October 2009

A Frank summary of the state of the market

'It does appear the worst is behind us' —KFR chairman

KNIGHT Frank Rutley is not a publicly-quoted company; it’s a limited liability partnership — but its full year results, published recently, and the group’s comments, provide key pointers to the way global property markets are performing.

KFR is a leading global commercial and residential consultancy and its research is widely read and respected.

The results cover the year ending April 30 2009, before the current revival became apparent. Nick Thomlinson, senior partner and chairman of the KFR Group, summing up current conditions, said: “We are emerging from 12 difficult months.”

During the year to April 30 2009, KFR turnover fell about 30 per cent from £339 million to £256 million, while profits more than halved.

Underlying pre-tax profits were £33 million against £57 million in 2008, while adjusted group pre-tax profits fell to £21 million from £59 million.

There was some good news on the balance sheet. Net assets rose from £76 million to £88 million, and although net cash flow was down, it was still a healthy £28 million, compared with £54 million in 2008.

The business was still making money, although the partners felt some pain.

In 2008, 46 made an average of £780,000, while in 2009, 61 made an average of £169,000, still a comfortable living, but belt tightening all the same.

KFR remains profitable since April this year and Mr Thomlinson highlights the resurgence of its UK residential business, mainly in prime areas of Central London. He said: “During August this year, our UK residential exchanges were 37 per cent higher than in August 2008, and stock is about a third lower.

“Prices of prime residential property are six per cent higher than in the spring and property is selling more quickly.”

He added that it now appears house prices across the world are starting to stabilise rather than fall.

The latest KFR global house price index for key locations in the world reveals that about half show an upward trend while those which still demonstrate a downward trend fall by less than 10 per cent.

Other KFR research suggests office rentals in the City are recovering and that the UK commercial property market shows signs of life.

“It does appear the worst is behind us,” said Mr Thomlinson.

Judging by the latest housing surveys, the summer resurgence is continuing, as is the resurgence of shares in firms such as Savills, LSL and Rightmove.

Their year end results published in late August did not yet reflect what will prove to be a profitable summer.

There are still problems, notably rising unemployment, and the possibility mortgage lending may dry up again.

I have noted that net mortgage lending has fallen because borrowers are repaying capital. But this is not necessarily a bad thing. It means lenders can either use the influx of capital to repair their balance sheets or to re-lend to other borrowers.

It also means that borrowers who ‘de-gear’ are less vulnerable to unemployment or other losses of income. I have also noted that companies are acting similarly.

Many balance sheets show considerable falls in borrowings, and this ‘de-gearing’ is also a good sign, as it makes it far less likely that companies will go ‘belly up’ if the current economic revival reverses. I think it also reflects a certain suspicion of banks.

If this trend becomes a long-term one, firms will be financing more of their investment out of retained profits rather than borrowings. What’s wrong with some good housekeeping ?