Market Update March 2008
Posted on February 23rd, 2008 in confidence, monolines | No Comments »
Summary
* Credit crunch gets teeth in March 2008
* Investors reliant on one lender increasingly exposed to risk
* Expect sharp rise in financial difficulties for vendors and tenants alike. Highly leveraged tenants should be avoided.
* Rent to own remains excellent prospect due to withdrawal of 95%+ LTV
* Good growth potential available in specific markets - 3+ terraces, universities, hospitals.
* Avoid offplan, 1-2 beds out of town
Introduction
As we all know, the money’s made when you buy. So here’s some insights into how we can buy better over the coming months. In particular where the bargains will be.
There is one major financial development to hit the headlines in March 2008, discussed below.
There are a few developments in the financial markets that one should keep an eye on in March as they will inevitably affect each of our respective long term business plans:
1) Monoline failures - expect serious credit squeeze in March 2008
Few people except those on the inside have ever heard of or even need to have heard of a “monoline”. So what’s the relevance to property?
Over the last decade the global financial market in its complexity has spawned a parallel finance system in response to a greater need for market liquidity. In this grey market, the bullish demands of private equity players have been serviced by monoline insurers such as AMBAC enabling levels of risk previously unforseen.
In recent weeks however these players have become one of the latest to be unravelled by the contagious credit crunch. If Northern Rock was a financial market storm, the failure of the monolines will be one notch up the Beaufort scale.
What does this mean to me as a BTL investor you may wonder? Well, a large number of our mortgages are underwritten by the same parallel financial system. The traditional financial system has not grown sufficiently to enable the market liquidity and risk required to fund some of the transactions we are involved in. In short, when the underwriters are no longer seen as stable entities themselves (ie holding the moniker of an AAA credit rating, their “life blood”) the cost of lending to them will increase.
Impact:
Credit crunch felt across all lending facilities, not just confined to financial sector. Private Equity buy outs that have funded the take over of Boots, Pret A Manger, Aston Martin etc are now on the block due to failure of monolines. Normally of little consequence to property investors but this time round the contagion is significant as it is the same companies undertaking buyouts that are also underwriting our loans.
Mid term signs indicate increasing pressures on non-standard property lenders due to monoline failures. In short, BM MX et al will take a decision to withdraw their riskier portfolio offerings or significantly increase lending criteria and charges.
Outlook:
* Expect LIBOR to remain high and lending charges to increase in near future despite short term falls in BoE rate.
* Investors should seriously consider complimentary options in accessing credit. A business model reliant on one lender alone remains high risk.
* Your average Joe will have less access to refinance their debt - whether that be remortgage or unsecured loans so the number of vendor/clients in financial difficulty will increase sharply during 2008.
2) Lenders further tighten up residential mortgage criteria - luxury flats, offplans, 1-2 beds out of town to fall significantly in value
Lenders move from 95% to 90% LTV and axing 100%+ LTV product ranges
Impact:
First time buyers priced out of market. Ultimately good news for BTL as rental demand will continue to grow disproportionately to supply.
Outlook:
* Excellent for rent-to-own lease options.
* Expect valuations to hold up in 3+ bedroom properties primed for sharers (eg your standard 3 bed terrace) as opposed to 1-2 bedroom luxury flats or those away from direct transport links.
* Capital growth in the latter will be negative.
* Relatively recession-proof markets are those that have a high rental:owner ratio particularly at the lower end - e.g. university towns, areas near hospitals etc.
