflation-adjusted 35 per cent from their peak in 1989, according to data from property services firm CB Richard Ellis.

Peter Damesick, head of UK property research at CB Richard Ellis, said the chances of a housing market crash were still ‘pretty small’ because there was no obvious trigger in the offing such as the economic downturn or sharp interest rate hikes seen in the early 1990s.

Mr Rubinsohn said RICS was not reacting simply to mortgage lender Northern Rock’s cashflow woes, which have been pushing up mortgage rates and could reduce the availability of credit, but had already been scaling back its expectations in the wake of previous UK interest rate rises.

Those interest rate hikes now appeared to have run their course, economists said, leaving the Bank of England with enough room to cut them if housing market conditions worsened significantly next year.

‘The risks in the near term are to the downside but further out, where there is scope for offsetting policy actions to take effect, we are more confident,’ said Michael Taylor, senior economist at Lombard Street Research, which was sticking to its view of negligible average house price growth in 2008.

 

Source: Reuters (Business Times 20 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

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)

No sub-prime miracle cure, says OECD chief economist

Increased scrutiny; borrower education; pugnacious rating analysis needed

(MADRID) The surge in short-term rates caused by rising defaults of US sub-prime mortgages exposed ’serious imperfections’ in the way global credit and housing markets function, OECD chief economist Jean-Philipe Cotis said.

‘Recent developments have revealed serious imperfections in the functioning of US housing markets and, more broadly, in credit markets worldwide,’ said Mr Cotis, chief economist at the Organisation for Economic Cooperation and Development.

Mr Cotis suggested that increased supervision of US sub-prime mortgages, more information and education for borrowers, and more ‘pugnacious’ analysis from credit rating companies, may help avoid future losses of confidence.

‘More transparency also seems to be called for in credit markets,’ Mr Cotis said. ‘I don’t think there’s a miracle cure readily available.’

Some so-called asset-backed securities lost more than 50 per cent before credit agencies downgraded them in July.

US Senate Banking Committee chairman Christopher Dodd said last month that the rating agencies’ failure to act sooner caused ‘great damage’.

Meanwhile, the Dutch central bank said that uncertainty has risen in the Netherlands’s financial system over the past six months and the full impact of the recent increase in borrowing costs ‘cannot be determined’.

The outlook for the financial system depends on ‘the extent to which the decreasing risk tolerance among investors continues and how much farther it spreads’, the central bank said in a report issued yesterday.

The European Central Bank and other monetary authorities around the world injected more than US$350 billion into money markets last month to prevent a wider crisis as investors shunned assets linked to US mortgages and corporate borrowing costs rose.

The US sub-prime meltdown has revealed that ‘unfavourable developments in one segment could lead to an overall deterioration of the market climate’, the Dutch central bank said. The ‘direct exposures’ of Dutch financial service companies to the sub-prime mortgage market are ‘relatively limited’, according to the report.

Meanwhile, tight money markets showed no sign of let-up in a liquidity squeeze caused by banks clamming up on lending over the past month as they scrambled to calculate exposure to mass defaults in the US sub-prime mortgage market.

Australia held interest rates steady yesterday, the first piece in a monetary jigsaw which investors expect to show euro zone policy on hold and a US rate cut in response to a global credit crisis.

Overnight interbank lending rates in the euro zone approached six-year highs, after Tuesday’s injection of liquidity by the ECB failed to sate demand for ready cash.

‘The fact that overnight is trading so high at the moment shows that the cash is not spreading out across the system, there are institutions which are struggling to get short-term needs filled,’ said a euro zone trader.

In Britain, sterling three-month money rates hit fresh 81/2-year peaks. The Bank of England – which has stood back until now – decided to act, but focused on overnight rates.

The BOE raised its aggregate reserves target for the next month by 6 per cent and said that it stood ready to add 25 per cent more if overnight interest rates stayed high.

It said that it aimed to ‘relieve some pressure on interest rates for overnight borrowing which have, at times during the maintenance period over the past month, been unusually high’.

The Reserve Bank of Australia does not explain its reasoning when leaving interest rates steady but has been striving daily to add liquidity to the banking system as market rates climbed.

The Bank of Canada was expected to follow Australia’s example late yesterday, and the European Central Bank and the BOE are seen keeping rates on hold today, while the calming of market turmoil depends overwhelmingly on the delivery of an expected Federal Reserve rate cut on Sept 18.

The Fed is expected to cut rates at its meeting after chairman Ben Bernanke said last week that he would take any steps needed to shelter the economy from the credit squeeze.

Richmond Fed president Jeffrey Lacker said on Tuesday that he would back a rate cut if the evidence showed slowing growth and lower inflation, but said that the case was not yet made.

‘If evidence arrives that we need a policy move, of course I will consider it and I will take that evidence seriously,’ he said.

‘That evidence would be of the nature of information that alters the outlook for real spending and inflation.’

Further diagnosis of the US economy will be provided later by the Fed’s Beige Book on regional economic conditions, while tomorrow’s August non-farm payrolls figures loom large.

 

Source: Bloomberg, Reuters (Business Times 6 Sept 07)

UK home price inflation seen slowing

(LONDON) British house price inflation looks set to slow sharply next year as affordability constraints are compounded by tighter lending conditions, according to Nationwide, Britain’s biggest building society.

A reluctance to extend credit has sent funding costs on money markets rocketing in recent days, putting pressure on lenders to pass these costs on, Nationwide’s chief economist Fionnuala Earley said.

‘If this situation persists, those lenders most dependent on wholesale markets for funding and those with the riskiest books will be forced to pass on higher costs, making it harder for people to get loans,’ she said.

‘We expect house price inflation to be no higher than wage inflation next year, so we are talking about low single digits.’

Wage inflation in Britain stands at 3.3 per cent, its lowest level in four years.

Despite a series of interest rate rises from the Bank of England, annual house price inflation in Britain is still running close to 10 per cent, but Nationwide expects it to slow to around 6 per cent by December.

Should it slow to 3 per cent next year, it would be the weakest annual average rate of growth in more than a decade.

The mortgage lender says, however, that the chance of a full-blown house price crash is low as long as employment levels remain high and the supply of new homes limited. Still, it is keeping a close eye on the credit markets.

 

Source: Reuters (Business Times 23 Aug 07)

UK mortgage lending rises faster in July

Home prices decline for the first time in a year in August, says a Rightmove report

(LONDON) UK mortgage lending accelerated in July, evidence that consumers are proving resilient to interest rates at a six-year high, the British Bankers’ Association (BBA) said.

Net mortgage lending rose by £5.7 billion (S$17.27 billion), compared with £5.4 billion in June, the BBA, which represents the nation’s biggest banks, said in an e-mailed statement yesterday.

Meanwhile, UK money supply growth unexpectedly gained pace last month, a Bank of England report showed.

The reports suggest that five interest-rate increases in a year have yet to dent demand for property. The central bank has said the UK housing market showed ’signs of softening’. It kept borrowing costs at 5.75 per cent on Aug 2. Investors have since pared bets on further rate increases after a global credit crunch sent stock markets tumbling.

‘July’s strong rise was surprising, given the expected cumulative impact of higher interest rates,’ David Dooks, director of statistics at the BBA, said in the statement. ‘This resilience shows the popularity of home ownership and also reflects more re-mortgaging activity.’

A separate report from Rightmove plc showed house prices fell for the first time in a year in August, slipping 0.1 per cent from a month ago to £394,268. The website bases its data of asking prices for 150,000 properties.

The BBA said spending on credit cards, adjusted for seasonal swings, fell by £73 million in July, compared with a drop of £78 million in June. Consumer credit rose by £141 million, with personal loans and overdrafts increasing by £214 million, the report showed.

M4, which is the broadest gauge of UK money supply and measures currency in circulation and deposits at banks, rose 13 per cent from a year earlier, compared with 12.9 per cent in June, the Bank of England said on its website yesterday.

Money supply ‘data so far has not been particularly inflationary’, said Amit Kara, an economist at UBS AG in London who used to work at the central bank. ‘The credit market turmoil will have an impact on the money data going forward, and the data that will come will reflect some slowing.’

Separate reports yesterday gave conflicting signals on the outlook for UK mortgage demand. The Building Societies Association said mortgage approvals fell to £4 billion in July, from £5.5 billion in the same month a year earlier.

The Council of Mortgage Lenders said yesterday gross lending fell one per cent in July to £34.4 billion, from £34.9 billion a month earlier.

It was 13 per cent higher than in July last year, and the highest ever recorded in that month, the report said.

 

Source: Business Times 21 Aug 07

London luxury home prices up a record 3.9%

(LONDON) Luxury-home prices in London climbed at a record monthly pace in July as buyers competed for a smaller number of properties, real estate broker Knight Frank LLC said.

The average price of the UK capital’s most expensive houses and apartments rose by an average of 3.9 per cent last month from June, according to data compiled by London-based Knight Frank. The annual increase was more than 36 per cent, the highest since Margaret Thatcher came to power in 1979.

‘Add into the mix rising domestic wealth and rising foreign wealth coming into the country, we can see why prices have risen strongly,’ Liam Bailey, head of residential research at Knight Frank, the UK’s largest closely held real estate brokerage, said in the statement. The company forecast a gain of 25 per cent for all of 2007.

Investment bankers and hedge-fund managers with bonuses to spend are vying with rich individuals from Asia, the Middle East and Russia for a shrinking supply of prime real estate in central London. The number of homes for sale in the city costing at least £2.5 million (S$7.6 million) has dropped by 23 per cent since 2005, according to Knight Frank.

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 to take advantage of the city’s security, schools, stores, theatres and restaurants.

About 61 per cent of all properties in central London that fetch more than £4 million are acquired by foreigners, Knight Frank estimates.

These buyers ‘are much more likely to hold onto their property for a longer period as an investment, even if they return to their home country’, said Mr Bailey.

Brothers Sri and Gopi Hinduja, who own Mumbai-based Hinduja Group with a sibling, last year paid £58 million for a 60-room home on The Mall, the road which runs from Trafalgar Square to Buckingham Palace, according to the Sunday Times.

Other foreign residents or homeowners include Norwegian shipping magnate John Fredriksen and Vladimir Kim, chairman of Kazakhstan’s biggest copper producer, according to the Sunday Times.

Overseas buyers are also attracted by tax rules that allow wealthy non-British individuals to live in the UK, while paying their tax overseas.

The Bank of England has raised borrowing costs five times in the past year to keep a lid on inflation. The benchmark interest rate may need to climb to 6 per cent in September from the current 5.75 per cent, policy makers indicated last week, a move that would further increase mortgage costs for homebuyers.

Prime properties in London are the most expensive in the world, selling at £2,300 psf, more than comparable homes in Monaco, New York and Tokyo, according to Knight Frank.

 

Source: Business Times 21 Aug 07

UK quoted property worth a look: analyst

Investors may benefit by tapping opportunities in the sector

(LONDON) Investors can benefit from a wealth of opportunities in the UK quoted property sector, currently battling the toughest market conditions seen in more than five years, one of Britain’s fastest-growing fund management firms said.

Alex Ross, manager of Premier Asset Management’s £100 million (S$305 million) Pan-European Property Share Fund, told Reuters, ‘We have seen examples of indiscriminate selling of property stocks recently, regardless of the quality of the company, management team or portfolio.

‘There are concerns that the rapid increase in the five-year swap rate could lead to a correction in capital values of the underlying assets but we think any likely depreciation in prime property is now fully priced into several property shares.’

Premier Asset Management floated on London’s junior stock exchange AIM in 1997. It had more than £1.77 billion worth of assets under management at end-March 2007, according to the company website.

Its European property share fund fell by more than 12 per cent in the year to July 27, but still outperformed the FTSE EPRA/NAREIT European property stock index by 7.39 per cent over the seven-month period, Premier said.

Five-year sterling interest rate swap rates – a property industry benchmark for borrowing costs – have climbed by almost one percentage point to more than 6 per cent since the start of the year. This has increased the gap between the cost of debt and the rental income generated by UK property markets.

Mr Ross told Reuters his fund was in the process of reversing an anti-UK strategy in order to gain exposure to some of Britain’s most valuable pieces of real estate, owned by quoted companies trading at large double-digit discounts to net asset value.

The fund had originally reduced the majority of its holding in UK property stocks in late 2006 and early 2007, after the market performed strongly in the run up to UK’s introduction of real estate investment trusts (Reits) on Jan 1.

Most of UK’s leading quoted property companies have since converted into tax-transparent Reit vehicles.

Mr Ross said he felt shares in several UK property companies holding prime assets had fallen too far in the wake of recent credit market volatility.

‘We have used the market weakness to add to positions in companies like Land Securities and Brixton, each of which are characterised by prime assets likely to be more resilient to weakness in the underlying market,’ Mr Ross said.

He said the fund was now more than 30 per cent invested in UK property stocks specialising in prime retail, office and distribution warehouse property, with plans to further increase weightings if the sell-off in stocks continued.

Outside the UK, Mr Ross said the fund would gravitate strongly towards smaller quoted property companies in less mature markets like Germany, Scandinavia and Italy, which often had well-connected local management teams and tended to own undervalued prime assets.

Investments in continental property companies using index-linked lease structures also provided a good hedge against the spectre of inflation, he said.

 

Source: Business Times 16 Aug 07

UK firm to buy two Shanghai buildings

(SHANGHAI) British property firm Grosvenor plans to buy two mid-rise residential buildings in Shanghai worth an estimated 500 million yuan (S$100.2 million), the official Shanghai Securities News said yesterday.

The buildings are located in central Shanghai’s upmarket Xintiandi district, the newspaper said.

Grosvenor managing director Nicholas Loup said in an interview in June that Grosvenor would start marketing its first fund dedicated to China in the second half of this year, with initial equity of US$300 million to US$500 million, as the company accelerates its move into Asia.

Borrowing at a loan-to-value of about 50 per cent, the fund would wield as much as US$1 billion in spending power.

 

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

Value of UK homes up 12.1% in June

This suggests that higher interest rates have not hurt demand for property

(LONDON) UK house-price inflation accelerated in June to the fastest pace in more than two years, suggesting that higher interest rates have yet to damp demand for property, a government report showed.

Home values rose 12.1 per cent from a year earlier, up from 10.8 per cent in May and the highest rate since March 2005, the Department for Communities and Local Government (DCLG) said yesterday.

From May, the average home price rose 1.6 per cent to £214,222 (S$655,000). The data does not reflect seasonal variations.

The figures ’suggest that the housing market is proving resilient to higher interest rates’, said Howard Archer, an economist at Global Insight in London, in an e-mailed note to investors.

‘We expect house price growth to trend gradually lower during the coming months, then settle down into an extended period of modest rises. It currently seems unlikely that house prices will slow sharply.’

The central bank has lifted borrowing costs five times in the past year to keep a lid on inflation. Policy-makers signalled last week that the benchmark interest rate may need to rise to 6 per cent in September from the current 5.75 per cent, further increasing mortgage costs for homebuyers.

House-price gains in London also accelerated, the DCLG said yesterday. Prices climbed an annual 17.5 per cent in June compared with 14.3 per cent the previous month, it said.

There are conflicting signals as to whether a housing boom, which was encouraging consumers to keep spending, has started to slow.

HBOS plc, the UK’s biggest mortgage lender, said on Aug 2 that house prices rose at the fastest pace in three months in July. Other reports from Nationwide Building Society and Hometrack Ltd showed prices barely increased.

Investors yesterday raised bets on one more increase in borrowing costs by the end of the year. The implied rate on the December interest rate futures was at 6.15 per cent at 10.30am in London, up five basis points from the close on Aug 10. The contract settles to the three-month London interbank offered rate for the pound, which has averaged about 15 basis points more than the central bank benchmark for the past decade.

A basis point is 0.01 percentage point.

 

Source: Business Times 14 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

Hilton planning 25 hotels in UK

(NEW YORK) Hilton Hotels Corp, the second largest US hotel company, said it plans to open 25 hotels with a total of 3,000 rooms in the UK in the next five years.

The company signed a letter of understanding with closely held Somerston Hotels UK Ltd, which will franchise the Hampton by Hilton brand of economy hotels, Hilton said on Tuesday in a statement distributed by Business Wire.

Tuesday’s agreement is Hilton’s second announcement with a UK property owner in the last month following an agreement to develop 15 hotels with Shiva Hotels Ltd. Hilton is expanding overseas after its acquisition of UK-based Hilton Hotels plc last year gave it access to international markets.

Somerston Hotels UK Ltd currently owns and operates 34 UK hotels with more than 4,000 rooms.

Also on Tuesday, Hilton announced a partnership with LVMH Moet Hennessy Louis Vuitton to create or upgrade 135 spas offering luxury treatment in its upscale hotels.– Bloomberg

Source: Business Times 14 Jun 07

UK house price growth hits 11.3% in April

(LONDON) UK house-price inflation quickened in April, suggesting the Bank of England’s four interestrate increases since August have not crimped the residential property market, a government report showed.

Home values rose 11.3 per cent from a year earlier, up from a 10.9 per cent pace in March, the Department for Communities and Local Government (DCLG) said yesterday.

From March, the average home price rose 1.2 per cent to £209,454 (S$636,067). The figures do not reflect seasonal variations.

The central bank has lifted borrowing costs after inflation reached a record in March and companies showed a willingness to raise prices. Policy makers last week left the benchmark rate at a six-year high of 5.5 per cent.

House-price gains in London accelerated, DCLG said yesterday. Prices adjusted for seasonal swings climbed 14 per cent in April compared with 13.9 per cent the previous month, the DCLG said.

Investors are betting that the central bank will raise interest rates by the fourth quarter, after its forecasts last month showed a further hike will be needed to bring inflation to the 2 per cent target.

The implied rate on the September interest-rate futures contract was 6.06 per cent at 9.36am in London.

The contract settles to the three-month London interbank offered rate for the pound, which averaged about 15 basis points more than the central bank benchmark for the past decade. A basis point is 0.01 percentage point. – Bloomberg

Source: Business Times 12 Jun 07