SECONDARY IS COMING BACK

With regular headlines of receiverships and administrations in the property press, investors would be forgiven for wanting to steer clear of secondary commercial property right now. Forgiven, but not praised.

Popular sentiment against the secondary market has been well deserved. The regional occupational market performance has been dire, with space being given away (literally) to avoid empty rate liabilities, even in the more expensive regional towns such as Reading, where prime headline rents have been £25 – £30 / sf for years. With tenant administrations, overrented stock, and taxes based on rent levels in 2008, many secondary buildings are, from a financial perspective, nothing more than liabilities with a risky income stream up front. But many are not.

BUDGET 2013: voters are irrational about housing economics and Osborne knows it

Like many in the UK, I did not have a spare moment to watch the Budget this year. I picked up the key points from the national news providers, but the fallout from most of the customary policy tweaks did not make it from the Westminster village to my office in the West End.

The mortgage insurance policy was not one such gesture. It made the headlines as designed, but it was an act borne of political acuteness, not sound economics.

PAUSE FOR THOUGHT – seeing through bubbles

I met with a Director of a private developer/investor today. They sold the majority of their stock in 2006, sensing an imminent downturn.

I asked him what made him think that at the time.

Answer: Experience. Some employees could remember the 1970’s downturn. When you’ve seen these bubbles before, you know when the market has gone mad.

LONDON GATEWAY – a welcome investment in infrastructure from the Gulf

The DP World site, with the old refinary in the background.

Along the Essex coast near Laindon, you can see an old oil refinery, decommissioned this year. It sits amid a construction site landscape, stretching for miles. It is the site of a new port, and the soon-to-be biggest logistics park in Europe. The capital investment for this behemoth project has its origins in oil, but this is no local project. The developer is in fact DP World, the Dubai government’s port investor.

As we trailed the perimeter of this gated desert, our taxi driver told us of his friend Mike, a man who, having lost his job working in the refinery, has retrained as a lorry driver, to ride an imminent boom in haulage demand. Mike, apparently, would rather be in the refinery, and looks back fondly on his four day working week. But in deep Essex, in the longest recession seen in living memory, he must pleased that this kind of investment is going ahead. And it is some investment.

ULI: ARE WE RESTRUCTURING OUT OF THE DEBT CRISIS – Advice from the experts on your career

As a new member of ULI, I decided to try out their seminar on loan maturities and insolvency. It was an excellent event, with an experienced (but relatively young) panel. There was a long and fascinating discussion among the panel about European real estate restructuring, from balance sheet disposals such as Isobel, to CMBS transactions such as Uni-invest.

Is there an arbitrage opportunity between core 5% yields and secondary double digit real estate yields in the UK? Which investors are smart and well positioned? Problems with workout strategies: Borrower cooperation an obvious one, syndicate cooperation more problematic. The problems with CMBS structures and interest rate swaps – a huge amount of ground was covered.

POLICY MAKERS COULD LEARN – BY DRINKING MORE

In light of the recent attention on the impact of loose monetary policy – in particular the impact of Quantitative Easing on asset price inflation (see BBC, Forbes), I thought it might be worthwhile posting an article I wrote at the time of the first round of Quantitative Easing…

Surveyors are experts in the economics of hangovers. We all know how it works. Buy cheap, hit it hard, payback tomorrow. Yet despite such knowledge, borne of experience, few of us consistently avoid the inevitable depression.

I admit, the study of monetary policy may be a little more complicated and infrequent than the simplicity, and devastating regularity, with which a hangover follows a night of excessive boozing.

WHY THE PRIME RESI BOOM WON’T LAST

When people hear that I work in property, people often ask me what is happening to house prices. My response is that they are falling, and that they will probably continue to do so. This is broadly shown by Nationwide’s data at the bottom of this post.

The conversation then moves on to those markets – such as London prime residential – that seem to be defying gravity. My response then is that London prime residential has been booming, and that it will probably not continue to do so.

It is an argument that is difficult to digest. Following a “long boom” (i.e. one crossing multiple cycles) in prime residential prices, and owing to conventional wisdom around the shortage of housing and the seeming abundance of people with a lot more money ‘than us’, it is easy to build a narrative fallacy that prices will continue to rise indefinitely.

The following are 15 fairly good reasons why market fundamentals may lead to a fall, not a rise, in those prices…

SWAPS – A beginner’s guide in a property context

A swap is a swap, as you know it – exchanging one thing for another.

In a plain vanilla world, you might expect the cost of a loan to be, say 7% per annum. However, banks look to match their income to their liabilities.

Seeing as they themselves are borrowing money on a regular basis, they looked to lend at a rate that was the same as their own cost. That rate is LIBOR, and it changes every day. It is a ‘floating’ rate (more on this later).

In a world that exists separately from LIBOR (i.e. the world of collecting rents from tenants – which are the same every month), investors will often want fixed costs. Therefore the bank will ask that they enter into a swap, of a floating rate for a fixed rate. The bank swaps the fixed rate cash flow, for the variable rate one.