August 2007

Why this is a ‘wicked month’

I DON’T know who coined the saying “August is a wicked month” but this time last year I suggested the aftermath of the introduction of Home Information Packs, coupled with rising interest rates and the threat of a global “credit crunch” would slam the brakes on the UK housing market as early as last autumn.

I was wrong in the first prediction. HIPs were not introduced In June as planned. There was a surge of property on to the market, as sellers anticipated the introduction of HIPs, and there is still something of a hangover, but we will not see the drying up of instructions that introduction of HIPs “for real” would have caused.

I was right about interest rates: the latest rise was early July, and the money markets now expect more to come. There is talk of “interest rate shock” for borrowers, first timers priced out of the market, and some buy to let investors wanting out, while in the USA there is a “credit crunch” for sub-prime borrowers and lenders.

But I was wrong about the timescale. Interest rate rises have taken longer to bite than I expected.

The reasons include a long run housing shortage, which the government has openly admitted and plans to tackle.

There is not a surplus of property in many areas as there is in Spain or the USA where prices have fallen in response to tighter credit. But I still expect tough times for the estate agency business this autumn, the only exception being the ‘trophy’ market in central London and the countryside.

Savills trade on ‘wealth factors’

A TRADING statement issued recently by Savills made for interesting reading. A few days later, rivals Knight Frank reported prices of Central London property rose 34.7 per cent during the 12 months to June despite signs that nationally the rate of price rises is slowing to single figures.

Savills chief executive Aubrey Adams, in discussing the trading statement, made it clear that the prime housing market in Central London and parts of the South East is not as interest rate-sensitive as other sectors.

That’s because it is wealth-driven and there remains strong demand from the international mega rich, which is why Savills’ trading statement was upbeat, despite some cautious comments about the commercial property market.

However, Mr Adams made what I believe to be a very pertinent comment about the market in London and the South East, which reflects how its buoyancy is linked to the health of financial markets.

He said: “ I can’t see that there will be any downturn unless there’s an unforseen event such as a major shock to the financial markets.”

There haven’t been any major shocks so far. But the bond markets are troubled, and I suspect higher interest rates will choke off big private equity deals.

What if a major international bank or financial institution decides to slash its London operation due to problems back home? What if the world’s stock markets nose dive, and the wealthy feel less wealthy? What if private equity deals dry up as money gets tight? What if bankers and hedge fund managers find their bonuses slashed?

This uncertainty is why Savills shares have been trading at about 570p, compared with their 700p high of April and May this year. That represents a price/earnings ratio of about 13 and a yield of about three per cent.

The share rating seems to be reverting to the days when the stock was regarded as a nice little earner, rather than a highly rated growth business.

For the record, Knight Frank, a limited partnership, enjoyed a 58 per cent increase in operating profits during 2006 from £22.6 million to £35 million.

Savills reported £75 million adjusted pre-tax profits in 2006, up 31 per cent, while earnings per share were up 23 per cent from 33.3p to 40.8p. Analysts expect 2007 profits of £78 million and earnings per share of 42.6p, with further modest growth for 2008.

Rightmove optimism

RIGHTMOVE shares have been trading on a price earnings ratio of nearly 75 and a yield of only 0.7 per cent. Such a rating means that either the shares are overpriced at about 620p or that analysts expect cracking good results for the half year to June 30 when they are released at the end of the month.

I think it is more of the latter as early last month its trading update said its full year figures would meet analysts’ previous expectations. Full year profits would be about £30million, while website traffic during the first six months of this year was 58 per cent up on the corresponding period of last year.

The big question is of course what happens when the full impact of mortgage rate rises bite on the housing market. I expect the Rightmove team will have much to say about this when they are questioned by journalists following the half year results.

Connells: no bid but new job

HAVING soundly rebutted rumours about being a bid target for 3i, as reported on the front page of our last issue, Connells group chief executive Stephen Shipperley has talked at length about a significant new appointment which suggests Connells themselves are on the acquisition trail.

Finance director Adrian Gill has moved to the newly-created post of group commercial director, while a new finance director, Martin Oliver, has joined from Avnet, the global distributor of electronic components.

Mr Shipperley said: “Adrian has done a fantastic job and been a key part of our development while effectively performing both the finance and commercial director roles. His move from group finance director to group commercial director will enable him to focus exclusively on the development of the subsidiary businesses within the Connells Group and to widen our scope in terms of acquisitions.”

Meanwhile, 3i revealed that during the three months to June 30 this year it made £591 million worth of acquisitions, more than double the same figure for the same quarter of 2006. However, realisations were up from £433 million to £605 million as the quoted venture capital group evidently cashed in on some of its holdings. The group was outbid for Countrywide and denies it is still targeting the estate agency sector specifically but looks at deals on their own merits.

Barclays takes its profit...

AROUND the middle of last month, Barclays cut its stake in Lending Solutions (LSL) from 28 per cent to 18.6 per cent, representing a cut from 29.75 million to 18.6 million shares. I don’t think too much should be read into this. The shares seemed to have shrugged off such a big sell off, having shed only a few pence to 360p

Readers will recall Barclays Private Equity originally backed the £42 million management buyout of Your Move which led to the creation of LSL. When LSL floated at the end of November, it provided an opportunity for Barclays to realise some of its investment. It has now done so, at about 260p per share, representing a near 25 per cent uplift on the 212p price at listing, and a sizeable profit on its original stake.

Profit apart, another reason for the timing of the Barclays sale was that LSL’s next set of results are due later this month or early next, during which time it’s the closed period on major share dealing by stakeholders or directors. Just before the Barclays sell off, however, e -surv, LSL’s residential surveying business, won a major contract to supply exclusive panel residential survey management services to Barclays Bank, which lends under the Woolwich brand. LSL said the contract would be “broadly revenue-neutral” this year but would grow earnings from 2008.

Joined up thinking?

ONE of the reasons why the Bank of England raises interest rates is to cool the housing market. But the Prime Minister wants to see more long term fixed rate mortgages. This would make housing affordability less sensitive to interest rate changes and therefore make it more difficult to regulate the housing market through varying interest rate rises.

Any changes in rates would have to be for a longer period in order to affect the cost of mortgage borrowing. It would make it harder for the Bank of England to ‘fine tune’.

I have a theory about recent interest rate movements. They were kept artificially low after the September 11 atrocity as leading central bankers feared a loss of confidence in the financial markets could lead to a world recession. It didn’t happen: China and India are booming, while the USA is deep in hock, which is why we are seeing an ‘upward adjustment’.