It always amazes me to think that every house on every street is full of so many stories; so many triumphs and tragedies, and all we see are yards and driveways - Glenn Close
World Markets Overview
The extraordinary and concerted rise in world commodities prices in recent years which has seen the Commodities Research Bureau index rise to over 350 from a base of 100 in 1967, has inevitably fed through into the world economy, causing inflationary pressures which, in turn has caused Central Banks to tighten rates. As we have seen by recent dramatic falls in share indexes in London and New York, these interest rate rises are not without consequence, and, indeed, may feed more inflation into the economic cycle, by increasing the cost of borrowing for heavily leveraged companies and householders.
Since 2004 the price of oil has more than doubled from around $30 a barrel to nearly $70 a barrel, and both Hugo Chavez and the Saudi Oil Minister, among the world's largest producers, have indicated that they are comfortable with these high prices. Supply pressures from Nigeria (where 200 people died in the blast at a pipeline in Lagos last week), to Texas, where Hurricane Katrina swept away over 500 offshore oil platforms, combined with the delay in getting Iraq's oil back on stream, mean that it is unlikely that there will be much downward movement in prices in the short to medium term, though higher than expected inventories of gasoline in the USA have brought oil down from just over $70 a barrel in recent days. And Hugo Chavez, Venezuela's populist President, has warned in his London speech that oil prices could go as high as $100 a barrel if the USA invades Iran. His South American ally Evo Morales, the left-wing Bolivian President recently announced the Nationalisation of that country's energy industry, and very publicly took control of the San Alberto gas field with the Bolivian army.
There are obvious temptations to compare the current situation with the oil shock suffered by Western economies in 1973 when OPEC quadrupled the price of crude, contributing to the property collapse and recession in the UK. But higher commodity prices are not the whole picture: Global interest rates are definitely on the way up, while bankruptcies and repossessions are at their highest level in the UK for over a decade. While this may reflect a more thriving enterprise culture and a propensity for risk not evident in previous years, and is undoubtedly a concern for heavily leveraged property owners, it is not yet affecting the upward trend in house prices, pegged as high as 8% by one recent report, year on year. Gold and gold stocks from large producers such as Consolidated Goldfields to smaller prospectors like Galahad Gold are enjoying a dramatic bull run with spot gold reaching $725 an ounce compared to its 12-month low of $416.05. Silver and platinum have followed it up, the latter much in demand for circuit boards and catalytic converters. Copper has also been up some $500 a tone on the London Metal Exchange, at $7550.
Currencies have been rather more volatile than the markets had been used to since the Euro's adoption by most EU member states, with the US $ falling over the last year, costing Warren Buffet, the sage of Omaha and Chairman of Berkshire Hathaway $1bn. But while the 0.25% increase in the Federal Funds rate in the US announced by the new Federal Reserve Governor, Ben Bernanke to 5%, the 16th consecutive rise, with hints of more to follow may benefit the dollar, it certainly contributed to the sharp correction in the Dow Jones Industrial Average in New York. In the UK the Bank of England Governor, Mervyn King commented that UK property prices seemed unusually high in relation to average earnings, echoing his sentiments on the subject two years ago, while the UK rate was left unchanged at 4.5%. Even in the Eurozone, where the European central Bank rate is a more reasonable 2.5%, Jean-Claude Trichet, the Governor, hinted at a rise in June to offset inflationary pressures caused by the rise in oil prices and increased economic activity.
Stock markets around the world have reacted badly to these hawkish signals on rates, with the Bombay Stock Exchange being closed after falling 10% in one day, while the FTSE has given up all of its gains this year so far. Further afield, Saudi Arabia's stock exchange fell over the last three months wiping over £200bn off the value of shares and ruining many margin investors, though the market has now stabilised after the appointment of a new regulator. On the Tokyo Stock Exchange the real estate sub-index was up 102% this year at one point, largely, it is suspected, due to hedge fund buying. Hedge Fund money is thought to be behind the surges in commodity futures, and conversely, may precipitate higher levels of volatility in stock and commodity prices if they short the market en masse, as they are likely to do.
Experts are split on where the markets go from here; David Woo, of Barclays Capital, has identified similarities with the economic picture at the time of the 1987 stock market crash, while Peter Oppenheim, the Goldman Sachs strategist who has published a recent report, points to cheaper goods and services from India and China as factors that will mitigate against inflation.
Mergers and Acquisitions
Merger and Acquisition activity continues to be strong, with Inco and Xstrata bidding for Falconbridge, valuing the mining concern with extensive Latin American copper interests at around C$20bn. Euronext and NYSE are planning a $20bn all-share merger, while Nasdaq continues to pursue the London Stock Exchange.
Corporate Bond issuance has surged this year, with over $300bn of High Grade bonds being issued by Companies in the US so far this year, with Abbot Labs a notable recent recipient of $4bn, despite this being an expensive way to raise money in the current interest-rate environment.
The big news affecting property in the UK will be the introduction of Home Information Packs in June 2007. Their effect may be considered similar to the Sarbanes-Oxley law in the USA, (Section 404) which requires disclosure of a company's internal controls and that those controls be checked by external auditors. The burdensome corporate compliance regime has been criticised as being unnecessarily expensive, especially for small companies. When Home Information Packs were introduced in Denmark in 1996, official Parliamentary figures show that they led to a 10% drop in sales. The head of Denmark's Estate Agents' Association claims that there was a drop in the number of houses being offered for sale of 25% as a direct result of their introduction. Ian Liddel-Grainger, MP for Bridgewater in Somerset has introduced a Ten Minute Bill to remove Home Information packs from the 2004 Housing Act, which gets a second reading in October, and the Conservatives, if elected, are likely to reverse the legislation.
There continues to be strong demand for high quality Commercial Property assets from liquid domestic and international investors, with last year's sale of the Burlington Arcade for £63m a case in point. There is 6.4m sq ft of office space under construction in London, and construction of offices in Central London rose 80% over the last year. Less than 10% of London's offices are un-let, and supply has fallen in the last three months from 20.8m sq ft to 18.8m sq ft, all this against the backdrop of City rents lower than during the 1990 boom. City rents are currently around £50 per sq ft, while those in Canary Wharf are around £40 per sq ft. The West End currently attracts up to £90 per sq ft, with some buildings quoting as much as £100 per sq ft.
Retail premises are not faring as well, with around 20% un-let across London, partly in reaction to the Congestion Charge and general economic uncertainty.
To summarise, in terms of prime residential houses and flats in Central London, now is an excellent time to sell, with a limited supply of vacant quality properties, while buyers will have to take a long term view that the interest rate volatility we are experiencing globally will settle down. Historically, rates are far lower than in the past, and inflation is still only around 2%.