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281: UK property update


08-15-2009

PropertyInvesting.Net logoPropertyInvesting.net team

 

Economies on the mend? News the economies of USA, UK, France and Germany are on the mend have been regularly published in the last two weeks. It’s not really surprising in view of record low interest rates, oil prices as low as $38/bbl (albeit briefly) and the massive printing of money, borrowing from eastern nations and a global co-ordinated approach to get economies moving. Property prices in the UK seem to have bottomed out around about March 2009 (we expected this by August 2009, so in our vew it came earlier than expected). Most indicators suggest prices have risen about 3-5% from their lows in late winter - particularly in London.  Despite unemployment continproperty-investor-relaxinguing to move higher, the massive reduction in borrowing costs (almost halving in a year) has stimulated the property market. Yes, banks are very tight with lending – they are hoarding the cash raised from the government and borrowing should be more plentiful and at more competitive rates, but all the other stimuli seems to have been enough so far to stabilize the market and lead to some modest price increases in the more wealthy areas (London, southern England).

 

Outlook:  So what is the outlook. We believe it very much depends on oil prices. You might say to yourself, what’s this got to do with it? To which we point you to the Special Reports on the subject we have prepared on the last five years for detailed analysis and comment.

 

 

But in summary

 

Oil price increase = inflation increase = interest rate increase = house price decline

 

The ideal conditions are when oil is plentiful, oil prices are low, then inflation (food, services, transportation, energy costs) is low, interest rates are therefore able to be set low, borrowing costs are low and thence people are able to borrow more money at lower rates to purchase a (restricted) quantity of property. Low oil prices in oil importing nations keeps oil import bills low, deficits low, and stimulates growth, GDP increase and asset (read property) prices.

 

oil-peak-James-Rickman-origin$50 Oil:  If oil drops back $50/bbl, this will stimulate the western economies and lead to lower interest rates, economic stability and rising house prices. The only concern would be if oil prices crashed to say $30/bbl this would imply a major prolonged recession or depression with deflation starting in many countries. Oil prices at $50-$70/bbl is probably best for UK property.

 

$70 Oil:  Oil has now risen back to $70/bbl – at these levels – we give it an amber danger signal. $70/bbl will start to stifle economic recovery – likely to be felt late in 2009. But it probably wont have a significant or noticeable impact at such price levels.

 

$100 Oil: At $100/bbl – we enter the danger area – red warning by our team – GDP ghigh-gas-prices-pump-shockrowth would be suppressed, inflation would start to become a problem, interest rates would rise and within a year, property prices would start to decline again.

 

$150 Oil:  At $150/bbl – at such price levels, we would get what we had before – an asset bubble likely bursting with stock prices and property prices starting to drop significantly and another period of recession in the western world kicking-in. Remember, at $150/bbl, the US oil import bill is about $0.75 Trillion in a year – how can a country afford to see so much money leave the country? That’s a whopping $2,500 per person per annum. The UK would be less badly affected because it only imports about 300,000 bbls/day – so it’s overall annual oil import bill would be far less per person – at $16 Billion or $273/person per year – about ten times less than a US citizen.

 

Spain, Italy Importers: Italy and Spain will be clobbered once more. France would suffer as would Germany. Norway, Canada and Russia would be the only winners from western countries. The UK would suffer far less than many countries because it currently only imports about 20% of its oil and gas needs – albeit this will increase as oil and gas production depletes by ca. 5% per annum moving forward from it’s peak oil in 1999 - when the UK was the fifth biggest oil producer in the world.

 

So in summary, for all property investors, do not think these current - in our view benign conditions will stay for long. As inflation starts kicking in early 2010, expect interest rates to start moving up – possibly quite quickly. Yields will drop, property prices will then likely stagnate again or could drop – IF oil prices rise above $100/bbl. Also ask yourself, do yo believe the current UK and US governments are able to control the inflationary mix that was started end 2008? And do they have a good control on factors such as oil prices and energy supply-demand? If you are skeptical, watch out and consider hedging with oil and gas investments.  

 

Which way oil prices then?  So the big question is – do we think oil prices will rise above $100/bbl in the next 18 months to cause this problem. Regrettably the answer is – yes. The reason being that Peak Oil we believe was July 2008 and we are now on a bumpy plateau before worrying global production declines kicks in after 2015. Western oil demand has dropped significant, but China oil imports have increase 42% in the last year. This happened during a western world recession and despite the Beijing Olympics ending. Chinas oil demand will sky-rocket as more people buy more cars.

 

An end to low energy prices – inflation to rear it’s ugly head: Chamberlayne Road Kensal Rise-We believe the end of low prices energy has arrived – for good. Expect oil, gas, coal and metals prices to rise sharply as the economic recovery gains pace. But it will also temper any big GDP growth in oil commodities importing nations. The best performing property markets will be those expose to commodities. For UK citizens who want to invest at home, we rank London and Aberdeen as the highest for potential property price growth as energy prices increase. Travel will become more expensive, so far flung commuter towns reliant on car transport from home to work will suffer disproportionately.

 

What About So Called Demand Destruction?  There seems to be this very western-centric view that oil demand will continue to decline because we have experienced some kind of wake-up call or mini-shock when oil price rose to $147/bbl. And we'll switch to other fuel sources so the issue will go away. We just don't buy this argument. There are some realistic reasons for this:

  1. Chinese oil demand will skyrocket as the number of cars rised from the current 25 million to ca. 525 million by the year 2050 - yes, that's half a billion cars. Read our Special Report for more details if you are skepticalchina-super-rich-cartier
  2. Most of the world either does not know about or does not care about "Peak Oil" - it's not even on the radar screen. It's consider a rather intellectual and fringe argument - most people remain skeptical because talk of "Peak Oil" has been around for many years, and oil prices have spiked but then crashed. But we believe this time it is very different - because we have modelled it (see Special Reports listed above). Talk of "Peak Oil" amongst interested nd/or knowledgable people in western countries will NOT stop almost person on the planet from wanting to own and use a car (will it stop you using a car?). If you visit Africa, India, China, Vietnam, Brazil - you will find people wanting cars. They do not want to ride bicycles or walk.
  3. Indeed, oil demand is dropping in some western countries, but this is nothing new. In fact, oil demand in Germany and Japan has been declining about 2% per annum for the last ten years. But so many countries have oil consumption that is rising sharply means the countries that use less oil will only make a small dent into over global oil demand.
  4. The population of the world is exploding - many countries are only just starting to industrialise. The Middle East is a classic example - as the population rises by ca. 5% per annum, and people get air conditioning, drive to shops, visit ski slopes in Dubai and purchase consumer goods, oil demand is and will sky-rocket, leading ultimately to less oil exports (e.g. each visitor to the ski slope in Dubai uses 1 barrel of oil per visit, a gigantic quantity of energy for little gain). First and foremost, Middle East countries will need the oil for their own usage first, then consider exporting any remaining oil. They will not be burning coal, or using wind or solar - instead, they will burn oil and gas to generation electricity and power desalination plants. As an example, Iran will likely start importing oil after 2018 despite having the tenth largest oil reserves in the world. All the news about major oil finds in Brazil is also interesting - we calculate Brazil will never export any oil - they will still need to import oil as their massive country continues to industralise.

Yes, technological improvements in oil and gas exploration, development and production will help delay the decline, but when it sets in, in earnest, no amount of investment will stop it because the countries with the bulk of the remaining reserves rest in the hands of National Oil Companies whose Governments will be more interested in investment in social projects rather then boosting short term oil production. Up until 2015 the picture is worrying. After 2015 it turns bleak (see chart below). Projects are delayed, financing is difficult and skills shortages exist - most graduates prefer media and finance rather than petroleum engineering so skills shortages oil/gas business will continue. Environmental constraint, delays and restrictions also slow projects - even when they are completed after ten years, they can be taken by host governments.  

 

Top electric rail hedges: In the UK it's best to stick close to good high speed electric railway lines – examples of such commuter towns with good fast electric links to London are:

 Spain Village

  • Reading - Hanford
  • Stratford-Ebbsfleet-Gravesend-Dartford-Ashford
  • Woking – Guildford - Hook
  • Barking, Ilford, Romford
  • Luton - Bedford
  • Watford

 

Death of the Budget Airlines to Obscure Regional Airports: A further warning is – the days of low priced budget airline travel we believe are nearing an end. Many budget airlines used small regional airports with low landing taxes to ferry tourists in and out. As airline fuel prices skyrocket, these airline will probably either curtail many of these destinations and/or go under. In any case, even if the flights are retained, they will be costly and be exposed to increases in aviation taxes because of CO2 emissions concerns. Hence, we would be the last peoplemontpellier-france to advise on purchasing countryside property close to one of these small airports with in-frequent flights. These areas have been opened up by low cost budget airline, but can equally be closed down by them as well – a property investment risk you will have no control over. Add to this the realization of how much fuel is used to move a person say 300 miles by plane and it’s impact on CO2 emissions, we seriously question how many more years frequent airline travel can continue with Peak Oil now behind us. It was great fun while it lasted – and all those weekend trips to Pau and Gdansk for £50 round trip were exciting, but the world will probably get real shortly and start to tax aviation fuel like they do normal car and truck fuel. As for the Seychelles and Maldives, whether the super-rich can keep these destinations active is a key question. Cape Town in South Africa is also exposed.   

 

If you do select to purchase holiday property abroad, better off to research areas with outstanding high-speed electric rail lines close by - close to high paid jobs and industry. Examples include Valencia, Barcelona, Malaga, Lyon, Paris, Lille, Marseille and Montpellier (we like Montpellier - a new young vibrant technology and business hub in the sun). Look to the Eurostar and TGV rail maps for reference.

 

London’s Massive Re-Developments: In the UK we still favour property investment in London or close by. The reasons are:

 

  • Massive infrastructure development in the next ten years
    1. Olympics
    2. East London Rail Line
    3. City Airport expansion
    4. West End redevelopment
    5. City of London commercial development
    6. Canary Wharf londondevelopment
    7. Thames Gateway developments
    8. Eurostar-High Speed One
    9. Crossrail
    10. Dockland Light Railway Expansion
    11. South Bank regeneration  (Nice Elms US Embassy)
    12. Stratford City retail
    13. Croydon regeneration
    14. Westfield White City retail
    15. Ebbsfleeet station-Gravesend
    16. Barking-Romford-Ilford regeneration
    17. Eurostar links to Paris, Brussels, Cologne, Lille
  • As oil prices rise, there will be net inflows of wealth Middle East, African, Russian and Asian oil and mining wealth from super high net worth individuals, banks, companies and investment services - some of the $1 Trillion of oil money will end up in London 
  • Green technology and trading centres
  • Less reliance on public sector jobs than the rest of the UK
  • Good electric rail and tube infra-structure for post Peak Oil era
  • Expanding population – by a further ca. 0.8 million by 2015
  • Financial service global centre
  • Tax haven for international wealthy
  • Tories will likely be in power by mid 2010 – historically, this party tends to stimulate business and cut back on public sector expenditure and lower taxes – this is likely to benefit London and southern England from mid 2010 onwards
  • Best city to invest in as a hedge against high oil prices in the UK (apart from possibly Aberdeen)
  • Decline in £ Sterling has stimulated foreign real estate investment into London 
  • Stock market crash has given another boost to property as a safe heaven
  • Higher income tax at 50% (up from 40% by 4th April 2010) for many Londoners will likely lead to high net worth individuals investing in property that saw a drop from 40% to 18% in capital gains tax April 2008.
  • Lower taxes if the Tories win the next election would likely give a boost to property prices in London – particularly if finances can be sorted out in ca. 3 years time 

 

Piece Hall Halifax Evans Vettori Milan ModelUK regeneration: We did some anecdotal research on regeneration – we do this every day in posting news on regeneration in our TUBE NEWS section. Frankly, we always find it very difficult finding any large regeneration projects in the news outside London. Many of the northern projects seem to be in a "go slow mode" or have even ground to a halt – most likely because of public sector funding problems because of the recession. Some of the best northern and midland regeneration projects are probably:

 

  1. Manchester-Salford
  2. Bradford-SaltaireSaltaire_Salts_Mill
  3. Birmingham city centre
  4. Nottingham and Derby
  5. Newcastle-Gateshead
  6. Halifax

 

But its more difficult to see with high oil prices cities that are more reliant on manufacturing and public sector jobs outperforming London and southern England in the next ten years. Newcastle has 53% of it’s population employed in the public sector – more than Hungary before the collapse of the Soviet Empire – so if government money dries up – likely with both Labour or Tories victories mid 2010, these areas will probably suffer from public sector jobs losses.

 

London Summary:  Meanwhile, there are few projects in London that seem to have been cancelled. Actually, from November 2008 onwards there was a spate of projects being given the green light. We can london-property-prince-charlesonly surmise that the dash to create jobs during the recession has stimulated a flurry of approvals - in part to keep economic momentum going. Jobs are what are required in hard time. When you look at the shear size, scope and quantity of the regeneration projects outlined above, we hope you can understand why we keep on about investing in London property. In he next three years leading up to the London Olympics – it is difficult to envisage that a nice one bedroomed Victorian flat for £140,000 in Stratford (village) will not rise in price. But possibly even safer is a one bedroomed flat in a quiet street in Battersea (close to Chelsea) for say £240,000. Seems a high price, but when you consider that many of the world’s most wealthy people have pied-de-terre within a stone’s throw and massive financial dealings are done every day – it must be one of the safest property investments in Europe. And meanwhile with a significant upside. Starting prices for flat in Chelsea are £500,000, so anywhere huddled close to Chelsea-Kensington-Mayfair should see a benefit on the basis that the wealthy will stay wealthy. If you don't believe they will, it will be counter to hundreds of years of history! 

 

We hope you have found this Special Report interesting. If you have any comments, please contact us on enquiries@propertyinvesting.net

 

 

 

Peak Oil - World Oil Production Consumption

Peak Oil - World Oil Production Consumption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas Pump Prices - are likely to rise in 2010 onwards. But in the UK, because petrol tax is currently 75%of a tankful, if oil price double or rise by 100%, a tankful will (only!) go up by 33%. Whether you can describe this as good news is open to debate!

gas-pump-pretty-lady-usa

 

 

 

 

 

 

 

 

 

 

World Population:  Anyone that thinks oil demand will not rise moving forwards with so many young people in te world wanting cars is, in our opinion, rather unrealistic. Expect oil demand in developed countries to drop slightly, with oil demand in developing countries sky-rocketting after 2010. Price, we believe, will move higher - before they act as the key constraint to demand - at some price higher than $150/bbl.  

world-population

 

 

 

 

 

 

 

 

 

 

 

Oil Bills: Look at these massive oil import bills for the different regions. The Middle East earns a gigantic net $1 Trillion a year at $150/bbl. Much of this is pulled from Japan, USA and China along with western Europe (except Norway, Russia and Canada).

oil-price-cost-deficit-surplus-per-region-propertyinvesting-net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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