Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

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Monday, 26 August 2013

5 things that I learned in London

I was fortunate enough to share a coffee last week with the Chairman of the real estate division from one of Europe's most established banks. I'm always interested to hear what is happening in London property to see what the future might or might not hold for some less developed real estate markets such as in Australia's main cities.

1 - A global city

London has changed so much since I worked there in the 1990s. 

Not only is the city a gleaming financial centre, London is also now a truly global and multicultural - and cultural - city. With a population of more than 8.3 million (potentially significantly higher depending upon where you prefer to draw the boundaries) more than 300 languages spoken within the city.

Whatever you now seek from life, London now offers.

2 - Premium sector has outperformed due to foreign capital 

The biggest real estate story in recent years has been one of foreign capital inflating of the premium sector of the market. 

In spite of talks of 'headwinds' through the financial crisis, the premium sector has continued an astonishing run, prices increasing by well over 150% since that time.

With very few restrictions of foreign capital flows in today's technological world, prices have largely been forced higher by international investors looking for an asset class in which to park their capital, at times almost regardless of yield.

3 - The path forward will be different - different boroughs to outperform

Trees don't grow to the sky and it seems likely that least an element of mean reversion is likely to impact the premium London market at some as yet uncertain point in the future.

Instead investors, may sometimes be wiser to seek out traditional working class London boroughs, but with a key focus on those located within comfortable commuting distance of the City and the West End.

Suburbs that were once seen as less desirable for professionals and middle classes such as Shoreditch, Whitechapel and Bethnal Green are becoming increasing popular for buyers and renters alike. To the north of the City, opportunities will also exist.

4 - Construction inadequate

On the face of it, London's construction future seems exciting with the skyline now dominated by breathtaking new developments, christened with an array of amusing nicknames by ever-witty cockneys: the gerkin, the walkie-talkie, the cheese-grater.

But the real story back at ground level is more concerning. 

London has a chronic shortage of affordable residential dwellings both for buying and renting and building levels must be accelerated in order to cope.

The city risks a genuine 'brain drain' as talented professionals opt to move elsewhere. 

The city needs approximately 1 million more homes by 2031. The colourful and ubiquitous Mayor, Boris Johnson, announced last month that he is working "flat out" to keep up with the demand but warned that construction activity must speed up dramatically from its current levels.

5 - Reverse yield gap to drive market for 2-3 years

Finally, cheap credit will be a key driver of the market dynamics over the next 2-3 years.

The new Bank of England chief Mark Carney hinted that interest rates could remain at the record low level of 0.5% for a further three years. While three years at the effective rock bottom may not eventuate in full, mortgage debt does seem likely to be very cheap for the foreseeable future.

Incredibly, buy-to-investors with the requisite deposit can contemplate mortgages from an unprecedented low of just 1.49%pa.

This product may appear to be something of a gimmick, but when buy-to-let investors can also consider fixing for an entire 10 years at a mortgage rate owning a '3-handle' many are beginning to see this as something of a no-brainer.

The outcome for investors is what we used to call in the old money a "reverse yield gap" - rental yields can be considerably higher than the cost of debt and thus mortgages are easily serviced with a minimum of fuss.

This dynamic is likely to see the property market showing gains in both London and the south-east of England in the coming years.

And for Australia?

There are some clear parallels with Australia here.

Adequate and appropriate dwelling construction is clearly an issue for some locations, particularly with Australia's population continuing to grow at a rate of above 1.5% per annum or close to 400,000 persons per year.

Similarly, previously unpopular suburbs located close to key employment hubs and capital city centres will gradually become more popular as affordability issues bite. Just as in London, though, few will want to venture too far from where the action is.

The role of foreign investment capital is debated in Australia. Clearly many new developments are sold very quickly to investors from Asia as highlighted by Meriton's Harrgy Triguboff when he stated that 70% of his units were sold to Chinese investors. However, established dwellings should under normal circumstances be bought by Australian residents.

As for the yield gap, Australia's mortgage rates have not yet fallen to anything like the same level as currently being seen in Britain, although there have been signs that banks are competing for business with the most recent interest rate cut being passed on in full by some lenders.

The official cash rate in Australia at 2.50% remains two full percentage points higher than the level set by the Bank of England, although with Australian economic growth slowing and unemployment threatening to tick up towards 6%, it is deemed likely by futures markets that there will be a further cut in this interest rate cycle.