Over-valued markets
The Financial Services Authority - the City watchdog - has today made it easier for all of us to invest in hedge funds, but Gerald Ronson wouldn't trust many hedge-fund managers to go shopping for him at Tesco.
Ronson speaks as an investor who has learned from his own mistakes. He has had his fair share of setbacks: severe financial difficulties in the early 1990s; imprisonment for his role in the Guinness affair.
But the legendary property magnate has rebuilt a fortune and his annual City lunch testified to the goodwill he has also nurtured: the 350 or so guests at the Savoy Hotel yesterday included property tycoons, bankers, assorted entrepreneurs, heads of charities, and senior policemen.
The lavish event marked the 50th anniversary of Heron, the Ronson family company, which remains a formidable force after numerous cycles in the property and financial markets. So his views on those markets are worth hearing.
I quote what he said at some length, partly because he made me laugh, partly because it鈥檚 a fool who ignores the voice of seasoned experience:
- 鈥淲hat a year it鈥檚 been in the property sector. We鈥檝e seen extraordinary levels of liquidity wash over the world鈥檚 asset markets. There have been remarkable flows of capital and yields have fallen to a level not seen in over two decades.
- Investors will have to rely on significant improvements in capital values to generate acceptable returns. There is not much room for further yield compression and much of the anticipated improvement can only come from above average rental growth.
- Never before has there been this kind of global liquidity propelling the market. A big part of the story is hedge funds together with property funds. It seems everybody is starting one, although I wouldn鈥檛 hire some of these start-up fund managers to do my shopping at Tesco鈥檚. Yet they are still in charge of massive sums of investors鈥 money.
- They only know one direction, the bull market, and in some cases their analysis and management skills are poor. There can only be one ending and we鈥檒l look back and talk about how obvious the signs were.
- The current property market however is unlike the one that collapsed in the late 1980s and early 1990s. We have low inflation coupled with relatively little new build and rents are rising not falling. But though the past few years have been profitable for anyone that invested in real estate, the next few years will require more than an ability to write a cheque.鈥
Just to be clear, Ronson told me he鈥檚 not liquidating all his property holdings. But he鈥檚 being selective about where he invests. Intriguingly, he believes the prospects remain good for central London office property and 鈥渜uality鈥 residential.
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I agree with Mr Ronson..
My simple complaint and concern about hedge funds and private equity is that they contribute nothing of note to real economic growth. Neither seem to create anything new.
But then again I'm not really sure that Mr Ronson does either.
As a business transfer agent things are not good at the moment, which is a bad omen.
Hedge funds are built on a quagmire of debt, the FTSE/DJ are substantially overpriced and Joe Blogs has lost all reason and buying houses in a blind panic at any price (dead money). It will all end in tears and soon!
As Ronson says, there is too much money/power in the hands of inexperienced, illeducated, poorly qualified, greedy people. Like Ronson I have battened down the hatches, sold my house (I now rent) cash in bank ready to cherry pick from the morass just around the corner.
>we鈥檒l look back and talk about how obvious the signs were
I agree everything looks overbought, but as Keynes said the markets can remain irrational a lot longer than you can remain solvent!
The 'obvious' trigger for a correction will be Israeli/US strikes again Iran.
There's an old saying which says something along the lines of: 'when Joe Blogs and his wife get into shares/property/any particular investment, that's the time to get out. Poster No.2 above has highlighted a problem, Joe Blogs IS into property and he has lost all reason (if he ever had any).
I have been in property since 1975 but turned my back on it 3 years ago. I retain my investments but stopped purchasing as the returns just aren't there at current levels of purchase price. It's not if the market corrects, it's WHEN.
well I am joe bloggs and I think that expensive property will stagnate whilst cheaper property will still attract buyers.But buying with a large mortgate is risky.If the housing market collapsed there are lots of people who would jump back in.I cannot think of a better long term investment,can anyone?
This pessimism is to my mind a tad overblown.
There's plenty of scope for interest rate reduction.
Selling a house (given the associated upheavel) is a poor deal, unless the 'correction' is immediate and of the order of 10%. 15%-20% if it takes 2 or 3 years.
If you're still feeling down, a 'bearish' spread bet should suffice.
Hedge you win, tales ... well that shouldn't be too bad either. Have another good one.
You learn a lot sitting quietly in the sauna at my local gym. For too long now the most overiding conversations I hear are about debt. Making ends meet after over extravagances seems to take up many peoples lives with the juggling of what minimum to pay or which card or loan requires payment. Our 'I want it now' society is unsustainable and has reached the correction point. Debt and Greed has taken over in the pursuit of easy returns by hedge fund clout and will eventually only go one way. The recent whispered warnings from the economy will become a boom of realisation as the cash crunch looms. I am staying in cash now, keeping my powder dry for the correction that WILL happen. The next rate rise will be up and the misery will slowly begin. We need to get back to basics have a reality check and live within our means.
Surely the point about markets and economic growth is that it relies on a variety of differing perspectives. If we all follow the bears then the (inevitable) downturn will only come more quickly as funds for investment dry up. The economy/society has little to gain from this scenario. The demise of the property market (in particular) has been forecast for a number of years now, yet people are still making money and the economy continues to grow. Ronson recognises this. He has not sold out. The key to sustainable investing and wealth creation, as Mr Ronson knows, is to beat the market over the cycle and to pick a portfoilo of risk to meet personal and/or commercial needs.
Yep, ive sold my home, the market doesn鈥檛 look to stable, moved into renting my decision was base on a top down approach to the whole market.
Over the pass year there have been small signs about future problems everything seems to be overheating.
I really feel sorry for the people that are going to get caught out over the next year or so. The masses will get hit hard this time round, iam prepared myself and family so the sudden economic downturn approving.
so many unqualified and inexperienced fund managers, i know one guy that works in the industry and hasnt a clue about anything thats whats scary.
the buy2letters constitute the fault line in the housing market, there are 900,000 of these properties that can be released back into the property market as soon as the landlords sense a downward drift, and try to sell at the top, and the first time buyers sense a downward drift, and put off buying
the last property crash in the early 1990's was can be traced to a single day, it was the end of MIRAS mortgage interest release at source, people who missed selling by that date had properties that were suddenly unaffordable, and a 4 year bout of negative equity and repossessions followed.
The smartest person I know in b2l got out two years ago, me, mortgage paid off, waiting to move when the fault line fractures, as it will, as it has in Australia and the USA
Number 4
i must say there is bit of an economic flaw in your argument. You say you turned your back on the sector due to substandard returns but retained your investments. Surely the opportunity returns on your investments are therefore substandard and you'd be better selling and re-placing the money elsewhere?
People like you are the very reason real professionals make money.
Number 11....
The returns on his initial (cheaper) investments are still viable. His point was that he had stopped investing now, as the returns available going forwards were not worth the risk.
It's people like you who need to go and buy tha Economics 101, text book for skool kids. Just hope none of my money is with these so called real professionals you might think yourself to be.....
Wise words!!!
The gate is now wide open and smart bulls/investors will be through it or have made plans to get through it shortly to avoid the mass panic that will no doubt ensue.
The market has historically been cyclic so it is no different now and Joe Bloggs, his wife along with other amateur investors and their managers will be left in the field wondering where everybody went and will end up chasing the market down.
Their 'investment', justified and made for the 'pension', suddenly becomes a gravestone that will undoubtedly mark the dark day that is inevitable.
RIP - Risk In Property!
There is little to doubt that Property & Equities are over-valued and that a large number of investors will get their fingers burnt. With corporate profits currently at their highest, future P/E ratios will rocket unless share prices become more reasonable.
Yet a number of property unit trusts are still placing large advertisements in the "Money" and "Business" sections of quality newspapers.
I have recently re-viewed my own sipp and allocated a good proportion into Government short-term Gilts, my guess is that the next two years will see downward shift in asset values, hence I will plan to use the proceeds of the gilts on maturity to purchase equities / unit Trusts (UK /World)in March 2009.
I thought Ronson's comments were interesting and accurate too. Individual central banks may attempt to control the shape of their country's bond yield curves but in an increasingly global financial market they cannot. The global bond yield curve is still on a massive bull steepener (borrow in cheap yen and invest in longer dated UK, US and emerging market bonds). As central banks are not issuing sufficient long dated bonds to satisfy massive global demand a massive industry in cheap credit including securitisation and credit default swaps has emerged. Armed with this cheap credit companies are indulging in a levereging up, buy-back, frenzy. Ronson is right to ask whether easy money on a massive scale is sustainable. Debt levels are massive and rising. Throw in additional US unfunded liabilities of c$50tr and an eruption of Krakatoa proportions lies somewhere around the corner. Banks and (unaudited) hedge funds are complicit in this low quality binge. The adjustment, when it comes, will be dramatic
If the Bears are so sure of a market correction, why don't they have the courage to go short on all the stock they can lay their hands on, and if they are REALLY sure, use CFD's to leverage & maximise ?
I'm not sure that the stock market is currently over-valued as I believe it's trading at a "Price to Earnings Ratio" close to the historical average.
However, I do think that the property market is seriously over-valued and the conditions for a bubble forming are in place. The bursting of which would affect financial markets.
With property, it seems people are panic buying for fear of missing out, funds are being made more easily available for 1st time buyers(5 x income and 100%+ loans with 50 yr terms etc), large numbers of buy to let investors and of course pure speculators in the market. It can't go on forever.
Although inflation and interest rates may be low now, who's to say this won't change. For instance, the potential for vast increases in consumption from consumers in emerging markets like China and India could see global demand and therefore prices rocket for commodities and oil etc. This would bring our currently benign economic situation to an end and the whole debt-built house of cards would come crashing down.
Property prices have traditionally averaged 8% growth pa. So, if there is reversion to the mean then at the moment we should be expecting either property prices to fall, or stagnate for a very long time.
Property prices in the UK and especially London are solely a factor of supply and demand. The economy is strong, China, India and new technology will drive low inflation for years to come and there are more people wanting to buy a home than there is supply - hence prices go north. Similarly with the overseas property market - baby boomers chasing holiday homes, cheap flights opening new markets....nothing to be negative about I'm afraid.
Interesting reading in the comments on Ronsons speech. All Ronson is stating is that he is taking some profit and rebalancing his investment portfolio since better value is available elsewhere. Yes there are strong signals for a correction in the property market, but which areas and by how much? In reality location and desirability will be a key factor in which properties hold better. Example is in the US, property as a whole has fallen yet the north east has held up better. So it makes sense to reduce exposure in less desireable areas. If there is a big downturn, it could be a considerable time before they repeak. Timing in all investments is critical, its never a bad thing to take profit no matter what personal views of the future or investment strategy may be. Profit is only truely that if its a realized and does not cost in the long run.
16. Nick - you are assuming that the stock market is the only game in town. It isn't.
Just thought I'd respond to e-mails 16 and 17. I'm not sure that, at the moment traditional absolute valuation measures such as PER's are particularly helpful. there's only one game in town "hunt the bid candidate". Professional investors are looking at those companies unlikely to be the subject of bids (in the near-term at least) and they are shorting them (I think that's a good way of explaining recent weakness in Pharma stocks, not concerns regarding strategic direction from 2012 etc). As we know, hedge fund investing is a zero sum game; you win, somebody else loses. So you short something like Next which is well managed, leveraging up and returning capital to shareholders, suck in some other suckers and then close out your short position citing vague bid speculation causing a gigantic bear squeeze which drives the price up and leaves other shorters stranded on the wrong side.
Number 12.
WRONG!
My point is why would you remain invested if returns are now substandard. Why not realise the values 'purchasers without reason' are willing to pay and invest in something with suitable returns.
Only a fool looks at todays returns on yesterdays purchase price. Its todays returns on todays value that matters.
No????
No 22
My original comments stand. Have you not heard of taxation? If I was to sell certain of my investment property it would render me liable to taxation at 40%. To reinvest the resultant sum would make my returns even less attractive. I can see your point though and would agree with you if it wasn't for the dreaded taxation issues.
Meanwhile, I remain very flexible with rents and can bend with the markets.....unlike many more recent Buy To Let 'ers!
18. "Property prices in the UK and especially London are solely a factor of supply and demand."
No!
If supply and demand is the sole factor in property prices, then why have Japanese property values collapsed over the past 15 years?
There's another factor at least as strong as supply and demand that determines property prices.
Your house is worth what a bank is willing to lend a prospective purchaser (plus any deposit he may have).
If mortgage arrears and defaults take off, as they appear to be doing, then the banks will take fright at some stage. Then they will tighten the screw on credit, and prices will come to a standstill, and will probably fall.
As for the foreign property boom, just see what happens to the value of holiday homes in Bulgaria (or where-ever) when EasyJet stops scheduled services due to environmental or other factors. The bottom will drop out of foreign property.
RE 24 J Islip
You are very correct, that plus how much people can afford. With interest rates going up all over the world, India have just put up their's, UK next (This Thursday?) then the Euro.
No doubt major lenders will be shortly reviewing their "mortgage portfolio" risks in the UK, although Spain is likely to have the biggest correction in prices for property.
The M&T Bank Corporation (USA)share price dropped by 10% of it's value yesterday (Monday)due to it's involvement in Alt-A mortgage loans.
The property crisis in the States is likely to ripple across the pond (Atlantic), although it will take time.