I, like many other people, have remarked over the last couple of months, that the market feels very much like the last days of the Roman Empire, sorry, 2006 with higher and higher prices being driven by a huge wall of liquidity looking to buy what few assets are available.  Clearly a major difference is that this liquidity is equity driven, rather than debt driven, but the effect on pricing is much the same.

However increasingly I am starting to believe that this time it is very different.

If I recall correctly, back in the boom-time mania of 2006 everybody actually believed in what they were doing.  Those nice Candy boys genuinely believed that they could pay vastly more than anyone else for prime sites because they could add more value, Modus thought that the UK needed 35 additional non-prime town centre developments, Peter Cummings honestly believed that every tubby middle aged man he was introduced to was a property genius, Gordon thought that he had abolished boom and bust……

What is very different now is the level of open cynicism abounding in our industry.

No one seems to genuinely believe in the current bounce.  After a bottle of wine (or two) fund managers will admit that it is clearly quite embarrassing to be buying back assets at a premium of 20-30% over what they sold them for less than 12 months ago, despite rents falling; but they are paid to splash the cash.

One agent described doing deals with them “like clubbing baby seals”.

Other, allegedly more savvy, investors are buying on a momentum trade, knowing/hoping, that they are clever enough to get the hell out of Dodge before the next inevitable correction.

However, should there be a double dip, the Nuremberg defence of “I was only obeying orders” or if “I don’t do it someone else will”, will ring doubly hollow and as Warren Buffet would put it, we really will see some horrible sights/sites as the tide goes back out.

Over the last week or so we have had number of meetings with our funding partners.  They have ranged from wizened old UK industrial investors, to fresh faced US opportunity funds, both of which suggested that the current liquidity problem is certainly not driven by a lack of equity.   To be fair even debt is now available to to investors who are able to buy assets that fit the pfandbrief model or the idiosyncratic credit models of the UK banks who are now lending,

The Ellandi view is that lack of liquidity is largely supply side phenomena, nevertheless matched by an insane level of yield seeking capital, which as my Oxford Poly economics tutor Marion pointed out nearly twenty years ago, will have only one effect on prices.

Bizarrely both investors used the phrase “constipated” to describe the log jam (if you will excuse their unintended scatological pun) to describe the lack of distressed assets that are coming to the market.

In principle I couldn’t agree more and it occurred to me that the children of Barcelona have similar frustration every Christmas with Caga Tio.

The big questions then, perhaps, for UK property market, is what is the stick and who is going to wield it?

This rather grandly titled event takes place on the 25th and 26th March. Mark and I will be speaking. If that does not put you off and you have an interest in this sort of thing then take a look at the attached brochure (euro-distressed-real-estate) and contact the good people at IMN for tickets. I can’t promise we will be worth the admission price but some of the other speakers may be?

Having worked solidly on a financial restructuring since the autumn, we are delighted to have successfully closed a financial restructuring on behalf of the Soroya Family.

Ellandi worked very closely with the family, its existing bankers and a new senior lender to structure, fund and close a simultaneous restructuring and refinancing.

The deal saw HSBC provide a new £16.6m loan facility secured on a portfolio of hotels and retail assets. The proceeds of this loan were used to partially refinance the existing senior lender who also made available a new subordinated loan facility. The new financial structure will significantly reduce the borrowers funding costs, make free cash flow available for refurbishment of their hotel portfolio and replaces maturing loans with new term loan facilities. Furthermore, this was achieved without the need for the borrower to commit significant additional equity.

Ellandi acted as restructuring adviser to the Soroya family and were able to work closely with the banks and their advisers to achieve a restructuring that worked for all parties.

We live in strange days.

The most left wing American president in my lifetime lurches so for to the left that he declares open warfare on the banks; the reaction from our labour government is appeasement, George Osborne agrees to join in the crusade unconditionally.

You would have thought that British politicians would have learnt recent lessons about declaring unswerving support for our American friends when they get all jingoistic, but plus ca change, as the cheese eating surrender monkeys would say…..

No one knows the details that these hostilities will take;  but it won’t be the shock and awe of our bonus tax, rather, it seems, more the returning of the lucrative pastures of “prop trading” to hedge funds and private equity that had been annexed with the overthrow of Glass Steagall Act in 1999.

But there is always the danger of the law of unintended consequences, or to overdo the military analogy, collateral damage.  Although, what is “prop” trading?  Put simply it is using the bank’s cash to bet alongside, or even against, the activities of it’s customers.  But it’s never that simple, General Volcker’s surgical strike at casino capitalism, could also nuke quite legitimate activities that are needed now more than ever to work through all of this bad debt.

For example, if a bank is banned from private equity participation, how does it undertake and manage a stake acquired through a debt for equity swap?  Where does this leave a bank who wants to take non-performing property loans onto it’s own balance sheet?  If that is not “prop” trading what is?

I am sure the next government will think these issues through before sending the boys over the top, but their biggest enemy could be the two banks it already largely owns.

It seems that my blog following the PBR was spot on. The Treasury is struggling to define who is a banker and, thus, who are the lucky punters that get to pay a bit more tax to HMRC.

Dylan Lobo on Citywire has a good article talking through the issues.

http://www.citywire.co.uk/personal/-/news/money-property-and-tax/

In a nutshell if you do the following you are allegedly a banker:

“* Those accepting deposits (in other words providing current accounts and deposit accounts to retail customers).

* Those dealing in investment as a principal (in other words trading in derivatives, bonds, commodities etc. on their own account).

* Those dealing in investments as an agent (in other words trading in the above types of investments as behalf of clients), or arranging deals in investments.

* Those safeguarding and administering investments on behalf of clients.

* Regulated mortgage contracts (in other words carrying out retail mortgage lending).”

That should just about cover anyone working in Financial Services or doing anything that involves money, so in today’s London economy - just about everyone.

HMRC has noted this may not be workable? So will publish more guidelines in January, which is great given that many bonuses are paid in December. I am told many firms have or are suspending payments until they have this clarity. In the meantime a cloud will hangover the largest tax generating sector in our economy and the City as a financial centre. This may sound over dramatic but I am already told it is impacting investment and spending on high value goods, just what is needed in a recession.

I am still not against the idea of the tax but surely fiscal policy has to be well though through and not be so transparent as to only be effective in tabloid headlines. This is what happens when the politicians are allowed to make decisions rather than the mandarins - see any old repeat of Yes, Minister. Where is Humphrey?

Alistair Darling’s pre-budget report was never going to please people as he had a series of very tough decisions that has to be made - tax more and spend less. His contribution to the festive cheer was a bit more banker bashing, which always seems to please to populous, and a 2% reduction in the Bingo levy.

So, where a bank bonus pool is credited with more than £25k for any one employee it will be subject to a one off 50% windfall tax.

He justified this by saying that every UK bank had benefited weather directly or indirectly from government support and that taxing the bonus pool may encourage banks to re-build their core capital rather than paying away profits in remuneration. It is difficult to argue with either of these points.

However, this policy does raise a series of other issues that are far less clear cut and may result in Mr Darling’s policy being significantly undermined.

Firstly, who is a banker? Anyone who works for a UK registered bank would seem like a good definition. But I doubt it is so simple. There are banks of every size, colour and creed. Some banks simply operate a retail franchises, taking savings and making personal loans, others only provide advisory services or specialist products and then there are the large banks that do almost everything either directly or through a plethora of subsidiaries.

Many of these organisations could probably argue that they are not banks in the sense that they did not lend large amounts of money to poor credits or invest in toxic securities. For that matters many of them don’t even carry out the basic acts of taking deposits and lending money. If you are an M&A adviser or a tax specialist at a boutique bank that does not lend money are you a banker? Equally if these people are deemed to be bankers, then surely those that provide similar services from within accountancy firms or specialist consultancies must also be classified as bankers? What about the people who sell insurance at Direct Line, surely they are in the insurance business, well actually they are part of the RBS group, so are they bankers?

Given that the Treasury rarely thinks through these things before they are announced I doubt there is a definition as yet. Maybe they will just put a question on the tax return - are you a banker?

Secondly, will this tax work? I doubt it, there will be means around this surcharge. It only applies until the 5th April 2010 so banks may opt to pay people in the next tax year. Alternatively, banks may only pay a £25k bonus but might make available interest free loans to be repaid from next years inflated bonus (the tax is a one off so should not apply in 2011,) employees will get shares or options in lieu of bonuses or may have contracts moved to offshore service companies, with Goldman paying UK staff in the USA or Deutsche paying staff through Germany or the Channel Islands. There will already be an army of top brains looking for ways around this soon to be legislation and I am sure they will find a way, at least for the top banker who are the ones that a) carry most responsibility for the crisis but b) can afford the tax structuring advise to avoid tax.

This process will be helped by the fact that the effective tax rate for bonuses is now 70%+. People will generally accept a marginally higher tax rate but if a £100k bonus is now worth less than £30k by the time it reaches your pocket then that will prompt bankers (or most other people if they were in the same situation) to look at ways around this situation.  

Mr Darling estimates the new banker bonus tax will raise £500m. I bet it will be far less in reality but then again this is not about the money it is about moral values. I agree entirely that we should not reward those who almost created a systemic collapse of the financial system but the truth of the matter is that finance is so interwoven with every part of western society that it is impossible to accurately attribute blame on an individual basis.

I fully accept that in my banking career I contributed to the almighty debt fuelled asset bubble but I will now escape any tax penalty, whilst there are others who work at banks but contributed nothing to the credit crisis who will be taxed. Mr Darling had to take a stand and he is right to do so - it is a shame that he does not have sufficient sophisticated tools at his disposal to create a tax regime that will achieve the objectives that are so well supported by the British people.

At least we can all benefit equally from the reduction in tax on Bingo. Housey?

Anyone who has read the Ellandi blog will know that I am pretty left of centre for a property chap, heck I’ll even admit to the fact that I was actually a card carrying member of the Labour Party until well into my 30’s.

Which is why I really must explain why I am voting Tory next May.

Ah, the 50% tax rate I hear you say?

Nope.

To be fair earning £150k next year is something to aspire to.

It’s more the case of being terrified what a hung parliament would do to the UK in these difficult times and according to The Independent (see more proof of my pinko-lefty credentials), this is almost a dead cert.

Tuen Draaisma of Morgan Stanley has a fear for next year that “The UK becomes the first of the G10 to have a major fiscal crisis as elections lead to a hung parliament”.

Why would a hung parliament be such a bad thing?

I’ve often thought that Proportional Representation would lead to a nice ineffectual government stripped of dogma; after all decades of coalitions don’t seem to have held Germany back?

The difference, of course, being that the Germans are not fiscally incontinent, have credibility in respect of keeping on top of inflation and don’t rely on the rest of the world to fund its deficits.

Despite still being in recession, the rest of the world hasn’t punished the UK too badly.  They have even let us get away with a fairly blatant spot of competitive devaluation, which has certainly beggared the shopkeepers of the RoI that neighbour the border with North.  However “the markets” tolerance of this is built on the premise that after the election, one of the main parties will cut the crap and get on with a seriously painful bit of tax raising and service cutting to get somewhere near a sustainable level of borrowing.

In the event of a hung parliament, or worryingly even the anticipation of a hung parliament, where every painful decision will be fought over tooth and nail or even avoided, UK plc will lose any credibility that it has overseas.  What happens then?

-The pound tanks (even further)

-We loose our AAA rating, bond rates shoot up; we can no longer sustain our massive debt

-Inflation rockets due to the increased cost of raw material imports

-Interest rates are ratcheted up to curb inflation

-Plague, pestilence, famine……..

You get the picture?

Basically Iceland without the free hot showers and Bjork.

So I am going to vote Conservative for the first time this June.  Having said that though, I am not sure how effectual this will be given that I live in Lambeth.

Maybe PR is not such a bad thing?

For most of my adult life any mention of PE, brought back the horrors of Physical Education classes of my youth, in particular a lesson in 1977 after my mother had packed me off to primary school without my kit.  Having to do a class of musical movement in purple paisley M & S “Y-fronts”, with green tubing, has scarred me forever and I will never forgive her.

The current problems in the world of Private Equity are more complex, but no less serious.

A recent article in The Independent was one of the first to highlight the seeming reluctance of some banks to engage with major equity players for fear that the buyers might have the temerity to be better at managing out distressed situations than them and might actually make some money!!!

To highlight a bout of insanity that could only be true of an effectively nationalized organization, it references the recent sale of Insight to New York Mellon.  HBoS (nearly 50% owned by you and me), allegedly, sold it at a discount of £15m to the best price bid by a respected PE player, in case they “make huge profit”.  Am I missing something, but surely NYM will now make a “huge profit” plus a gratuitous £15m!!!

If this is true, the only losers are the beleaguered HBoS shareholders and the even more beleaguered UK tax payers.

Now PE does have serious structural issues, returns on previous funds may have been illusory, driven by leverage rather than stock picking or asset management, and even worse than that the industry has billions of pounds to invest, sometimes with no real idea of how to get to their desired returns.

Let me explain:

-On the back of Fund I, which made phenomenal returns up to 2005, Gear Lots Over Value Everything (GLOVE) Investment Management looked to raise second fund.
-GLOVE II closed in 2006 with £500m of equity pledges.  It promised its funders a return of 12%, but charges a 2% asset management fee and 30% of the profit over the priority return.  It promised to invest the money within three years and return it within five or six.
-Very excitedly GLOVE announce that they have £2.5bn (geared) to invest, however to make money themselves GLOVE need invest in opportunities that offer a >20% return and this is based on being able to get 80% gearing.

Unfortunately the world as we know it shortly thereafter came to an end.  In 2008 GLOVE looked very clever (if you ignore the returns on Fund I) and couldn’t wait to buy loads of distressed kit, but like a surfer on The Serpentine, for them the wave never came and now funds and cash buyers have stoked up the prime market to a level which they couldn’t justify, even if they could gear at 80%.

But the clock is ticking , they really need to get that money away shortly or the chance to earn lots of lolly in management fees will have passed, does GLOVE:

a) Spend the money anyway as they otherwise won’t get paid and hope the market continues to go up

b) Hand the cash back to prove what jolly good eggs they are; as long as they can have it back at a later date

c) Swallow some pride and buy more secondary assets

d) Explain to their investors that there are fantastic opportunities out there, but in this new environment an 8% hurdle rate is more appropriate and that would give them a chance to compete in the market with target returns of, say 15%

e) Engage in some serious PR, drop all mention of “distress” or “opportunity” from their marketing material and look to cosy up in joint ventures

Clearly a combination of the most pragmatic routes would allow them to engage with banks as credible counter parties with realistic return criteria.

It’s one of the many interesting conundrums for next year, after all no one wants to be left shivering at the side of a cold assembly hall being called “Skinny Sick Coloured Pants.”

I can assure you.

At the danger of being stoned to death the next time I go into a bar in Mayfair, or getting banned from even more dinner parties in South West London, can I state a few facts, as I see them:

A housing market that rises much in excess of average earnings is bad for economic mobility, social cohesion and acts as a tax by the old on the young.  Trying to explain to my dad this week, admittedly after a couple of pints of Guinness, that the fact that my younger brother cannot buy a decent home for his young family is a direct consequence of my parents sitting on a huge “unearned” gain on their house did not go down nearly as well as the beer had been.

Yes the news that prices are now growing again at 6.00% pa is a bad thing.

Unfortunately, residential capital values bear no relation to rental values, a fact that will strangle at birth the concept of residential REITS far more effectively than governmental lack of interest.  Which is shame as they would solve a number of the above problems.

But our collective mania when it comes to bricks and mortar will be near impossible to shake, the most obvious solution, a capital gains tax on primary residences, would never get any government elected.  So we’ll continue to swing from boom to bust; canny investors will make a packet, poor ones will bring down banks and the man on the Clapham Omnibus will feel fine as long as the value of his primarily, and many cases sole, investment keeps up with the Jones.

And I no longer have to worry about my brother.

I’ve been cut out of the will.