John Maynard Keynes likened making investment decisions to the difficulty of deciding who will win a beauty contest.  In this circumstance beauty is not in the eye of the beholder, rather,the determination of what is beautiful will be decided by the majority decision of others; the wisdom of the crowd will be the arbiter.

Simon Cowell’s decisions as a judge in the X Factor are much the same, his personal taste, for what it is worth and judging by his clothes may not be that good, is secondary, it is subsumed into his sublime ear for what he can sell to the masses.

Morgan and I are presented with a similar dilemma in the current market.  The “market” already seems to be driving the price of some assets to levels that we frankly do not believe can be supported by fundamentals.  We have deliberately shunned looking at core buildings in The City and West End, but who are we to judge?  Perhaps our investment strategy should be to join in the party, with an eye for being able to bale out to a “greater fool” before the Environmental Health Officer comes around to complain about the noise.

An alternative is to spot the next trend before the market, something that Mr Cowell has occasionally done, but is repeatedly achieved by Madonna. 

Money can be made out of the most ordinary opportunities.

What we’ll be looking for is the next Robson and Jerome.

EDIT: I have subsequently realised that anyone under 30 or American may not quite get this cultural reference.  For convenience can I refer you to http://www.youtube.com/watch?v=f5UlB4Yw1wQ, you’ll find it very hard to understand quite how successful they were.

The Irish Government have announced that NAMA will acquire real estate loan with a face value of €77bn for €54bn, report Property Week.

http://www.propertyweek.com/story.asp?storycode=3148961&origin=PWdailynews

This reflects the fact that they do not anticipate full recoveries on this debt and they have arrived at a 30% discount to par as a ‘fair value’. In reality this will have been a horse-trade between the losses the five big Irish banks can afford to take and the political pressure to ensure the Irish tax payer does not lose too much on these loans when they are eventually repaid.

It like a reasonable starting point and it was accompanied by a message from the government that the banking system cannot recover until some of the pain is taken and the debt mountain starts to be tackled. This is all very true and the UK banking and real estate market, if not bank shareholders which include the UK government, would benefit from an equally large serving of reality.

However, when you dig into the detail you realise that this is by no means a risk free trade for NAMA. Over half of the loans are secured on land and developments; given the current state of the Irish economy many of these sites are worth little more than agricultural land, and only 40% are income producing. A true mark to market on the loans based on the value of the underlying security probably shows a far bigger discount than 30%. But at least this is a start….

Pre-nationalisation Anglo-Irish Bank had loan loss provisions against its real estate loan book of c.3%. These figures expose how inadequate that was, yet many UK banks are still opearting with comparable loan loss figures. Granted the UK property market is in better shape than Ireland but the fact remains that every real estate loan book in the UK is still over stated. Until this issue starts to be addressed there is little hope that there can be any sustainable recovery in lending volumes in the property sector or a broad based market recovery.