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Mike Goodman

February 2009

Property affordability v bank unpredictability...

HOW the housing market performs this year depends on availability of mortgages.

Last month's UK bank bailout is supposed to unlock the credit market and allow more mortgage lending.

As David Adams, head of residential at Chesterton Humberts explained: "The level of interest in properties has increased but both buyers and sellers are stymied by lack of finance."

The pre-Christmas cut in Base Rate is working its way through to mortgage rates, even though lenders have not passed on the cuts in full.

According to Moneyfacts, the average Standard Variable Rate is now 5.06 per cent, with some lenders charging only 3.5 per cent, while the average tracker rate is 4.1 per cent against 6.29 per cent in January 2007.

Mortgages will cost even less this year, while affordability, as measured by Council of Mortgage Lenders’ figures, is increasing.

One firm of analysts, Lombard Street Research, even believes that prices may bottom out by the end of the year.

But its prediction is based on affordability figures and does not take into account the shortage of mortgage funds.

Against the plus factor — affordability — is the prospect of rising unemployment — perhaps to 3.4 million — and the continuation of the “credit crunch”.

If the latest Government bank bail-out fails, then all bets are off, predict gloomier City analysts.
In short, we can expect another hard slog in the housing market, with the banking crisis adding an element of unpredictability.

Weak sterling to rescue London market?

ONE near certainty is that sterling will continue to be weak against other major currencies. But that’s not really bad news for the London property market.

In dollar and Euro terms, prime central London property is cheaper than for several years. Knight Frank cites the example of a property selling for £8 million in 2007, which equated then to 11 million Euro. Now it’s the equivalent of eight million Euro, 30 per cent down, while in dollar terms it is 40 per cent down.

Yolande Barnes, head of residential research at Savills, reckons that for the Japanese buying in Yen, terms are 50 per cent lower than at their peak, while for Far East buyers from territories such as Hong Kong and Singapore, they are 40 per cent down. "There are serious buyers in the wings," she says, adding that they are waiting for the market to bottom out.

Rivals Cluttons even predict a busy February as vendors finally cut prices to 25 per cent or less than peak 2007 levels. As their potential buyer clients often pay in dollars or Euros, that's even more tempting. So we can hope that foreign buyers laden with Euros and dollars come to our rescue, not to mention British ex-pats looking for bargain-priced investments, and retirees returning from the Eurozone.

The situation is like a re-run of the mid-1990s when foreign buyers helped the London market revive ahead of the rest of the country.

Despite the prospect of foreign buyers boosting the London market, Savills have already issued profit warnings ahead of their full year 2008 results due on March 11. That’s because the group is affected by weakness in the commercial as well as residential markets. The most recent profit warning, in mid-December, warned of underlying profit "significantly below" earlier forecasts. Back in October, analysts were looking to £35 million, having lowered their forecast from about £40 million.

How share prices sank more than property prices

WITH the exception of Savills, shares in estate agencies and property-related firms last year fell more than the values of properties they sold or listed.

The benchmark FTSE100 index fell 31 per cent to 4434 and crashed as low as 3714 . The FTSE 250, which includes many property firms, was down even more, by 40.4 per cent to 6361.

Savills beat the index, as its shares fell only 20 per cent to 223p, with a low point of 174p and a high of 366p. However, Savills’ share price had already fallen from a peak of 680p the previous year.

LSL, parent group of Your Move and Reeds Rains, ended 2008 at 64p, but fell as low as 29p and traded as high as 141p. LSL began 2008 at 135p, so by my estimate the price fell 51 per cent during the year.

Humberts are no longer quoted on the Alternative Investment Market, as the group went into administration last summer, as reported in earlier columns.

Rightmove fell 62 per cent to 176p, but traded as high as 540p and as low as 160p.

The shares ranked near the bottom of the media performance league, where the worst performers fell by 90 per cent.

Changes at Chesterton

CHESTERTON saw a change of ownership before Christmas. The Consensus Business Group, run by property tycoon Vincent Tchenguiz, sold its 50 per cent stake in Chesterton to the Mercantile Group, co-owner of the business. Consensus cites “strategic reasons” and is currently investing heavily in "green" businesses. The Mercantile Group, run by Salah Mussah, bought 34 Humbert offices from the receivers in June this year. The two deals have made Mercantile a major player in the middle to upper sector of the estate agency market.

Connells' 'war chest'

BY contrast with many of its competitors, Connells, the second-biggest estate agency group in the country, now enjoys a reputed £30 million ‘war chest’ for spending on acquisitions, following the sale of its remaining 18 per cent stake in Rightmove in December at 155p per share.

At the time of writing, Connells had yet to announce any major deal but Stephen Shipperley, group executive chairman of Connells, confirmed the sale raised cash for possible expansion of the Connells operation.

He said: “Currently, we see greater opportunities in buying property market-related businesses than in holding shares.It’s like someone raising cash to buy property in the current market, because there are bargains around. Currently it’s a distressed market for estate agency businesses and other property-related businesses and we want to take advantage of the situation.”

Connells will be looking at different sectors of the market, including asset management businesses, letting businesses, as well as expanding its estate agency business into new areas of the UK. The group is set to make a profit during 2008, said Mr Shipperley, adding: “We are on course to make about £10 million trading profit in 2008 and we do not have any debt.”

He predicts another “tough market” this year, with volumes similar to last year. But he believes prices are more than half way down to the bottom of the cycle.

“If the peak-to-trough fall in prices will be about 30 per cent, then we have already seen a fall of 20 per cent to 25 per cent, some of which has not yet been recorded by the statistics,” he said. “This suggests that, at most, prices will fall a further 10 to 15 per cent this year.”

As I have suggested already, predictions these days are a moving target but Mr Shipperley makes another forecast which will unfortunately prove all too accurate: “This year could be a year of casualties as opposed to branch closures.”

BC Partners break their silence over Foxtons

SO BC Partners, owners of Foxtons, have broken their silence over the financial situation of this London firm.

London-based managing partner Andrew Newington admitted last month that, with hindsight, BC got its timing wrong with the Foxton acquisition in summer 2007.

He was briefing a small group of journalists who specialise in covering the private equity sector and he also mentioned negotiations between BC Partners and the two banks, Bank of America and Mizuho, who lent £260 million in the deal to buy Foxtons from founder Jon Hunt.
The three parties are discussing various options, including a further capital injection by BC and writing off some of the debt.

Meanwhile it is business as usual at Foxtons, or as usual as it can be during the market slump.

Foxtons, who have 24 branches in and around the capital, only represents a small proportion of BC’s portfolio of investments, but it has not proved a profitable one.