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Money Talk

By Jerome Kennedy,2014-11-21 21:38
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Money Talk

Property Week

    Episode 10

    rdDate: 3 September 2009

    (34 mins)

    James:

    Hello, I’m James Max, and welcome to the August edition of Property Week’s podcast. This month, Paul Griffiths from BNP Paribas will be here to talk about commercial property investment trends; Miles Shipside, Commercial Development Director for Rightmove.co.uk will be here to talk about the latest twists and turns in the residential market; and Adrian Mills, broadcaster, and probably best known to you for his seven years presenting as one of That’s Life – well, he’ll be joining me to talk

    travel and restaurants. That’s all coming up, but first …

    The Governor of the Bank of England wanted to inject an extra ?75 billion of money into the British economy. The other members of the MPC, the Monetary Policy Committee, vetoed this idea, but even so ?50 billion of extra funds surprised the markets. With inflation at 1.8%, and interest rates at a mere half a percent, we have a mismatch. Mervyn King is clearly worried about our economy, yet the stock markets have had an unprecedented rally in recent months. Can this continue? Are we heading into another storm? And just what do you do as investors, letting agents, valuers and property professionals, with all this uncertainty? The eternal optimist in me says we’ve seen the worst, but that’s simply because we saw, quite frankly, a near and total financial market meltdown. I don’t think that’s about to happen again, but what I do think is that economists, commentators and other investors are making light of the problems facing our, and indeed the world, economy. Quantitative easing is going to generate significant inflationary pressures in 2010 and 2011. That, if it happens, will demand an interest rate rise, and if, as I suspect, inflation does go out of control, then I’m afraid we’re going to be right back where we started. The thing is that many people think that we’re going to be in a low interest rate environment for some time, so there’s no expectation that inflation will rise at all. The problem is that

    the issues that we face could be even worse than where we are at the moment; money will be in short supply, and very expensive at that, and this time around we won’t have the cushion of ten years of fat to help business, and indeed yourselves,

through. And that’s on top of our national debt – government debt has passed ?800

    billion for the first time, that accounts for 56.8% of GDP. In day to day terms, things aren’t that good either, in July the government had a net debt in public finances of ?8 billion. Now, that’s not a lot in the context of the ?175 billion they need for this year alone.

    So, if I were you, by all means invest and borrow, but do take account, both personally and corporately, of a potential and significant rise in the cost of borrowing in the years to come. It’s those who manage and finance their properties, assets and businesses prudently who will continue to weather the storm. I happen to think that we’re in the eye of that storm at the moment, the eerie quiet and relative stability is

    simply due to the summer sunshine, and the expectation of a general election in 2010. As and when the true impact and devastation of this current recession comes to light, and the horror at the sheer mass of debt in which this nation finds itself, and the cumulative effect of post election cuts to public services, which both parties will have to attempt, the impacts are going to be profound, and, I would suggest, uncomfortable. And that’s corporately and personally.

    And on that jolly note, let’s catch up with the property news. My colleague, David Doyle, caught up with Deputy Editor of Property Week, James Whitmore.

    David:

    Hello, I’m David Doyle, Senior Online Reporter at Property Week, and I’m here with James Whitmore to discuss this week’s news. Hello James.

    James:

    Hi, good to be here, David.

    David:

    So James, what’s big in the magazine this week?

    James:

    The best story of the week is the row between the British and US governments over the US Embassy’s move to Battersea. It’s an absolute cracker, the UK Government

    wants the US Embassy to pay a VAT bill on the construction of their new building,

    which will be about ?50 million. The US Government says, “We never pay VAT, and we’re not going to pay VAT now”, so a bit of an impasse has been reached, if I was a

    betting man I’d suggest that the US Embassy will probably win on this case, and they won’t pay VAT, because, let’s face it, the US Embassy is rather crucial to London, I can’t imagine it moving off to Paris and people having to get an aeroplane to get a

    visa to go to America.

    David:

    And I suppose with the election next year as well, that could kill the row dead as well? James:

    Possibly it could, I suppose Gordon Brown’s got more important things to worry about at the moment than ?50 million.

    David:

    And this isn’t the only thing that the American Government don’t pay, is it?

    James:

    No, well they don’t pay tax, full stop, when they’re in the UK. The Americans generally don’t pay tax on diplomatic properties throughout the world, so being asked

    to pay VAT is obviously something that’s rather upset them.

    David:

    So why is the Government trying its luck this time, then?

    James:

    Well, what they’ve done essentially as I’ve said is to defer the pain, so the amount they’ve got to pay back on their debt now is only $4 million this year, $180 million next year and $234 million in 2011, which sounds a lot, but they make a huge amount of revenue each year and if the markets reach the bottom, and it’s going to improve next year and the year after, then these should be payments they can meet, and they have promised that they will make early repayments and pay it off earlier

    than the dates suggest. So it looks like, as one of the top analysts in America said, that CBRE is out of the woods now.

    David:

    And how does that put them against some of their rivals then?

    James:

    Well, they’ve always had a lot more debt than any of their rivals, I mean Jones Langs is less than a billion, so it’s at least double what Jones Langs’ debt is, and considerably more than the guys over here: Savilles, DTZ and so on. DTZ’s debt is about 100 million, so it’s considerably less.

    David:

    And things seem to be hotting up in the world of coffee, if you can excuse the pun. What’s happening in the magazine?

    James:

    Yes, ho ho! Coffee, a fantastic feature on the fall of Starbucks, which personally I’m delighted with, I think their coffee is dark brown water, I don’t like it at all, but obviously it’s a fantastic success story, I mean since it was the Seattle Coffee Company, and I remember when it first came over here like that, but it’s just become a vast great company which has opened up everywhere, I mean it’s all over the place, and I suppose the recession has found out it. Just near where we are, just south of Blackfriars Bridge near Fleet Street, there are six within about quarter of a mile, which is silly enough, but when you bear in mind that their two major rivals, Costa and Café Nero, also have outlets there, and they’re facing growing competition from Pret A Manger, Eat, and even McDonald’s, which is selling coffee, and cheaper, and probably no worse as well, then that’s why Starbucks is suffering a bit, and they’ve appointed CB Richard Ellis to offload 50 stores, they haven’t actually identified what the 50 stores are, maybe none of the ones that I’ve just talked about in Fleet Street are one of the 50, but it’s the first sign that the Starbucks machine is slowing down.

    The interesting thing, I think, is that in Seattle, where Starbucks was founded, they’ve responded to the anti-Starbucks way, and I suppose it’s a little bit like the anti-Tesco

    movement that we have here, by rebranding one of their outlets, they’re calling it

    th Avenue Coffee and Tea”, in an attempt to appear more community-focused, “15

    rather awfully they’ve described it as “we’ve re-imagined the coffee house

    experience”, but they’ve gone back to what they think is a traditional coffee house, which I think of as Café Nervosa in Frasier, which is a lot more attractive, and also they’re going to be serving beer and wine in there, so it’s a change of image, it’s only one in Seattle, but I think that’s something that they’re going to start doing a lot more of, and not before time.

    David:

    OK James, thanks very much.

    James:

    Thank you, David.

    James M:

    That was David Doyle chatting to Property Week’s Deputy Editor, James Whitmore.

    Later you’ll hear from Rightmove.co.uk’s Commercial Director, Miles Shipside, and broadcaster and restauranter, Adrian Mills, but first, the property investment markets have taken a battering, values are down, loans in default and banks licking their wounds from years of overlending and under-collateralisation. Yet there are some players out there, and indeed what the banks say about property well, it affects us

    all - their principles, their property advisors, investors and lenders. David Doyle went to meet Head of Investment from BNP Paribas Real Estate, Paul Griffiths. David:

    Paul, UK banks have an exposure of ?300 billion to commercial property, and are set to make, as I understand it, paper losses of ?100 billion from that exposure. Against that backdrop, surely it’s not the best time to be an investment agent?

    Paul:

    Well, we’ve seen better times, I would say, but it’s maybe not as bad as you might think, and there’s been a marked change in the last two or three months by property

    investors showing very keen interest in the UK, and what we’ve seen is competition has arisen again for a number of well let investments. Now, the reason for this, it’s coming from two key sources: international investors, and also UK pension funds, all in search of yields, and in every asset class they look at, property, whether it’s yielding you 8%, 9% or 10%, still looks a good bet.

    David:

    But surely the fact that banks aren’t lending anywhere near the same amount as they

    were two years ago is going to be having an impact on what people can buy? Paul:

    It is having an impact, but there are other types of investors out there, and these are equity investors with cash, and therefore their recourse to borrowing is very limited, if they need any money at all, so we’re seeing at the moment the market dominated by really cash-rich investors in the form of funds of overseas investors, so bank lending yes, that is depressing the market, but at the prime end it’s not having much of an

    impact at all at the moment.

    David:

    But is there a limit to this sort of mountain of equity? Is that going to run out before we see a recovery?

    Paul:

    There is a limit, and we’re of course talking at the slightly smaller end of the spectrum,

    so typical deal sizes today might range from ?5 - 30 million, being the hot spots, and

    yes, when you get up to deal sizes of ?100 million plus, then normally a bank debt is required, and that’s where things become a bit tricky, but for the foreseeable future,

    and I’m talking about the next six months, there is plenty of cash in the market that will mean that prices will be maintained.

    David:

    But it’s those big deals that kind of give the boost to the market that it often needs?

    Paul:

    It is the big deals, and going back to your original question of being an investment agent, we all rely on one or two big deals each year, and I think that’s where things are tricky at the moment, but we certainly see that easing up as we go into 2010. David:

    Of course we have seen a few big deals happening this year, in particular the one from the large fund in Oman are we going to see any more like that?

    Paul:

    I think we can do, what these funds are particularly keen on in the UK is the long lease structure that we have here, and therefore if we could come up with more opportunities where leases are typically 15 years plus, then there would be more of these deals that would be available, but the problem with it is, is the leasing structure is now getting shorter in the UK, and typical occupiers are taking more ten year leases rather than 15 or 25 year leases, and therefore that’s limiting the amount of stock available for these funds, but I think if we could find suitable properties, then yes, we could well see some more deals of the type you mentioned.

    David:

    So is it lease structure that’s the defining factor for an investor now?

    Paul:

    It is at the moment, yes people are looking for security, and particularly the German open-ended funds and the Middle Eastern funds, the market is very much driven by strong covenants on long leases, and that’s typified by a number of the deals we’ve seen in the City and in the West End in recent months.

    David:

    OK, so if you personally had a bottomless cash pot at the moment, what asset that’s

    available at the moment would you go for?

    Paul:

    Well, I think the assets to go for at the moment are those ones where debt funding will be difficult. Now that is typically a good property in a good location, but might have a slightly shorter lease structure, and that is where you will get the value, because people requiring debt for those properties are unable to acquire it. David:

    BNP Paribas Real Estate has recently rebranded from the old Atisreal, it’s a bit of a mouthful do you think you could have gone for something shorter?

    Paul:

    Well, we can’t change the name here, but I think the benefit is it brings us closer to part of a global banking group, just to recap the Atisreal was a bit of a strange name, and was a combination of three large European practices, Weatheralls in the UK, Auguste Thouard in France and Müllers in Germany, and I think by bringing those brands wholly integrated into BNP Paribas, it really sets us apart from some of our competitors, and gives us a strong financial backing for the future. David:

    And what’s the main advantages then of that closer link?

    Paul:

    Well, I think the main advantages we’ve seen already, we’re working very closely with the private bank, who have got a number of overseas investors looking to invest in the UK, so that’s an instant benefit to my area of the business, but it also gives us greater financial tools and instruments to draw upon, which is what we’re finding clients are requiring more and more in their property investment strategies. David:

    Of course the business has been owned by the bank since 2004, surely some of those benefits were there beforehand?

    Paul:

    I think they were, but you would be amazed the difference by changing your name, rather than a subsidiary with a different name, having the same email address and having the same company name as your parent, it puts you in a slightly different league with other departments within the bank.

    David:

    Paul, thanks very much for your time. If listeners want to find out more about BNP Paribas Real Estate, where should they go?

    Paul:

    Well, you can have a look at our website, which is www.realestate.bnpparibar.com. David:

    Great, thanks again.

    Paul:

    Thank you.

    James:

    Don’t forget, there are a myriad of property superstars and celebrity interviews on our

    previous podcasts: radio presenters from The Big Top 40 Show, Kat Shoob and Rich Clark; Dragons Theo Paphitis and James Caan; TV architect George Clarke, newsreader Katie Derham, DJ Emma B, and London’s former mayor, Ken Livingstone, and a range of leading lights from the property industry too. If you go to iTunes, type in “Property Week”, and you’ll find us there, or indeed find us on our website: www.propertyweek.com. Oh, by the way, it’s still free.

    Still to come, broadcaster and restauranter, Adrian Mills.

    My next guest is the Commercial Director of one of the most successful residential property websites in the nation it’s called Rightmove.co.uk, it has over a million

    properties listed for sale and for rent, and here’s a statistic for you: 550 million pages

    of property are viewed each month. His name is Miles Shipside, welcome Miles.

Miles:

    Hello.

    James:

    You’ve just announced your recent results – can you perhaps give us a flavour as to

    how you’re doing?

    Miles:

    Yes, revenues are down by circa 11%, but compare that against traditional media, newspaper advertising, that’s down around 60%, and therefore what’s happened is estate agents are still using the internet, but choosing not to use newspapers as much, and it’s breaking the habit of 40 or 50 years. Funnily enough, the home mover

    has moved online, but estate agents, who are quite traditional, still are advertising in newspapers, so this downturn has actually meant that they’ve really adopted the internet as a very cost-efficient way of reaching home movers, but yes, our results, whilst revenue’s down, it’s still a profitable company; obviously we’ve had to cut costs, along with others, but we have kept up our marketing spend to make sure that people still hear about the Rightmove name.

    James:

    And one of the things that property particularly suffers from seems to be a lack of understanding of what the internet can do for you and for your business, and in commercial property particularly, although major firms have websites, they don’t really make the best use of the internet, would you say?

    Miles:

    That’s true, and certain industries are actually suited well to the internet. Houses obviously, there’s a lot more demand and interest in them than commercial property, so the expense of setting up a website makes sense for residential property sales, perhaps less so for commercial property, because you’ve got to advertise it, you’ve got to let people know about it, and with there being far less commercial property around, then the business model doesn’t necessarily stack up. We don’t look to advertise commercial property on Rightmove there are some commercial properties

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