Loan spreads

There’s a nice little piece from the Bank of England on differences in interest rates for different LTV rates and BTL loans.  The point being made is that spreads have decreased sharply.  In 2012, BTL rates were just over 5% and with a 40% deposit, you could borrow at just under 3%.  The spread was approximately 250 basis points.  In 2017, the comparable figures are approximately 2.65%, 1.15% and 150 basis points.  The fact that the interest rate spread between 60% and 75% LTV ratio is now negligible seems to indicate a loosening of credit conditions.  In relative terms, it’s not as clearcut.  In 2012, BTL interest rates were less than double the rates for a 60% LTV ratio.  They are well over double now.

Disruptive valuations

There was an interesting piece in the FT Lex on Purplebricks – one of the many market entrants trying to disrupt the established intermediaries in the residential brokerage sector.  The valuation of the company looks very exuberant for a sector where barriers to entry are fairly low and established businesses can probably adapt their business models if disruption levels undermine the current ones.

So Purplebricks, the UK estate agent whose shares trade at 560 times 2019 forecast earnings, should feel right at home as it launches in the Golden State…Having floated with a market value of £240m in 2015, the upstart is now worth more than established peers Foxtons, Countrywide and LSL combined, even though its UK market share is about 4 per cent.

Lex are concerned that Purplebricks’ business model that is working reasonably well in the UK and Australia will not work in the US.

There seem to be two key differences between US and the UK markets – one is very encouraging for Purplebricks, the other is less so.  The bad news is that the residential brokerage market in the US is a lot more regulated than the UK.  Brokers need to be licensed in most states.  They need a professional qualification.   The good news is that fees are far higher.  Typically brokers can extract 6%-7% commission.  The US is a major outtier compared to other markets where UK levels of 1.5%-2% are more typical.   US agents seem to be earning abnormal profits.  The strange issue is that it is a UK-based online firm that is trying to disrupt the homes of Silicon Valley.   Where are the US online real estate intermediaries?

Sustainable real estate operations

I was at an IPF Sustainability Update yesterday.  Debbie Hobbs from LGIM provided some very useful takeaways.  In particular, Debbie had a lot of interesting and direct things to say about some of the practical and operational challenges of trying to improve the sustainability of real estate investment assets and funds.

  • She identified poor environmental performance in operation of some assets which are highly environmentally rated ‘on paper’ i.e. in terms of good EPC or BREEAM ratings. She had concerns about the knowledge and expertise of the maintenance engineering and asset/property/facilities management sectors.  She also expressed some disquiet about potential perverse incentives in the outsourced business models of service providers and their clients.   Such problems were exacerbated by outsourced supply chains creating “everyone’s responsibility becomes no-one’s responsibility” co-ordination problems. She argued that the combination of poor incentives and poor skills was causing poor operational performance and poor maintenance strategies.
  • It was also interesting to hear that, at LGIM, sustainability is a criteria in the individual performance measurement of individual staff and it directly affects their remuneration. Someone else mentioned that Land Securities has something similar in place.

The Real Estate Environmental Benchmark (REEB) is a publicly available operational benchmark of environmental performance for commercial property in the UK. It is one of the only benchmarks based on the performance of buildings ‘in-use’ and is increasingly becoming the ‘industry standard’ used by investors, fund managers and property owners to compare the performance of their assets with other similar assets from portfolios across the UK. Based on the annual consumption data of the BBP members’ property portfolios we provide energy, carbon, water and waste performance benchmarks for offices, shopping centres, retail / leisure parks and offices which others can use to compare the performance of their own buildings… The REEB dataset is one of the most comprehensive concerning performance in-use and, with the permission of our members, the data is made available on an anonymous basis to support a wide range of research projects in this important field.

  • Debbie highlighted the growing interest in “social value” of institutional investors and the emergence of financial products with social return and impacts. I found this technical paper on the issue useful.  It refers to social property REITs.  Coming soon?

Quite a lot of stuff there.

Biased research: a medical problem?

I saw a couple of things this weekend that illustrated how the research process can be essentially corrupted by combinations of perverse incentives and moral hazard.  In the FT, a lot of Anjana Ahuja’s review of a book on such problems in the bio-medical sector rang very true to my experience of real estate research – and I’m pretty sure that it applies to most other disciplines where the stakes may be lower.  There’s a lot of reference in the piece to the reproducibility crisis in research.  If you replace the words ‘patients’ with ‘participants’ and ‘animals’ with ‘students’ (sorry) in the piece below, then you could basically say the same thing about lots of academic research.

But the reproducibility crisis also attests to the many ways in which scientists can sway or manipulate their results. These techniques include, but are not confined to, HARKing (hypothesising after the results are known), creative statistical analyses, choosing particular patient subsets, having too few people in a study, and over-extrapolating from animal studies.

There was another piece in the Guardian by Will Storr looking at the growth of the self-esteem “business”, grade inflation and forms of self-absorption.  Behind it all is a fascinating example – but I suspect not an unusual one – of how commissioners can influence research projects to get the results that they want to hear and how researchers will sometimes respond to that pressure in order to secure financial support.

Ben Goldacre has been campaigning passionately for years about the problems of publication bias in medical research – but I suspect that its’s endemic across most disciplines.   It’s something that I’ve written about before but it’s definitely worth a reminder.

You don’t always get what you want?

We always tell students that asking prices tend to be below actual achieved prices in the hierarchy of evidence.  This is set out in the RICS’ Information Paper: Comparable Evidence in Property Valuation where asking prices are at the bottom of the list (hierarchy).  So how useful are asking prices?  How much out are they likely to be?

I’ve seen some interesting evidence in various RCA documents.  Tom Leahy presents an interesting graph which suggests that differences between asking and achieved prices tend to be related to market conditions.  When the market is hot, there tend to be premiums above asking prices (15-20% in mid-2104 for London).  When the market is in crisis, there tend to be similarly large discounts.  I suspect that the pattern would be closely linked to patterns of valuation accuracy.

The reason for premiums is because of the sale process.  Similar to residential property in Scotland, commercial real estate is often sold by a tender process and it is common to bid above the asking price (in Scotland, they usually specify “offers over”).  In other markets (typically where the buyers accepts the first satisfactory offer that arrives), it is common to bid below the asking price.  So, in another RCA piece, Jim Costello and Elizabeth Szep look at asking prices relative to achieved for US apartments over the last decade.    Again, the variation between asking prices and achieved prices is variable over time.  You see the same pattern – large discounts in downturns (15%-20%) and lower discounts in strong markets (2%-3%).

Ignorance is…?  (HE not RE)

Having a son at university, one (hopefully) about to go and working in a university myself, I’m embarrassed about my lack of knowledge of the student finance system.  But – I’m also pretty sure that I know more than quite a lot of my colleagues!  I regularly find it strange how we (even the academics) frame the student funding as a loan/debt when the later payments are essentially linked to income and, if you don’t earn above a certain threshold, you don’t pay anything back.

In addition, I hadn’t really appreciated that the amount that a student could obtain from the funding was also means tested and that better off students (or students from better off families) will obtain lower upfront amounts from the student finance system.  Their parents are expected to make up any shortfall.  However, future payments made by the recipients of student finance are not linked to the amount that is “borrowed” – the analogy is hard to avoid.  Martin Lewis, the consumer finance expert, wrote a piece last week explaining that

Student loan repayments are set at 9 per cent of everything earned above £21,000 for 30 years, regardless of how much you borrow. So unless you are a big enough earner to clear the borrowing and interest within the 30 years bigger “debts” don’t actually result in you repaying more

So, if the system remains in place in its current form (a big if), then students can obtain different amounts of student finance dependent on parental income and their future payments will be linked to future earnings regardless of how much they have obtained to finance their initial studies – albeit there will still be an amount to clear.   Apologies if you knew all this already.  I think that I might be getting there.

More carry on local authority

Following on from my recent blogposts on the strange expansion of local authority investment in commercial real estate assets, Real Capital Analytics’ Tom Leahy has provided some hard (rather than anecdotal) evidence of the phenomenon.

RCA data shows commercial real estate investment by this buyer group has leaped in the last two years and in the 12 months to the end of March local government buyers deployed capital totaling £1.75b – six times the long-term average volume.