Editorial: Feel the force

To purloin a few choice phrases: Wall Street has stumbled punch-drunk into the middle of a turkey shoot, in which it is the target and Joe six-pack is holding all the aces. And US voters currently seem to be giving out the message that they view merchant bankers as exactly that.

In clearer English, what this means is that the vote on new US law to reverse the status quo is still far from certain, despite the ‘group hug’ stance of elder statesmen in the US Senate earlier in the week, when they did vote to support the package, albeit with amendments.

So, where does this leave the UK investor?

Well, the short, short term answer is it may be a case of Armageddon or bust. Failure to agree on a deal later today - any fudge may do, frankly - would leave many financial services professionals seriously considering how to downgrade to a meal of turkey substitute in roughly three months’ time (if one may be permitted further reference to foul deeds).

The other option is to look for opportunity in the uncertainty, and here there is one interesting nugget that has raised its head: analysts at Lehmans of all places wrote a note shortly before the bank went under noting that UK property could be on the way up.

This might be a tad early, but the call has some support in the form of other evidence.

For example, looking over figures from Hometrack, the UK property tracking service, suggests the market is far from being easily labelled, despite the headline house price falls spotted by indices from the likes of Nationwide and Halifax.

Between 2001-5 Hometrack’s figures show a trend upwards in repossessions in the market. However in the three years since, the figures suggest repossessions are actually down as a proportion – and this despite other figures suggesting affordability is being stretched to the hilt in a way it has not since the last housing market crash during the early 1990s.

Arguably, it may be that people are doing whatever it takes to hold on to their houses, avoiding repossession by cutting back expenditure on all but the mortgage. And there is evidence for this too. High street spending, tracked by organisations such as the British Retail Consortium’s monthly Retail Sales Monitor suggests that like-for-like sales fell 1% in August, continuing a trend that has seen sales fall on this basis in five out of the last six months’ worth of such data.

Less shopping, apart from caning stocks such as DSGI, Kingfisher or Home Retail Group, might suggest poorer returns from commercial property, but that would be, particularly in the UK sense, to ignore the way rents are generally revised upwards and the niggling feeling that any interest rate cycle from here on is going to consist of downward revisions.

Lower interest rates would have an immediate impact on commercial property yields, partly because the rental yield would improve against servicing costs of any loans tied to the base rate, and partly because any interest rate cut by the Bank of England would likely spark a rally in property shares, hence capital appreciation would flow to investors.

Particular gainers could be REITs such as British Land, Land Securities, and Hammerson, as well as house builders such as Taylor Wimpey and Persimmon. Barratt Developments shares are up more than 170% over three months. Property investment trusts would likely see a sharp improvement in the discounts currently being suffered against estimated net asset values.

Unit trusts and OEICs should not be forgotten in this discussion. Figures from tools such as Financial Express Analytics and sources such as Trustnet.com suggest that in the past month retail collective investments in property as an asset have in most cases outperformed returns from equities with ease, as measured against both the FTSE 100 and the All Share. The data suggests that the worst of the falls may have passed some three to six months previously. September 2008 was, obviously, bad for equity performance broadly speaking. But, it is also arguable that the outperformance may be because property has seen off the main challenges in the form of redemptions and investor displeasure – again, assuming Armageddon does not occur sometime in the next few hours after writing this.

Back in the world of residential mortgages, the Araldite approach of injecting liquidity coupled with a base rate cut would result in an immediate colonic in terms of passing through the worst of the toxicity remaining, notwithstanding the fewer number of actual mortgage brands now in the market following the takeovers of HBOS and Bradford & Bingley’s respective mortgage books. Noting the propensity to avoid repossessions seen in Hometrack’s figures above, it seems the average mortgager is as far as possible ready and willing to work to meet their debt obligations.

All that remains would be for European lawmakers to push onwards with implementation of the ideas outlined in previous Green and White papers on pan-European mortgages and there would be yet still improved access to credit secured on immovable assets. There are plenty of arguments against trying to time the market, but given the opportunities that may open up simply on the basis of a ‘yeah’ or ‘nay’ spoken sometime after the UK stock market closes today, it may be that one should do as the Jedi and reach out to feel the force of property.