What an Investment Fund, Forced to Take a Big Loss, Said about the Housing Bust in Prime Central London

“Probably now enduring its most protracted period of price suppression since records began.”

Here is an interesting and colorful tidbit on the housing market in Prime Central London, one of London’s most expensive areas and once the hotbed of London’s breath-taking property bubble, and now a deep morass.

London Central Portfolio Property Fund, a closed-end fund focused on small apartments worth less than £1 million in Prime Central London, sent a letter to its investors on January 21 in which it disclosed that it had to write down the value of its properties by 9.6% over the six-month period ending September 30, 2018. Due to leverage in the fund, the net asset value of the fund dropped by nearly 20% over the six months. This pulled down its net asset value by nearly 25% over the two-year period.

The write-down came about because Al Rayan Bank, which provides financing for the fund, exercised its right to revalue the fund’s portfolio properties, according to a filing with The International Stock Exchange, where the shares trade as London Central Apartments III. The bank instructed Mortlakes Chartered Surveyors to conduct the valuation.

The fund, the letter says, aims “to benefit from attractive rental yields as well as capital value growth.” But that second part didn’t quite pan out.

Some of the letter’s painful and eloquent laments about the debacle — a debacle for investors — playing out in the Prime Central London (PCL) housing market:

“Fundamentally, the dynamics in PCL reported over the last couple of years have regrettably not changed. If anything, they have deteriorated further.”

“Most investors are aware of the unprecedented difficulties faced by Prime Central London residential over recent years and recognize the remarkably difficult trading conditions that the Fund has had to endure.”

The letter mentions the collapse in share prices over the past four years of two real estate agencies: Foxtons down 87.4%; and Countrywide, the largest agency in the UK with over 10,000 employees down by 98.5% (we covered this fiasco).

“Its difficult to open a paper these days without reading about the parlous state of the residential market in PCL.”

“With such negative news predominating, it is perhaps unsurprising that the number of transactions continues at an all-time low. In the most recent data available from HM Land Registry, year to date sales totaled just 3,671 across the whole of PCL – just 71 per week – and fewer than were seen at the depth of the Global Financial Crisis. While this dynamic is sometimes indicative of a lack of vendors, in the current circumstance, it is largely due to a lack of buyers.”

“50.4% of all current listings in PCL have been on the market for more than 6 months, with 26% still being available after 12 months. This contrasts starkly with ‘normal’ market conditions where the supply-demand imbalance means good properties go under offer in days.”

“The upshot of all of this is that PCL is probably now enduring its most protracted period of price suppression since records began.”

“During the Global Financial Crisis, annualized volumes of sales for PCL (perhaps the best barometer for the market ‘s general health) dipped below 4,500 for just 10 months from January to October 2009. In contrast, the current scenario has seen 23 consecutive months at this level.”

“Due to the current market conditions, most people with properties listed on the sales market are selling out of necessity. This is therefore reflected in the prices.”

So, the letter explains, the net asset value per share has “materially” declined. But “in light of the dysfunction market detailed above, the performance is not surprising.”

The letter blamed a mix of Brexit, political uncertainty, “two General Elections,” and a slew of new taxes focused on expensive residential properties — such as those in PCL — particularly “the top end buy-to-let and international investor sectors.” And all these are factors that “affect investor confidence.”

But this is what happens at the end of a property bubble: There is pain.

The government imposed the taxes on the market precisely to cool the price increases driven by investors, particularly non-resident foreign investors. Prices rose to the point that a whole generation of young people with even good jobs in London were locked out of the London housing market, as investors piled into housing as if it were just another asset class to be recklessly inflated, thereby creating a now legendary property bubble. But all bubbles end and then deflate, no matter what the perceived reasons, and now these hurting investors are lamenting its end.

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  46 comments for “What an Investment Fund, Forced to Take a Big Loss, Said about the Housing Bust in Prime Central London

  1. 2banana
    Jan 23, 2019 at 11:28 pm

    In the end…someone will be holding the bag.

    Banks and large investment houses will do their best to make sure the bag holder will be the UK taxpayers.

    • Gershon
      Jan 28, 2019 at 9:38 am

      In the UK, as in the US, the banksters own the Establishment parties. Rest assured that any and all gambling losses will be transferred to the public ledgers.

  2. WES
    Jan 23, 2019 at 11:49 pm

    Guess they are one of the lucky ones to be down only 25%!

  3. HMG
    Jan 23, 2019 at 11:56 pm

    It’s a liquidity problem.

    When assets a such as London apartments drop say 15% in value , even at the 15% lower value there is still no buyer. In a buoyant market the transaction price is +/- 2% of the asking price. In a housing ‘bust’ such as this transaction prices can be up to 20% less than the asking if there is a forced or desperate seller.

    The agent often has good reason to keep details of under market transaction prices ‘confidential’ in order to try and keep a stable market.

    True price discovery and valuation becomes very arbitrary.
    The 9.6 % drop referred to in this article could in reality actually be as high as 19.6%.

  4. Chip
    Jan 24, 2019 at 1:01 am

    “‘normal’ market conditions” of “supply-demand imbalance” – pretty funny.
    I guess these fund managers don’t spend a lot of time reading esoteric economics texts :)

    • Bobby Dale
      Jan 24, 2019 at 8:18 am

      Great catch Chip!

  5. VPV
    Jan 24, 2019 at 1:59 am

    Wolf, can you add a chart, if you have one, to show the rise in PCL property since GFC? That will set the context for the 9.6% drop. Like in Sydney, Australia, where a 10-15% property price drop sounds a lot but is hardly catastrophic when compared with the its rise over the past 10 years or more.

    • Rory
      Jan 24, 2019 at 8:46 am

      Good thought. Of course that’ll be little consolation for those who bought 2-4 years ago, but essential data for forecasting next leg down.

    • Jan 24, 2019 at 9:13 am

      No one is worried about buyers who bought 100 years ago. But if you bought in recent years, you’re likely underwater in those markets. Defaults happen at the margin. In the US mortgage crisis, only about 65% of the homes even carried a mortgage, and of those, only about 10% defaulted. It was really a small percentage of the homes out there. The majority of these defaults were purchases or refis of the prior five or so years (from about 2001 forward). And look what it did!

      • Iamafan
        Jan 24, 2019 at 1:36 pm

        I think we have to make a distinction here. The London issue you are discussing is about (falling NAV) price of investments in flats whereas the 2008 crisis were about mortgages not being paid (since house prices fell). I don’t think these companies are reporting failed loans, yet.

        • Jan 24, 2019 at 3:52 pm

          Thank you been trying to wrap my head around this, it’s a far more insidious form of devaluation don’t you think? Suppose this extended to other industries? It’s a whiff of deflation isn’t it?

  6. C
    Jan 24, 2019 at 2:36 am

    Which reminds me. During (one of) the last recession(s), after “investors” pulled money out of the stock market, they “had to” put their money somewhere, and that was real estate. Which then had *its* bubble and crashed. Good time to buy a house in the SF Bay Area, though — prices ran up again in three years.

  7. fjcruiserdxb
    Jan 24, 2019 at 3:27 am

    In an article yesterday I read that London renters spend an average of 41% of their income on rent. I do not think it even includes bills. Insane.

    • MD
      Jan 24, 2019 at 11:54 am

      Yup extraction of economic rent of one form or another is the UK’s main business now we have de-industrialised even more than the USA (post-WWII the UK has de-industrialised further than any other G8 country).

      Third-world status ahoy!

  8. Iamafan
    Jan 24, 2019 at 5:07 am

    There’s one prevailing theme in Wolf’s recent articles – it is collapse. The massive asset price buildup in the past decade fueled by low interest debt can longer be sustained. We’re just waiting for the cieling to fall down due to disrepair. The kids can buy them cheaper later as a fixer upper.

    • Unamused
      Jan 24, 2019 at 10:03 am

      =>There’s one prevailing theme in Wolf’s recent articles – it is collapse.

      Not exactly.

      If you look carefully you see that the prevailing theme is bad management, and that does not always result in collapse. It does, however, very reliably victimize nearly the entire human population, putting rather a lot of it in a more or less constant state of unnecessary misery.

      This is because the world is run by people who are obviously mad, driven by fear and greed and ambition. Human social and political dynamics guarantee that it will always be so, and try as you might you really can’t do very much about it. History shows that even the most well-intentioned and heroic efforts to make the world a better place have resulted in solutions which have proven to be inadequate and temporary at best, regardless of the costs. The world does not want to become a better place, and it will fight you if you try. Madness always prevails. Always. Wonko the Sane put the world into an asylum in the hope it might get better someday, but that hope is very much in vain. The madness is incurable and terminal.

      It is sometimes said, by myself, for example, that no matter how bad things may be, they can always get worse. But that is hyperbole and is not actually true. There are definite limits. The very worse that can happen is that the human population goes to zero in some variety of abominable catastrophe. It really can’t go negative, and after that, things actually start to get better. Not that you have any chance of seeing it, of course.

      I suggest that your most reasonable strategy is to stoically accept the fact that you will inevitably lose absolutely everything, to cope with the madness of the world as you please, and try to enjoy your life as best you can. All things must pass. In the meantime, try to do something worthwhile. Let go of all you fear to lose. It will all be over soon.

      • Colorado Kid
        Jan 24, 2019 at 11:11 am

        Geologists (of which I’m one) estimate a million people have died in volcanic events since recorded history. But people still build and live on the fertile volcanic plains around volcanoes.

        We humans seem to live our lives in a combination of fear, denial, euphoria, and depression. If you look at things in geologic time, nothing much matters, and Unamused’s astute comment above is excellent advice.

        • Lou Mannheim
          Jan 24, 2019 at 2:34 pm

          That reminds me of a line from a Jim Jefferies show, where he makes a distinction between “saving the planet,” and “saving ourselves.” The world will be just fine without us, and in fact will be happy to see us go. And once we’re gone…

          “Right! I’m gonna do dinosaurs again!”

        • Iamafan
          Jan 24, 2019 at 2:53 pm

          I am a little bit confused about your suggestion.
          London Central Portfolio Property Fund is an investment fund which buys prime properties in London. It had a very bad year causing it’s price to drop 20%.
          Considering it was selling for about £60,000 to retirees who want a piece of Prime London stuff, I can only surmise what a large drop like that would mean for folks who are old.

          It’s not the end of the world for them, but I bet it’s very painful. Full disclosure I am retiree myself and I just recovered from a bad stroke. So I have some idea what it means to almost lose it. You’ll need all the money you can get.

      • Convex Buccaneer
        Jan 25, 2019 at 12:52 am

        Memoirs of a Superfluous Man – Albert J Nock

        • Erle
          Jan 25, 2019 at 8:52 pm

          Back when “Memoirs” was republished by FEE I bought a box of them to give away. It was a substantial amount for me at the time.
          I never got a comment from a single recipient even when I asked.
          I still buy books to give away but it is pretty much the same situation where no one reads them.

  9. Gershon
    Jan 24, 2019 at 8:43 am

    Who knew that fake valuations created by hot-money flows of funny-money central bank “stimulus” would end up crashing back to earth once the financial crack cocaine stopped flowing to the debt junkies.

    • MD
      Jan 24, 2019 at 11:50 am

      Foreign speculators seeking to evade taxes and/or launder ill-gotten gains are the big driver for London – or the Chinese ‘nouveau riche’ (who of course may also fall into either of the two previous categories).

  10. IanCad
    Jan 24, 2019 at 9:56 am

    There will be wailing and gnashing of teeth. Ownership of property tends to make one mad.
    These guys have a bad case of unreality:

    https://www.theguardian.com/business/2018/oct/31/brutalist-market-flats-at-londons-centre-point-taken-off-market

    I have a dear relative in Seattle who, when I raised concerns over their recent purchase of a house, declared confidently that there is so much building going on that prices can only increase!!

    • Lou Mannheim
      Jan 24, 2019 at 2:36 pm

      Guessing Economics wasn’t part of the core curriculum? :)

      • qt
        Jan 24, 2019 at 5:21 pm

        Supply and Demand. When Supply go up by 100% so does prices!

        • char
          Jan 25, 2019 at 9:34 pm

          With real-estate i would say that this is correct in a 101 kind of way.

  11. RD Blakeslee
    Jan 24, 2019 at 10:18 am

    “No one is worried about buyers who bought 100 years ago … In the US mortgage crisis, only about 65% of the homes even carried a mortgage…”

    The price my paid-for house would bring in this-or-that year over the past 41 years has never been of interest to me.

    But I was enmeshed in a troublesome house price problem once. In 2009, my wife-to-be came to live with me and we put her her house on the market. It sold … in 2012!

  12. Jan 24, 2019 at 10:55 am

    So is this like I bought a car from GM for 20K, GM got in trouble and started selling the same car for 10k? Are there ramifications for say Blackrock in the US?

    • nick kelly
      Jan 24, 2019 at 12:00 pm

      Very unlikely because GM wouldn’t build the car for K 10.

      Massive price declines occur when the stranded asset already exists.

      But something this like happened to a GM car quite a while ago: the Iraqi Malibu. (I think it was Malibu j

      Long before the Iraq ‘wars’ some entity in Iraq (gov?) ordered thousands of Malibus.
      They were built and then shipment was refused.
      Can’t remember why, no AC perhaps.

      Not sure why GM couldn’t cover up the refusal and just offer them as usual.
      Possibly they had been registered and were legally second- hand even with zero miles. Or it just leaked out.

      Anyway, GM unloaded them very cheaply. But they already existed so GM wasn’t losing any more money, and wouldn’t have built them for that price.

      • Joe
        Jan 24, 2019 at 6:31 pm

        I remember.,this was about 1979,Iraq -Iran war time and US sanctions blocked the sale-Talk about deja-vu,but the reason they sold cheap-they were all ordered as standard transmission models,but the US market was only for automatics-I remember wishing I had the mone to buy one,but alas was a very young and not wealthy man then

  13. MD
    Jan 24, 2019 at 11:43 am

    “The letter blamed a mix of Brexit, political uncertainty, “two General Elections,” and a slew of new taxes focused on expensive residential properties — such as those in PCL — particularly “the top end buy-to-let and international investor sectors.” And all these are factors that “affect investor confidence.””

    They’ve of course neatly overlooked the main reason – the sources of funds pumped into London RE may now be investigated under the auspices of the Criminal Finances Bill of 2016. Repo may result.

    Cor blimey, guv’nor! Who’d have though that a real estate bubble fuelled by people like this:

    https://www.theguardian.com/uk-news/2018/dec/21/azerbaijan-leaders-daughters-tried-to-buy-60m-london-home-with-offshore-funds

    Just the neat £60 mill…drop in the embezzled bucket.

  14. MD
    Jan 24, 2019 at 11:45 am

    Above was meant to read:

    “Cor blimey, guv’nor! Who’d have though that a real estate bubble fuelled by people like this could ever end in tears:”

    Bleedin’ ‘ell I sure am a thick lummox.

  15. raxadian
    Jan 24, 2019 at 11:56 am

    So, they are praying for Brexit to not happen?

    • MD
      Jan 24, 2019 at 11:59 am

      Won’t make a blind bit of difference – see my comment above. Speculators care not one hoot whether the UK is in our out of the EU – they just want fast, no-questions-asked returns in a ‘minimal oversight’ environment.The bursting of a rampant speculative bubble is always the same.

      London 2018 = Tokyo 1989.

      • Leser
        Jan 25, 2019 at 5:03 am

        Yes, that’s exactly true. RE bubbles indicate more how adeptly dirty money is being courted rather than actual demand by clean money.

        Chinese money is still driving the margin in London and there seems to be a shift noticeable in the type of Chinese students, a useful indicator of this source: the current crop seems more low-key and carries a concerned expression on the face similar to other students, whereas 2-3 years ago the Chinese students were clad from top to bottom in designer clothes and strikingly carefree. Now they rather rent serviced apartments (still often paying cash upfront for 6-12 months), whereas previously the apartment would be bought by the parents to facilitate student life.

  16. hotairmail
    Jan 24, 2019 at 12:01 pm

    The even funnier thing is that overseas buyers (‘investors’) have largely been treated as ‘cash’ as the money has come from overseas so no alarm bells have been going off about financial stability according to the BoE reporting. But we know for a fact that the overseas arms of UK and foreign finance providers have been trailing the property developers around the Far East roadshows. So….who is reporting those losses if and when they come?

    Everything looks rosey in the garden according to the BoE, their ‘cash’ transactions are making the overall lending averages they have sight of look just hunky dory. And when the time comes….how could they possibly have known?

    • MD
      Jan 24, 2019 at 12:08 pm

      Lessons will be learned about ‘mistakes’ made, that’s for sure.

      They always are.

      The answer of course after the implosion will be lighter-touch regulation and tax breaks for the wealthy.

      It always is.

      • Jan 24, 2019 at 12:48 pm

        Lessons are never learned in these scenarios. You will always have speculative bubbles followed by crashes – it’s classic heads-i-win-tails-you-lose capitalism.
        Those who gain from the rise are often different than those hit by the crash. One great thing about leveraged speculation is that a fund owner can take out the upside during the climb and then default the corporate holding vehicle to make the lender or debt investors eat the downside.

        • MD
          Jan 25, 2019 at 10:57 am

          I know…I was attempting to be sarcastic/ironic.

          The only thing we appear to learn from history is that we don’t learn from history [particularly when there’s oodles of cash in the mix].

  17. wkevinw
    Jan 24, 2019 at 2:33 pm

    The only realistic way to evaluate investment results is over at least one complete cycle, e.g. from price trough to price trough or peak to peak. (how much does the investment system retain for at least one cycle!). More than one cycle can take decades.

    If you really torture the public data there are only a few stock market investment strategies (“factors”, variables) that correlate to healthy retained earnings over a complete cycle.

    I assume real estate is similar.

    The other strategy, that most of the “famous” investors you see in the media use, is a short term one: mixture of luck and high beta/volatility investment. If you can do this and sell fast, then you can retain some earnings. This is pure speculation, which is fine, but it’s good to understand this. Proof: look at what hedge funds are very good at: liquidating.

    You don’t see all that many really elderly and extremely successful investors in the media. There aren’t many. Virtually all make market returns or less over ~2 complete cycles.

  18. Iamafan
    Jan 24, 2019 at 6:31 pm

    To appreciate this better, you really need to real Al Rayan bank’s letter here:

    The pdf document speaks volumes of the hardship occurring in London (real estate). Those invested in REITs or CRE funds (etfs) here should get an idea about how their underlying assets are probably not worth what’s in the books. The pdf is worth a read (if you really want to understand what’s going on).

    • Jan 24, 2019 at 6:56 pm

      I deleted the awfully huge Google search link. The original PDF is linked in the article. It was filed with the TISE. And that’s where it is.

  19. Jon W
    Jan 25, 2019 at 5:37 am

    I live in central London. London is a really complicated market but most of the issues with these flats have been caused by policy changes. As for the supply/demand thing, that hasn’t been important for at least five years. There has been a surplus of 2bed luxuries for that whole time but they just sit empty until someone pays the asking price.

    The main issue in the last two years is that the government has effectively shutdown all the schemes that were being used to avoid stamp duty (~5%), capital gains tax (28%) and inheritance tax (40%). Many brits were using offshore trusts/companies to invest in these properties, but this does not shield them from the taxes anymore. Further, many foreign buyers were not subject to these taxes in the first place, but this has now been changed.

    Every loop hole has been closed. A loan made (or collateral offered) in a foreign jurisdiction that is subsequently used to purchase a UK residential property is itself subject to inheritance tax. Properties held in a company structure are now subject to an annual tax (~0.5%). Properties held in trusts are subject to a 6% exit charge and 6% charge on every 10 year anniversary.

    Before 2016 it was trivially easy for a foreign buyer to avoid all these taxes (and only a little harder for a British buyer), so this has been quite some change.

    However, prices will only crash if a Corbyn government gets into power and imposes penalties for leaving flats empty. That is extremely likely to happen if they come to power. If the stock of empty luxury flats ever made it into the market all at once, there would be a serious correction alright. Outside of a Corbyn government institutional owners will just store up more empties and wait it out (London population will continue to grow for some time yet).

    • MD
      Jan 25, 2019 at 11:06 am

      No speculator ‘waits out’ a bursting bubble – they liquidate and move on to the next opportunity for fast returns.

      Tokyo has 14 million inhabitants crammed into tiny spaces – didn’t help its property market one jot 30 years ago, despite being at the time a bigger economy than the UK’s.

      Expect minimum 50% reductions in London RE – irrespective of political party in power.

  20. Rob
    Jan 28, 2019 at 9:11 am

    London as an economy is bust. Its not economic for even people with £350k household incomes to live here through their lives as the houses are small, you have to live in a good area, pressure to pay for private school etc. Meanwhile if you move out you have a 3 hour commute. As for people on normal incomes… If you are operating a normal business it makes no sense to locate here.

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