The great wit once said “Every time a friend succeeds, I die a little.”

I was therefore looking forward to the potential restorative powers of seeing financial disaster unfold in my very own living room, as I sat down with a large cup of schadenfreude, to watch the lovely Sarah Beaney in Property Snakes and Ladders.

There was clearly potential to improve my constitution in watching a couple of happless Candy Bros. (TM), wanabees, bring in projects both over time, and budget, in a crashing market.

However it would appear that the prospect of financial Armageddon has resulted in the the assembled backing singers and graffiti artists actually taking the permanently pregnant presenters advice.  Now where is the fun in that I ask you!?!?

As a result, disappointingly, both schemes this week, actually made a profit.

It would appear that to revel in others misfortune, I will have to start watching Eastenders or maybe even Prime Ministers Question Time.

Like many active buyers with cash, we too have recently fallen victim to “free valuation” scam, being perpetrated by certain vendors who feel quite content to let you do a number of weeks detailed work on a purchase only to be coquettishly told that they are no longer sellers.

This spring bounce seems to have got a number of people quite intoxicated and they have once again fallen in love with the assets that they have rarely given the time of day to, let alone asset managed, for the last decade.  Their rose tinted glasses have given a pulchritudinous hue to investments that three months ago they would have “stapled” their nearest and dearest to, to facilitate a sale.

But, vendors should have a weather eye to the cost of finance and the impact over the medium term that this will have on what we are prepared to pay.  Whilst the number of banks willing to lend is undoubtedly on the increase, so is the accepted margin that they feel they can get away with reasonably charge and underneath all of the current mood music is the distant rumbling of inflationary expectations.

Despite the best efforts of the BoE to keep down the yield curve through Quantitative Easing, 10 year gilts now stand higher than when they began the process, 5 year SWAP rates have gone up 50 bps in the last month; for purchasers already struggling justify >20% IRR this is 0.50% onto the initial yield.

But, inflation is good for property, isn’t it?

Despite being a child of the seventies, I don’t even, unfortunately, remember Sunderland’s legendary FA cup win against dirty Leeds, never mind macro-economic factors, but there seems to be an obvious flaw in this logic, certainly in the short term.

Given the dire outlook for rental values over the short term, where pricing power rests solely with the tenants, I just don’t see inflation feeding through into rental growth in a meaningful way.  It is certainly conceivable that investment property could be caught between the horns of falling rents and increasing cost of finance, that will rapidly squeeze out the positive yield gap that makes property an attractive proposition.

Why are we still buyers then?  Obviously we believe that we will make more money out of an asset than an incumbent owner who are firefighting on all fronts and our investors are backing us over the medium to long term.  But this is going to be a long slow recovery, with many false dawns and as Mike Slade has wryly observed more of a www shaped recession.

“Newcastle United needs to be filled with people who love this club”, so spoke, Alan Shrearer, yesterday.

For any right minded follower of football, and at this stage I must declare an interest as a life long Sunderland fan, this is plainly the last thing that The Geordie Nation need.  Newcastle have already been through more messiahs in the last twelve months than the average middle eastern suicide cult and look where it has got them.

What has this got to do with property and finance? I hear you ask.

Adimittedly not a lot, however what I think it does is illustrate how not to turn around a hopeless situation, such as many of the defaulting loans banks now find themselves with.  What is needed is a dispassionate, un-loving hand of an outsider, who is able to take clinical or even cynical view in how to make the best of a lost cause.

To resource their workout teams, many banks have co-opted their origination bankers en masse, who, like Mary Poppins, might actually be a little too close to the problem to offer a subjective solution. 

I have given this all of five minutes deliberation and have come up with a solution that could remove the current impasse and keep all of Morgan and my lovely banker friends in work:

The banks all swap loan books with each other.

This could executed in a number of ways; bankers in Canary Wharf could move to the building immediatley to the right, for example.

This would facilitate closure on their current pain and allow them to get tucked into sorting out problems that were, genuinely, not of their own making.  

Genius.

By the way, I also appreciate that as a Sunderland supporter, I do not qualify as a “right minded follower of football.”

We are delighted to have been asked to help Aitcheson Raffety, who have been appointed as receiver by Dunbar Bank plc, with asset managing of a retail development site.

It seems that when unprecedented economic events occur commentators reach for metaphors to try and rationalise what can not be readily explained using logical economic arguments. Thus, we regularly read about ”Black Swans,” “Five stages of grief” and numerous other biological metaphors.

Given that I am a simple person and so are most of the people I know, even the ones with high flying finance jobs. I felt I would try and capture the irrational economic behaviour we are currently seeing in the stock market with my own valley boy metaphor.

The irrational but much welcomed bounce in equity markets are driven by the same short term energy that underpins Saturday night on a stag weekend. 

OK, I know this sounds odd but my thinking goes like this…

The global economy is unquestionably in decline, corporate earnings are starting to reflect this and almost every major company, regardless of sector, is having to try and re-build its balance sheet. Yet, against this incredibly negative backdrop the FTSE is up 14.7% over the last three months. I have studied a bit of economics, worked at two major banks and I read the FT every day but I am still at a loss as to why share prices are flying.

At least I was until I went on a stag do a few weekends ago. Twenty six lads, an easy jet flight to Majorca and as much San Miguel as you can drink - you picture the scene… (Actually it was worse than that but you can see where I am leading you.)

Friday night everyone is over excited, we are all dressed in Toga’s and everyone gets happily plastered. I awake the next morning, feeling terrible and vowing never to do this to myself again. I stroll down to the beach, drink as much water as possible and try to avoid 25 idiots and the inevitable beer that will follow when I bump in to them.

At this point I have total clarity. Beer is bad for me, I can’t handle my booze and when pissed I am likely to do something stupid that I will regret in the morning. This is almost inevitable especially as I will be surrounded by 25 drunk daredevils who will encourage each other on to new levels of recklessness.

So for all of Saturday afternoon I stand in a sun drenched bar avoiding as much alcohol as possible and carefully hedging my position by following each pint of beer with a sneaky bottle of water.

Back to my economic metaphor, Friday night = 2005 / 2006. The party was in full flow, everyone was on great form and it was easy to make money, whether this was in shares, property or in hedge fund land. We were all high on life and felt like we were masters of our universe and it seemed the party would last forever. Even in a pink sequined toga you could take on the world… 

Saturday morning = 2007 / 2008. The dawing realisation that the party is over, you have lost your wallet and your head hurts so much that you can not conceive what to do next. The only thing that you know for sure is that you are not ever going to invest again, well not for a long time at least and next time you will be sensible! True to form nothing reallyhappened in late 2007 and 2008 as everyone liked thier wounds digested the fall out of the high jinx that had enjoyed and now regretted.

And suddenly, it’s Saturday evening… The sensible afternoon has helped, the pain of the night before has faded. You have had one or two quiet drinks and suddenly as the sun fades and the music begins to play you are feeling somewhat better about life. You were thinking you would never drink again, at least not before 2010, but suddenly its mid 2009, it Saturday night and all of your mates are in town - hey why not, lets get involved, after all yesterday we were the masters of the universe.

Deep down you know that this is a bad idea, that tomorrow will be even more painful than this morning andthat this is a stupid idea but by now its too late - the band is playing, you andeveryone aroundyou is two sheets to the wind and in full voice you blast out the lyirics to Sweet Caroline - “Good times never seemed so good, I’ve been inclined, To believe they never would…”

Suddenly for no apparent reason other than everyone is on a high and you are feeling good about life the FTSE is through 4000 and heading for 4500 - the good times are rolling once more.

Oh, if only I’d listened to my inner voice, that Neil Diamond had added the line he forgit to sing ”Good times never seemed so good, I’ve been inclined to believe they never would… I don’t believe it, your making it up!”

I left Magaluf on Sunday morning - feeling a shadow of my fomer self, my wallet empty and my limbs aching. It was always inevitable!

So if you buy into my metaphore it seems there will be a sudden downwards market correction as the night clubs closes and the bar man kicks out the final revelers. It is never easy to leave a party early, especially one you are enjoying but as we sang on that balmy Saturday night in Majorca - “You got to know when to walk away, know when to run…”

With corporate earnings set to collapse and banks only just starting to account for loan loss provisions. It may be time to cash in those equitites and go home. If you need a rest there is a bar in Magaluf I can recommend… the sign says ”the beer is cheaper than the water.” (There is probably a blog on relative value in there somewhere…)

You may feel me metaphore is baseless but I have one other piece of anecdotal evidence. The stag is a finacialadviser who specialises in shares, he has been off work since his stag weekend - maybe he has come to the same realisation? Surely nobody would believe he has an infection that would take this long to heal, we were only in Spain.

Being a closet communist, as some friends and associates would have you believe, you would not be surprised to learn that I wholly endorse the new upper rate tax band for people earning wages over £150k.

At least now we have a proper higher rate that “the little people” can at least aspire to.  During the noughties, it used to be rather dispiriting to know that the average estate agent, mortgage broker and even deputy head teacher was considered so successful that they should pay the highest tax band like us entrepreneurs.

Of course by now setting a differentiation between the top marginal rate of tax at 50% (plus NI, of course) and a capital gains tax of only 18%, darling Darling has given an even greater incentive to those of us who can organise our tax affairs, to evade (or is it avoid?) even more tax.  

Good work HMRC, talk about the laws of unintended consequences……….

Given this obvious loop hole though, it is at best disingenuous that the those most corpulent of “fat cats”, Guy Hands and Crispen Odey, have said that they will be driven from this sceptered isle by this punitive rate, that they are very unlikely to pay.

This becomes even more odious when you consider that Mrs Odey was a non-exec of Northern Rock, the cost of the demise of which is being met by all of those inreased taxes.

To provide a bit of balance to my last post criticising a certain elements of the property press, I would like to commend Daniel Thomas’ editorial in the FT this morning(http://www.ft.com/cms/s/0/5f48b60c-2856-11de-8dbf-00144feabdc0.html).  If you can’t be bothered to read it, the title is “Cash Buyer’s Won’t Sustain Commercial Market Forever” which pretty concisely  sums up the following 973 words.

Morgan and I have shared this slightly sceptical view of the current market for a little while, but I am particularly impressed that Daniel did not have to resort to the stock in trade cliches of “green shoots” or “dead cat bounce” or my own favourite “bear market bull trap”.

When this is considered alongside the current availability of new debt and, more interestingly, what happened to net lending in the last property downturn of the early 90’s then anyone pinning there hopes on a sustained bounce back in the next 12 months is likely to see them dashed.

As you can see in the link to this graph, net-real-estate-lending, stayed stubbornly around zero from 1991 to 1997.  Given the massive deleveraging that must occur to allow the global economy, never mind the bloated balance sheets of our banks, stuffed full of real estate loans, to balance, it is practically impossble to forsee a return to any form of credit driven recovery over the short to medium term, for all but the best of assets.

That’s not to say that secondary property won’t perform or there will not be very good money to be made, only that initial yields have much further to fall to allow investors to make equity type (>15% IRR) returns on very lowly geared purchases.

I’ve been more than a little remiss in posting recently, but I’m happy to say that it’s a reflection of how hard we have been working; I’m quite confident that the volume of opportunities we’re now working on will lead to some very exciting business towards the end of the year.

Thankfully I was shaken out of my blogging torpor by Julia Cahill’s “Leader” in this weeks Estates Gazette.

It must come as some relief to workers in the most reviled of jobs, estate agents, traffic wardens, MPs and even journalists, that they can now hold their heads high at dinner parties and say “well at least I’m not a banker.”

However it takes some chutzpah to use your weekly opining to firstly “dis” Gerald Ronson’s views and then go on to brand most of her readership as infantile.

Using the lazy metaphor of “kids in candy stores” not only displays woolly thinking and a profound lack of understanding of how property finance works, but is pretty patronising to most of the industry.

Heaping further aprobrium on banks is yesterday’s story, perhaps the property press should speand more time trying to understand the dynamics of what drives the issues that they print and move beyond “top and tailing” corporate press releases and regurgitating them as “news”?

At Ellandi, we always strive to make the most of our intellectual capital and bring incisive market insight to the market in these troubled time.

We have worked tirelessly over the last few months to analyse the Government Asset Protection Scheme (GAPS) and are pleased to provide you with a briefing paper.

Please do not hesitate to contact either of us, if you require any further explanation.

Regards

Mark and Morgan

GAPS Explained

We have recently obtained planning in respect of the Victorian police station in Beckenham.   We now have consent to partially demolish the ground floor and then extend it to provide a restaurant unit of 2,200 sqft and an adjacent retail unit of 1,500 sq ft.

The existing accomodation at first floor will be converted into four, loft style flats, all with their own secure car parking space.

Cormac McNabb at Savills is the letting agent CMcNabb@savills.com.