May 2008

How long is the tunnel before we might see any light?

IS there some light at the end of the tunnel? I refer to the ingenious £50 billion Bank of England boost for the banking system, announced last month.

If it does help ease the credit crunch, then it will ease some of the pain in the housing market, or at least stop transactions drying up further.

That said, I see no miracles, as I believe we experienced an unsustainable housing and credit bubble during the past three years, which has finally been burst by a lack of mortgage finance.

Last month, I heard Anatole Kaletsky, editor at large of The Times and an economic consultant, tell an investment conference that the end of the credit crunch was in sight thanks to Central Bank intervention and that the US economy was not going to be dragged into recession by the housing market.

“If I am right then the main impact of the US housing slump will have only a marginal impact on the US economy — but this is not the case in the UK and certain European states, especially Spain,” he said.

The bad news was that he forecast UK house prices could fall by 15 to 20 per cent in real terms, compared with 40 per cent in real terms between 1989 and 1994.

Ominously, Mr Kaletsky’s forecast for house prices no longer looks pessimistic — indeed Harry Hill, non-executive chairman of Countrywide plc, believes prices may have to fall in order to reverse the fall in transactions.

I spoke to him after the Bank of England announcement, which he said “can’t do any harm”. He felt it marked a shift away from the Bank of England’s position that its main priority was to control inflation.

But he suspects the major banks have problems with their balance sheets and that until mortgage lenders pass on cuts in base rate then “we are not out of the woods”.

He added: “I think that in the meantime the number of transactions could fall below 800,000 this year. The market is in shreds.

“Even during the early 1990s, volumes held up, even if prices fell, and many sales were of repossessions.”

He suggested that unless prices fell, volume would not recover. “Even a fall in prices this year will still leave prices out of reach of many buyers,” he said. “It’s not beyond the realms of possibility that prices

may fall 20 to 30 per cent in real terms from their 2007 peak.”

The net result will be a massive cull in the estate agency business, Mr Hill warned.

“I guess 70 per cent of estate agency branches will make a loss on estate agency this year,” he said.

“We reckoned that in March this year 315 estate agency offices closed. If that trend continues, then one third of the country’s 14,000 offices could close.

“It’s good for us — less competition. We could even take advantage of distressed sales of other firms, as we have at least £100 million cash on our balance sheet, which Apollo wisely left with us.”

Mike Nower, Mr Hill’s former colleague at Countrywide and now with Humberts, is less pessimistic and thinks transactions will not fall below 800,000 this year.

“We do not have the ingredients of the 90s crash, notably rising unemployment,” said Mr Nower. “If the Bank of England does succeeed in unlocking lending, then turniover could recover.”

The 800,000 figure has been cited by LSL Property Services, owners of Your Move, as a sort of benchmark for this year’s business volume.

Dean Fielding, group finance director at LSL, said: “We told analysts we forecast 800,000 transactions this year, 45 per cent down on 2006/7. This prediction seemed pessimistic at the time we made it. The first three months of this year tracked our prediction, but mortgage volumes proved stronger than expected because of re-mortgaging and that’s good for our surveying business.”

He believes that house prices in the UK will hold up better than in the USA because there is an underlying shortage.

n Judging by Harry Hill’s comments, the first full year’s trading by Countrywide plc under its new owners Apollo Management is not going to be an easy one.

But Apollo’s exposure to an ailing UK property market is small change compared with its other diversified investments, judging by figures produced ahead of a planned flotation.

Apollo plans to list its shares on the New York Stock Exchange, subject to approval by the Securities and Exchange Commission.

Apart from enabling investors worldwide to buy and sell Apollo shares, the listing will throw more light on how Apollo is investing its capital, which sectors it is targeting and, of course, how much profit it is making.

The listing process has involved producing a 400-page document for the SEC. This so-called Form S-1 contains much information about Apollo, including the background of its directors, a recent balance sheet and other financial information.

It is available on line on the SEC’s web site (www.sec.gov) and lists 16 of the most recent deals from late 2006 onwards.

They total $66.7 billion, of which Countrywide amounted to $1.8 billion, representing only about three per cent by value of all its other recent investments.

Apollo wants to sell nearly 30 million shares for about £211 million ($417.5 million).

Since summer 2007, Apollo has been listed on the private share exchange run by Goldman Sachs, and its share price has evidently suffered from the ‘credit crunch’, as it is about 40 per cent down on the original $24 price.

So the expected price of the float is about $14 per share.

Some of the loan stock raised to buy Countrywide is listed on the Irish Stock Exchange and it has traded below initial offer price because of the credit crunch.

The stock is listed as ‘Castle Holdco 4’.

Apollo has taken advantage of the situation to buy in this debt. The net effect is to reduce Countrywide’s borrowing level.

Apollo is also buying distressed debt elsewhere as it sees profitable opportunities arising from the credit crunch.

One reason why Humberts’ shares currently trade around 8p is that the board is asking shareholders for powers to issue more. In fact, 28 million more, compared with the existing 121 million in issue.

That could enable the board to approve a one for four rights issue.

Mike Nower, who was appointed interim chief executive officer in February to help sort out the group’s strategy and finances, says every quoted company regularly asks shareholders to approve the issue of more shares as a matter of course.

But it is public knowledge that Humberts need to re-finance to pay for the string of acquisitions made under the previous management, and that a rights issue is one of the options.

Mr Nower admits his new role is perhaps more difficult than when he joined Countrywide in 1989 as the housing market was beginning its slump.

During the depths of that recession, Countrywide’s share price slid to almost “penny stock” status, before staging a long recovery.

Obviously, getting a grip on Humberts finances is a priority but he also stressed the importance of integrating the group’s businesses.

“For example, Humberts own a well known goods and chattel auctioneering firm,” said Mr Nower.

“When one of the estate agency businesses is instructed to sell a high-value property, the goods and chattels are often to be sold as well, so we want to get these different sides of the business to co ordinate their efforts.

“But we do not plan a mass re-branding of our businesses to Humberts if the particular existing brand is strong.

“One of our potential strengths is the diversity of our property-related businesses and diversified income stream.”

Another move is the disposal of ‘non-core’ businesses to raise cash.

There were two small deals announced early last month — one of Farley Management Co, for £315,000 to Timothy and Chris James. Tim James is a Humberts director. The other was of the Farley Management business for about £425,000 to Peverel Ltd.

Peverel is owned by a family trust which is a substantial shareholder in Humberts and which is advised solely by Consensus Business Group Ltd, which is chaired by Vincent Tchenguiz and is also a major shareholder in Chestertons.

All this was announced to shareholders via the group’s web site as were the elements that made these “related party” transactions.

“Both were ‘arm’s length’ transactions and the terms were better than other offers we received,” said Mr Nower.

The largest listed shareholder is Pendana Ltd, described as an associate of Consensus Business Group. If you look on CBC’s website, you have some idea of how many fingers are in different pies.

One final thought. Will any major estate agency business make a profit out of selling homes this year ?