16
Apr
2015

London And Global Property Bubble Fears

– “Renewed global property bubble” warned of by Financial Times
– Research company MSCI says returns on property last year averaged 9.9% globally
– “Best performance” since 2007 and fifth consecutive annual rise
– Rents have not increased in line with asset appreciation
– Speculators moving into more risky peripheral markets around the major hubs like London
– Demand being driven by lack of yield and ultra loose monetary policies
– Bubble is now fully dependent on record low interest rates in the U.S. and EU continuing …
– Bubble will burst as all bubbles do … question is not if but when …

Fears of a renewed global property bubble are rising as prices hit records last seen before the financial crisis.

New data shows real-estate returns in the UK surging 17.9% in 2014 and London returns of over 20% and global returns averaging 9.9%, the Financial Times has warned of a “renewed global property bubble”.

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Drawing from a report by research company MSCI, the Financial Times‘s Kate Allen explains that the returns were driven primarily by “rapid capital value appreciation” saying it was “the best performance since 2007 and the fifth consecutive year of increasing returns” and driven by “frenzied buying.”

However, rents have not risen by the same extent. In the U.S. – where property investments saw returns of 11.5% – “investors’ returns from rental income are now lower than before 2008, when a crash in massively overleveraged property triggered an international banking slump.”

MSCI question the sustainability of the current trend. Rental revenue as a proportion of property values in “most global markets are at or close to historic low [yield] levels.”

The MSCI report states that leveraged capital is now flowing into the riskier peripheral property markets around some of the very highly priced U.S. cities and London and also into the peripheral European nations.

“In the past year investment cash has poured into continental Europe — particularly the periphery” according to MSCI. Dublin property prices went parabolic and saw record returns of 44.7%

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“People are moving up the risk curve into riskier locations and taking on higher levels of debt and more challenging development activity,” says Peter Hobbs from MSCI.

The demand is being driven by a lack of high-yielding investment opportunities elsewhere. Against  “exceptionally low” bond yields and equity markets returning 10.4% on average globally, real estate companies generated returns of 19.5%.

MSCI suggest that the global property market is now dependent on the ultra-loose policies of the ECB and the Fed. “QE is sucking in real estate capital because debt finance is so cheap,” says Hobbs.

He adds “If the US keeps doing what it has been doing for the past five years and Europe catches up, then we are set for another strong year [in 2015].”

This should set alarm bells ringing. The recent boom in high-quality residential property was initially driven primarily by Gulf state oligarchs and high-net-worth Russian and Chinese investors looking to park cash in reasonably safe assets.

We warned back in January 2014 about the developing London property bubble and warned that the bubble would burst and then cautioned people should prepare for property prices to fall globally in January of this year.

Back in December we wrote with regard to London’s “super-prime” market,

“Western sanctions on Russia have led to a shuddering halt to Russian money entering the UK.  Since Xi Jinping came to power in China in November 2012 there has been a crack-down on corruption in China and the amount of Chinese cash being funnelled through tax-havens and into London property has been greatly reduced. The Fed’s QE has come to an end, for now at least, so U.S. sources of capital have waned.”

“Now the plummeting oil price is leading to a drop in demand from wealthy Middle Eastern elites. Many Gulf States are having difficulty financing their social programs due to the very low price of oil. Control over their countries restless populations is becoming more tenuous. So providing “bread and circuses” is a higher priority than pet investment projects in the UK.”

We cautioned that this would have consequences for the UK economy and sterling.

On Tuesday, Bloomberg confirmed that the Gulf States were indeed reigning in their overseas investments. Quoting BNP Paribas it stated,

“This is the first time in 20 years that OPEC nations will be sucking liquidity out of the market rather than adding to it through investments,” due to the depressed price of oil.

Investment into many property markets globally is now being driven by speculative leveraged buying based on near zero percent interest rate policies.

The primary driver of these markets is leverage and floods of cheap money being provided by the ECB, the BOJ, BOE and the Fed. It, once again, poses a major risk to the global financial and banking system.

A “soft landing” is unlikely and an allocation to safe haven gold will protect investors from the bursting of this latest bubble.

MARKET UPDATE

Today’s AM LBMA Gold Price was USD 1,204.60, EUR 1,131.19 and GBP 811.40 per ounce.
Yesterday’s AM LBMA Gold Price was USD 1,189.85, EUR 1,123.56 and GBP 808.58 per ounce.

Gold climbed 0.84 percent or $10.00 and closed at $1,202.50 an ounce on yesterday, while silver rose 0.74 percent or $0.12 closing at $16.32 an ounce.

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In  Singapore gold prices climbed 0.3 percent to $1,204.76 an ounce near the end of day trading.

Gold continues upward for its second session and has risen above $1,200 an ounce to near $1,209 an ounce after weak U.S. producer data and a soft U.S. dollar. U.S. economic data out yesterday saw a drop for industrial output in March with its largest fall in two and a half years.

FOMC members Dennis Lockhart and Stanley Fischer are scheduled to speak this evening.Expect more mixed messages from the Fed.

With half of the month gone, sales of gold American Eagle bullion coins by the U.S. Mint are on track to fall well short of both last April’s total, and the final figure for March according to Reuters. This month the Mint has sold just 10,000 ounces of gold Eagles, versus 46,500 ounces in March and 38,500 ounces in April 2014. Some 1.4185 million ounces of silver American Eagles have been sold, meanwhile, against 3.569 million ounces last April and 3.519 million ounces last month.

In late morning European trading gold is at $1,209.40 an ounce  or up 0.6 percent. Silver is at $16.56 an ounce or up 1 percent, while platinum is also up 0.34 percent at $1,167.89 an ounce .


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Mark OByrne