Real estate finance in paradise

Worth a look at this piece in the Guardian as a good case study into how many of the unlisted property funds structure themselves to avoid paying the price of civilisation and to be tax efficient.  It’s a difficult moral issue.  There’s the standard argument that “It’s legal.  Everybody does it and, if we didn’t, somebody else would”.  It’s surprisingly hard to refute.  Secondly, most of the fund returns are being returned to institutional investors who are often mass savings vehicles.  But – it still feels wrong.

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Housing crisis debunked?

There’s some scepticism about the prevailing wisdom of a housing crisis.  I referred to a piece by Merryn Somerset Webb last year.  There’s some very interesting analysis by Ian Mulheirn at Oxford Economics on the so-called ‘housing crisis’.   In a number of posts, he takes a critical look at some of the stylized facts about the housing market.  I don’t have enough in-depth knowledge myself to evaluate the arguments but there are some interesting points that come out of the various blogs (see here, here and here)

  • Growth in the stock of houses has been running at around 176k per year since 2008 (some 24k per year morethan household growth).
  • ONS’s newish Index of Private Housing Rental Prices …shows…that the cost of renting on a like-for-like basis actually fell in real terms from the start of the series, in January 2005, to the end of 2014. (Rents have been rising a bit in real terms since then but up to November 2016 they’re still roughly 4% lower than their 2008 peak)
  • The true cost of owning a house — not the asset you accumulate by paying down the mortgage principal since, to repeat, this isn’t a cost — has been falling since prices and interest rates dropped after the financial crisis. Indeed we can see that the cost of owning has tended, with temporary divergences, to fluctuate around the cost of renting, which is exactly what we’d expect to see, according to simple asset pricing theory, when the housing market is in equilibrium.
  • Many econometric studies in the UK (see page 43 herefor a comparison of results) have concluded that a 1 percent increase in the housing stock per household will only cut prices by at most 2 percent. Consequently, even if we were to add 300k new houses per year (about 150k in excess of household formation, approaching 0.5 percent of current stock), this would only lower prices by about 1 percent per year. This is peanuts in the context of price rises over the past 20 years.

 The BBC have also been doing some interesting research on land use in the UK that suggests that there might be a disconnect between our perception of large parts England as a congested, concrete covered country and, er, reality.

Ordnance Survey data suggests that all the buildings in the UK – houses, shops, offices, factories, greenhouses – cover 1.4% of the total land surface. Looking at England alone, the figure still rises to only 2%.  Buildings cover less of Britain than the land revealed when the tide goes out.

All thought provoking stuff.

Estate Management?

There was a very good piece by Dave Hill in the Observer yesterday on the “regeneration” of a local authority housing estate in LB Haringey.

The north London borough of Haringey’s is planning to form a joint venture company with an international property developer (Lendlease – who also did the Heygate Estate), and commit tens of millions of pounds’ worth of its land and buildings – including a housing estate close to Tottenham Hotspur football club, and its own civic centre – to a massive transformation programme… At its heart lie basic conflicts about the role of private finance, the use of public land, the functions of local government and the principles that should guide the spatial development of urban areas all over the country. It has become a microcosm of a debate that rages across the country, drawing in beleaguered councils, property developers, social housing tenants, lower middle classes anxious to remain in gentrified neighbourhoods, and the growing army of homeless. And it is also about Jeremy Corbyn.

Although all existing residents are guaranteed a ‘right to return’ on the same terms as they currently have, there is a lot of resistance.

These types of projects have been common in London for the last decade – albeit the scale is usually much smaller.  At the heart of it seem to be some fundamental issues about the ‘model’ for replacing/upgrading existing and providing additional housing in local authority estates.  Most would agree that the existing stock needs substantial refurbishment or replacement.  I suspect that there would be a consensus that there is an opportunity to increase densities on former council estates to create additional supply.  The key question seems to be supply of what?  In essence, the debate seems to be about how much market housing should be provided relative to social housing.

I also suspect that partnering with companies like Lendlease sends a bad signal.  Personally I’ve got nothing against Lendlease – but I think that things would be much less controversial if the council had partnered with a large housing association instead.  Housing associations are in expansion mode and are becoming increasingly focussed on market housing – whether they should be is another question?  Would a large association have the capacity and capability to undertake such a large project?

Certifiable?

Yet another environmental certification that I haven’t heard of…

Transport for London continue their great work in reducing their impact on the environment.  TfL Head Office buildings, managed by their Facilities Operations Division, has been officially awarded the Carbon Trust Standard for Carbon.

The Carbon Trust Standard provides recognition for achieving clear reductions in carbon emissions. TfL were awarded the standard for their efforts in reducing their carbon emissions by 9.6% (based on the compliance period of 1 April 2015 to 31 March 2017).

Some of the projects that have enabled them to achieve the Carbon Trust Standard include:

  • A BMS (Building Management System) upgrade at Oxford Circus House
  • A chiller replacement at Windsor House
  • A chiller refurbishment at 172 Buckingham Palace Road
  • A calorifiers replacement at Baker Street
  • ClimaCheck performance analyser installed at four sites to assist in chiller performance analysis and refurbishment planning
  • Replacement of MR16 Lamps for LED at Pier Walk

The Carbon Trust Standard requires organisations to keep reducing their carbon emissions and to recertify every two years. This was a recertification of the Standard, with TfL being a Carbon Trust Standard bearer since 2009

Energy Star?

Just been updating my (increasingly slowly) expanding list (up to 41) of studies on the effect of eco-certification on real estate prices.  The most recent paper that I have seen focuses on the effect of Energy Star rating on the prices of new homes in three US cities (Austin, Portland and the N Carolina Research Triangle).  Although it’s not in a peer reviewed journal yet, it looks like a pretty rigorous econometric analysis to me.  As ever, results vary with model specification – but the broad finding is of price premiums of approximately 2% for Energy Star rated residential properties.   Unlike other papers (mea culpa), the authors also looked at whether those price effects were consistent with expected energy savings.  They find that this is the case.  You can read all about it here.  However, there are different versions of the papers with different findings – so be warned.    In one version of the paper, the premium is only applicable to older Energy Star dwellings.

In the paper, one figure that caught my eye was a claim that, in 2011, 26% of new housing completions in the US were Energy Star certified.  Digging around a bit, I found a good source of recent data.   It provides a detailed breakdown of Energy Star penetration by state.  With an average of about 10% of new homes E* certified in 2016, there were some astonishing variations between states.  Arizona had over half its new dwellings certified whilst in neighbouring Utah, the comparable proportion was 4%.  Literally a case of “Go figure”?

In other interesting news, a sort of new environmental certification for real estate has just been launched by the Australian government – the National Carbon Offset Standard for Buildings.  They describe it quite well themselves.

The National Carbon Offset Standard for Buildings is a voluntary standard to manage greenhouse gas emissions and to achieve carbon neutrality. It provides best-practice guidance on how to measure, reduce, offset, report and audit emissions that occur as a result of the operations of a building…The Standard can be used to better understand and manage carbon emissions, to credibly claim carbon neutrality and to seek carbon neutral certification.

It seems that certification will be validated by existing eco-labelling organisations – NABERS and Green Star.  Carbon neutral certification – coming our way I suspect.

Newly Permitted Development.

I hadn’t been aware of the change to the Use Classes Order that came into force this month.  The new permitted development right allows the change of use of a building and any land within its curtilage from light industrial (Use Class B1(c)) to residential (Use Class C3).  It will be for a temporary period of three years, starting from 1 October 2017 (although the PDR from office to resi was soon made permanent).  It’s also focussed on small sites.  The gross floorspace of the existing building cannot exceed 500 sqm.  Local authorities can potentially withdraw these rights, by using Article 4 directions. According to Firstplan, a number of local authorities in London seem to be already applying for exemption under Article 4.

It will be interesting to identify the type of units where conversion might be most viable and, therefore, most likely.  I’d suspect that the best type of units would be adjacent to or in residential areas, be of traditional brick construction, be high enough to put in a mezzanine.  Whilst, it could lead to a quite a lot of new substandard development, I suspect that the bigger effect will be that the permitted development right will give developers more leverage when trying to get permission to demolish and rebuild – although that could involve affordable housing delivery.   Fairly obviously, there’s also likely to be concentrations in area with the most light industrial stock.  In 2015, 31% of all office to resi conversions using PD rights in London were in LB Croydon.

Superstars or pools of risk?

As ever, the recent UBS Global Real Estate Bubble Index makes for interesting reading – although why Reading isn’t there, I don’t know.  They point to the growing concentrations of wealthy individuals in a relatively small number of areas in a relatively small number of global cities.

The intuition is that the national and global growth of high-wealth households creates continued excess demand for the best locations. So, as long as supply cannot increase rapidly, prices in the so-called “Superstar cities” are supposed to decouple from rents, incomes and the respective countrywide price level. The superstar narrative has received additional impetus in the last couple of years from a surge in international demand, especially from China, which has crowded out local buyers. An average price growth of almost 20% in the last three years has confirmed the expectations of even the most optimistic investors.

Basically, the argument is that the 0.01% will pay huge premiums to be close to each other.  Sounds fairly plausible.  However, the main global financial centres can also be viewed as concentrated pools of risk.  As quantitative easing has fuelled rising asset prices, the global cities have large pools of interlinked and interdependent global real estate investors, lenders and intermediaries occupying, trading, owning, developing etc. They all look exposed to a global or national systematic shock.  Seeing an Indian company like Lodha secure over half a billion pounds for the re-development of 1 Grosvenor Square in London from M&G looks like a good example of this concentration.