London Update

August 2007

Turbulent Times for Equities – By Paula Hawkins
The Landmark East Tower, Released for Sale
Economic Outlook
Market Comment
Other News
Young Group's August Highlights
About Young Group

Turbulent Times for Equities – Paula Hawkins

For anyone with significant stock market investments, the past few weeks will have felt uncomfortable to say the least. The FTSE All Share index fell by around 10% over the four weeks from mid-July to mid-August, wiping out almost all the gains of the previous 12 months. Globally, a staggering £2 trillion was wiped off the value of quoted companies as markets around the world tumbled.

Some of that ground has since been recovered, thanks in part to an injection of cash from the European Central Bank into European money markets and similar moves by the Federal Reserve Bank in the US, as well as the decision by the Fed to cut its discount rate from 6.25% to 5.75% on August 17. However, most experts predict that the volatility in international stock markets is far from over – and some are calling this the start of a more prolonged downturn.

The trigger for this international investment mayhem has been problems in the US housing market – specifically in the sub-prime mortgage market. Over the past few years, there has been a huge increase in the volume of sub-prime lending in the United States, with banks extending so-called ‘Ninja’ (No Income, No Job or Assets) loans, to those with very poor credit histories and with very little ability to repay the money. This generous credit policy underpinned US housing market growth, and has been credited with expanding American home ownership significantly.

Moreover, as long as house prices kept rising and interest rates were very low (US borrowing costs were just 1% in 2004), Ninja loans created few problems. But since 2004, the Fed has raised interest rates no fewer than 17 times. Defaults have been rising, repossessions have soared, and property prices have begun to slide. Not only has this been disastrous for many US homeowners, many sub-prime lenders have found themselves in severe financial difficulties. Some, including New Century Financial and American Home Mortgage, have filed for bankruptcy.

The problems of US sub-prime lenders would not, on their own, have much of an impact on international financial markets had these Ninja loans not been sliced up, repackaged, securitised and sold on to pension funds, hedge funds and other institutional investors, not just in the US, but around the world.

As defaults on these loans started to mount up, so did the problems for some of the world’s largest hedge fund companies, many of which are quant funds, relying on ‘black box investing’ to deliver returns. Black box investing - in which computer programmes buy and sell thousands of stocks based on complex mathematical formulae – is based on models which assume a degree of rationality in markets. These models perform less well in turbulent times, when faced with investors’ irrational fear and greed, exacerbating the difficulties.

In June, hedge fund manager Bear Stearns was forced to provide $3.2 billion in loans to rescue its High Grade Structured Credit Strategies Fund, the largest bank bailout in a decade and problems continued to mount throughout July, culminating in the heavy stock market falls of early August.

“Nervous investors are being
advised to sit tight”

So what should we expect looking forward? In the short term, volatility is to be expected, but whether this is just a blip, a correction similar to the 10% fall in the FTSE All Share index that we saw last July, or the start of a more significant downturn is a hotly debated question. Equities strategists point out that shares in the UK are not actually overpriced: the average price to earnings ratio on the UK stock market is 12, its lowest level since 1991 when interest rates were roughly double what they are today.

However, there is a possibility that the US sub-prime crisis will create longer-term problems, not just for stock markets, but for the UK economy and the housing market. The main risk, experts argue, is that credit availability will remain constrained for a considerable period of time. This will affect businesses’ ability to grow, it will limit merger and acquisition activity, and eventually it will begin to affect household borrowing, and therefore the housing market, too.

Already, sub-prime lenders in the UK market, such as GMAC and Kensington, have re-priced their loans, raising rates and in some cases tightening lending criteria. While rate hikes are not expected in the prime market just yet, the cost of borrowing could rise eventually if the credit crunch continues. The level of repossessions, which reached an eight-year high in the first half of this year, is also giving cause for concern, although buy-to-let repossession rates remain a third lower than the mainstream mortgage market, buoyed by a strong rental market.

Pessimists such as Ted Scott, manager of the F&C UK Growth & Income Fund, warn that “Contagion to the real economy is inevitable”, largely because the UK’s economy has been kept ticking over by consumers: 70% of UK GDP is accounted for by consumption. As a result, higher interest rates and tighter liquidity conditions will take their toll, and the damage to the economy will eventually lead to lower employment and more sluggish growth.

However, over in the optimists’ camp, more bullish investors insist that there is little for investors to panic about. Global economic fundamentals remain sound, they point out, and although the credit crunch is likely to have a negative impact on US growth forecasts, here in Europe, GDP growth is accelerating and rates in emerging economies such as India and China remain in the double digits. Moreover, experts are likening the current crisis not to the bursting of the dot-com bubble, which led to an extended bear market, but to the situation in 1998, where systemic risks related to hedge fund losses caused havoc in global financial markets. In that case, central banks intervened and the markets rebounded within a matter of months.

Nervous investors are being advised to sit tight. Corporate bonds – a traditional refuge from equity market turmoil – are proving less popular than usual, because of fears that the credit crunch affecting riskier assets could spread to high quality debt, too. Commercial property, both in the UK and abroad is being touted as a good, non-correlated investment. While returns from UK stocks are now negative for 2007, UK commercial property has returned just under 5%, with office properties returning almost 8%.

Residential property, particularly in the capital, has shown much stronger returns – and with the continuing lack of supply underpinning the market in the south east, this is unlikely to change, whether or not the wider UK housing market suffers as a result of the sub-prime woes.

Written by Paula Hawkins – Paula writes on the residential property market for a range of national newspapers including The Times, The Independent, The Sunday Telegraph and the Evening Standard. A former deputy personal finance editor at The Times, Paula has also written a guide to personal finance, published by Penguin.

The Landmark East Tower, Released for Sale

Young Group is proud to announce that we have bought the freehold and second skyscraper, The Landmark East Tower (which reaches a height of 140 metres), so now own the entire Landmark development. Apartments in the 45 storey East Tower, were made available to Premier Clients in mid-August and the majority of apartments released for sale were reserved within the first five days.

The tremendous interest already generated by The Landmark is testament to its premier location and quality, and highlights the stark difference in value being offered at comparable residential developments in Canary Wharf.

Situated adjacent to The Landmark West Tower, apartments within the newly released East Tower will be finished to an equally high standard with floor to ceiling glass, integrated kitchens, Siemens appliances, marble bathrooms, comfort cooling throughout and wooden floors. The two towers also share equally generous layouts.

It is the aspect of the iconic East Tower at The Landmark which differentiates it, with a large proportion of one bedroom apartments benefiting from east/west orientation and River Thames or Canary Wharf/dock aspects. Additional floors have now been released and suites, 1 and 2 bedroom apartments are available from £355,000.

The Landmark - Canary Wharf

The potential for further growth at Canary Wharf was emphasised by Savills this month, as the firm highlighted the vast amount of space available for future commercial developments, particularly in the run up to the 2012 Olympic Games. Matt Oakley, head of research, explained: “There’s a lot more that can be built at Canary Wharf. All in all there’s potential to [build] another 5 to 10 million square feet of offices.”

Economic Outlook

	Perhaps unsurprisingly to most, the Bank of England’s monetary policy committee (MPC) voted unanimously to keep interest rates at 5.75% in August. Minutes of the August meeting show the committee was in agreement that there was little pressing need to deliver another increase in the cost of borrowing, even prior to the market turbulence seen later in the month.
	More surprising however were figures from the Office for National Statistics (ONS), revealing that consumer price inflation in July had fallen below the government’s target of 2% for the first time since March 2006. The drop was dramatic as inflation slowed sharply to an annual rate of 1.9% in July from 2.4% in June, the biggest fall in more than 5 years. This inflation data, minutes of the MPC meeting, softer than expected July wage increases and the recent market volatility all point to reduced chances of another interest rate rise next month. Jonathan Loynes at Capital Economics predicted: “We still think that one more hike later this year remains likely, but a September move now looks out of the question.”
	More good news is that despite the recent, well documented, stock market turbulence, analysts expect that the housing sector will stand firm. Martin Ellis, Halifax chief economist, said “The economic fundamentals are still very strong, the economy is doing well and unemployment remains very low. I don't think the stock market falls will have much of an impact.” Fionnuala Earley, Nationwide's chief economist concurs: “Overall, there should be a limited impact on the housing market.”

Market Comment

	The Council of Mortgage Lenders this month reported that the buy-to-let sector outperformed the rest of the mortgage market during the first half of 2007, seeing 2% growth in the value of new buy-to-let lending. The growth is attributed to a strong rental market, higher rents and shorter void periods. The strength of the market was emphasised by new figures showing that repossession rates are 50% higher for mainstream mortgages than for buy-to-let mortgages. Lenders continue to have confidence in buy-to-let and in July increased the average aggregate loan available to a single investor to £2.5 million.
	As reported in our last London Update, undersupply remains a key driver of the property market. National House-Building Council (NHBC) figures show that there were 50,721 UK housing completions during the second quarter of 2007, a decrease on the same period last year, at a time when the government has identified that there is the demand for around 30% more homes per year.
	Property prices in the capital show no signs of weakening, with Knight Frank reporting that July saw prices of the capital’s prime property soar by a record 3.9%, the highest monthly rise since its index began in 1976. This helped to boost the annualised rate of growth to 36.4%.
	Rental demand at all levels of the London market also remains strong. Hamptons reports demand across the capital to be up by 40% year-on-year and there are no signs that the rental market is abating, with average rental renewal up by 4.78% in July alone. London Lettings Director, Kate Whotton, comments, “August has exceeded even our high expectations. With high demand from applicants willing to commit for longer periods, it is a shrewd decision to get into the lettings market.”
	Homes at the lower end of the housing ladder are increasingly out of reach to first-time-buyers, who are staying in rented accommodation for longer and deferring their first step onto the property ladder. NHBC reports that the First Time Buyer’s Affordability to Buy Index has hit an all time low, with the average price of a new home in the UK now standing at £194,000, 6%higher than a year ago. The Royal Institution of Chartered Surveyors (RICS) also points to interest rate uncertainty buoying rental demand in this segment of the market, “With interest rates perched at 5.75%, and a jump to 6% a strong possibility, aspiring first-time-buyers are continuing to rent until the market trend becomes clearer.”

Other News

Witanhurst House, on Highgate Hill, which formerly housed the BBC's talent show Fame Academy, is soon to be renovated to become London's first £150 million property. The grand and expansive Georgian pile is the size of 10 normal detached family houses and boasts 25 large bedrooms, eight reception rooms, eight bathrooms and five cloakrooms. But although the property is the second largest private residence in London after Buckingham Palace, poor maintenance means it requires renovations which even Angela Kelly, the newly-created £35 million lottery millionaire, wouldn’t be able to afford…

Witanhurst House on Highgate Hill

Staying with the lucky lotto winner, it’s worth pointing out that if Ms Kelly had invested her £35 million lottery win in residential property in 2000, by now she’d have generated returns of a staggering £156 million, more than four times her original winnings!

Young Group's August Highlights

The Landmark Scoops Two National Property Awards

The Landmark, Young Group’s iconic residential development in Canary Wharf is to receive two awards in the prestigious Daily Mail UK Property Awards 2007. The full extent of this success, in the categories of Best High Rise Development and Best High Rise Architecture, will be revealed at the gala dinner on Friday, 5th October.

Neil Young, CEO of Young Group, comments, “The Landmark is currently under construction and the fact that three years ahead of completion it has won, not one, but two of these coveted accolades, is proof that it stands out within the highly competitive UK property arena.”

A wide range of studios, 1, 2 and 3 bedroom apartments within the stunning new 45 storey Landmark East Tower are now available, priced from £355,000. For more information, view The Landmark microsite - www.thelandmarke14.com.

Young Property

The announcement of our forthcoming Development Fund received a tremendous response and we’re delighted to announce that in September, Iain Macgregor will be joining us as Managing Director of Young Property. Iain, formerly a director at Berkeley Homes, will head up the team establishing Young Group’s new investment fund. Created to facilitate investing at the earliest stage of the development process, clients can share in the development profit whilst adding diversity to their portfolio.

We are already in discussions regarding a number of land opportunities and the fund will initially seek to develop residential projects in London of approximately 100 private units with a gross development value in the region of £40 million. The development process will be managed in-house by Young Group’s senior management team. To register your interest in the development fund, contact us on +44 (0)845 356 1000 or email info@younggroup.co.uk.

Young Finance

In the wake of the US sub-prime mortgage difficulties UK lenders remain confident, particularly in the buy-to-let sector. Whilst some lenders are effectively pricing themselves out of the sub-prime market, others are switching their attention to increasing market share of the prime loan sector. As always, there is an ever-changing range of products available and Young Finance Consultant, Jessica Hodgson, notes: “A number of lenders have changed how they calculate their rental requirement. By switching to a product pay rate in their buy-to-let mortgage calculations, and lowering this to 100–115% rather than the more traditional 125%, lenders are demonstrating that they’re keen to grow their buy-to-let market share. Similarly, lenders who see a high commitment from investors are prepared to offer ever more flexible terms. For applications with a loan-to-value ratio of 80% or below, one lender has decided not to make any rental assessment at all.”

Young Lettings

The lettings team has already successfully secured tenants for more than half of the apartments at Union Wharf in Shoreditch, weeks ahead of completion with our clients seeing yields in excess of 6.5%. All lettings have been at the asking price, setting a new benchmark for rents in the area. Young Lettings Consultant, Jonathan Holland, comments: “Tenants are particularly impressed by the waterfront location and the sense of tranquility that comes from overlooking the Regent’s Canal. They also appreciate the development’s high quality, reflected in the rents that we’re achieving for our investors.” With a number of weeks to go before completion, interest in Union Wharf is increasing daily, and the team is working hard to ensure that all apartments are rented to quality tenants and generating rental income as soon as possible.

About Young Group

“We create wealth through the one asset class we believe offers dependable, long term capital growth, low risk and the opportunity to maximise returns through active management – London property”

Young Group specialises in providing Property Portfolio Management services to private investors, identifying the best off-plan opportunities in London on their behalf and managing the entire investment process - from sourcing the property through to financing, furnishing and letting.

Young Group is a wealth manager with a focus on property as an asset class. Young Group owns all the property it sells, and also retains a number of properties in each development for its own portfolio. As the principal in every transaction, Young Group does not realise any profits until completion, giving investors 100% confidence that properties will ‘value up’ and that financing will be secured.

Young Group has transacted in excess of 1,500 apartments, with a retail value of £630 million. Over 50% of units have been bought by multiple investors. The Group’s lettings division, Young Lettings, has successfully let all investors’ apartments within a week of completion.

For each property exchange, Young Group donates £50 to CHILDREN with LEUKAEMIA, the UK’s leading charity dedicated exclusively to fighting Britain's biggest childhood cancer through pioneering research, new treatment and support of children with Leukaemia and their families, and to Norwood, the Children and Families First charity which provides support to families facing social difficulties.

t:  +44 (0)845 356 1000   e: info@younggroup.co.uk