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Mike Goodman

May 2009

After the winter of discontent — a brighter summer?

THE recovery of share prices in estate agency and property service businesses seems to have escaped under the radar, amid all the Budget coverage.

As of late April, Rightmove nudged above 300p, while shares in Savills and LSL Property Services traded within striking distance of their 12-month highs.

Savills nearly reached 300p, only 15p below its 12-month high, while LSL Property Services, parent company of Your Move and Reeds Rains, topped 115p, compared with a 124p high.

This suggests City analysts believe there are ‘green shoots’ in the housing market. But will they wilt this summer ?

I reported in my last column that LSL made a pre-tax loss of £4.8 million in 2008, due to write downs, and will not be paying a final dividend, yet the share price proved resilient.

The shareholders’ meeting, held on Budget Day, April 22, heard chairman Roger Matthews describe “an encouraging level of enquiries and buyer activity” although market conditions remain “challenging”.

He revealed that compared with the first quarter of 2008, group turnover during the first quarter of this year was down 28 per cent, surveying turnover down 25 per cent and estate agency and financial services turnover down 32 per cent.

I draw the inference that the business trend was similar to the national trend in mortgage lending, which hit rock bottom during late 2008 and has since recovered.

The spring figures on lending look good when compared with winter 2008 but are still way behind 2006/7.

I note that Harris Associates LLP, the US value investor, bought more LSL shares in March and now hold 19 per cent.

Barclays, which provided initial financial backing to LSL before it floated on the stock market, has since reduced its holding to six per cent.

I also note that Simon Embley, LSL’s group chief executive, recently bought an extra 400,000 shares at 105p per share, which means directors and staff hold more than 31 per cent of the shares in LSL.

That’s a good incentive to put LSL on track to emerge stronger from the recession.

With the top rate of income tax rising above 51 per cent, but capital gains tax remaining at 18 per cent, the Budget has provided an even stronger incentive for directors and staff to buy shares in the companies they work for.

I’m not sure whether encouragement for top earners to be paid in shares rather than in cash was an intention of Chancellor of the Exchequer Alistair Darling’s Budget strategy.

But it certainly provides an incentive for directors of companies to hold a long-term personal stake in their firms’ fortunes.

That’s something I believe was sadly lacking in the banking sector where directors made fat salaries and cash bonuses even though their risk taking would eventually bring down the banks for which they worked.

Surveying the surveys

ALMOST all surveys point to some recovery from the low point of last winter.

The Royal Institution of Chartered Surveyors’ March survey remarked that buyer interest increased for the fifth consecutive month while the stock of unsold properties was falling.

The National Association of Estate Agents’ survey covering the same month and published on April 24 reported sales per agent in March was just under nine, the highest for 12 months and above the March 2008 figure of seven.

When the market was in the dumps last winter, the respective figures were 5.7 last November and December and 6.6 last October.

In other words, sales in March had recovered nearly 50 per cent from the final quarter of 2008, which was the worst for turnover for more than a decade.

If April sees momentum maintained, then more agents will be making trading profits than at any time since the winter of 2007.

Mortgage lending figures from the Council of Mortgage Lenders also point in the right direction.

The March figures showed gross lending of £11.6 billion. This was 16 per cent up on February but still represented a 52 per cent fall on the £24 billion reported in March 2008. “A sign of stability returning” is how the CML describes the figures.

Housing market analyst Hometrack reports that prices fell 0.3 per cent in March, the smallest monthly fall for several months. But it suggests any recovery is “largely seasonal”.

Clear evidence of a March upturn comes from Connells where sales during March this year were about a third up on March 2008.

They were still 30 per cent below March 2007, but that was a month when “the market was still rocking and rolling”, according to Connells group chairman Stephen Shipperley.

“We are still below the market norm and I am making no predictions for the rest of the year,” he said.

“The final quarter of 2008 was the worst for business I can remember, but it is too early to suggest that will prove to be the low point in the market. I think prices have stopped falling at the lower end of the market, below £250,000. There are more first time buyers while investors have returned because interest rates on savings are so low.

“Another factor for a busy March was the weather and that Easter fell in April this year. Contrary to popular belief, the Easter holiday does not generate more business.”

Simon Embley, chief executive of LSL Holdings, also reports the best March sales figures for 12 months and that prices have stabilised but fears a “double dip in the market” because many sales are to cash buyers.

“Cash buyers currently account for 30 per cent of sales, but they normally account for 10 per cent to 15 per cent,” said Mr Embley.

“Some are buying for investment, as returns on bank deposits are low and the outlook for equities is uncertain, some are people moving to retire, others are buying for children.

“What happens when the number of cash buyers eases off? The problem is that buyers’ ability to borrow is still restricted.”

THE debt-into-equity restructuring at Countrywide is on track to be completed by the middle of this month, according to chief financial officer Jim Clarke. This is reassuring for anyone reading on the internet reports of Castle HoldCo4, filing for Chapter 15 administration at the New York Bankruptcy Court. This move is a “technical one and is part of the restructuring process”, said Mr Clarke.

That suggests Castle HoldCo4 will be wound up and another holding company set up to take over the Countrywide assets and one which will be financed by less borrowing and more equity, as described in our earlier articles.

Meanwhile, Foxtons, which also struggles with a debt burden, is reported to be still in negotiation on a debt for equity deal and it is likely that the banks which lent BC Partners about £260 million to buy the firm may have to write off between £60 million and £90 million.

So little in the Budget

THE Budget did little for the housing market, although a Government guarantee on £50 billion of Mortgage Backed Securities will make more lending available, as will “quantitative easing”.

But the extension for another 12 months of the Stamp Duty ‘holiday’ on property sales below £175,000 is equally welcome, as there is some evidence it has helped first time buyers, or at least helped sales at the lower end of the market. Or put it another way, ending the ‘holiday’ would have dented, perhaps severely, any market recovery.

According to the NAEA, 24 per cent of sales in February and March were to first time buyers.

London agents tend to scoff at the effects of the Stamp Duty ‘holiday’ as they have next to nothing on their books below £175,000.

But a survey by the Halifax shows that in some areas of the country nearly eight out of 10 purchases from April to December 2008 were below that threshold.

Nationally the figure was 26 per cent, but in Greater London, which is a wider area than Central London, the proportion was 18 per cent and even in the South East it was 40 per cent and in East Anglia 60 per cent .

In the North, it was 79 per cent. LSL, whose agencies have a Northern bias, reckon almost eight out of 10 sales were for properties below £175,000.

Finally...

I RECENTLY bought yet another ‘old banger’ when the previous one expired but I plan to buy a newer car later this year.

So I was disappointed my current ‘banger’ will not qualify for the £2,000 trade-in scrapping scheme announced in the Budget until I have owned the vehicle for 12 months, which takes me to next April.

I suspect the Government wants to end the scheme before a May 2010 election campaign — otherwise the Conservatives will be putting up posters showing Gordon Brown and the Cabinet accompanied by the slogan “time to scrap these old bangers”.

Perhaps one reason why shares rose after the Budget is that the City became more certain the Conservatives will win the next election.

Or am I being cynical?