Pfwoooor!!

The radio silence has been due to some travel asI am visiting London again, which I enjoy after many years of residence here, both as a student and professionally. Yes, things have changed. The number of servants shining their bosses Rollers in The Boltons continues to increase. The plumbing remains as lame as ever (can someone please explain the English incompetance with manipulating water??). The number of east europeans continues to sky-rocket (though it remains possible to pick-out the Russians from the crowd with ease, and despite the bravado and Putin-sque chest thumping, they remain the butt of jokes from the other east europeans and Hey!, will someone tell those Russian girls to peel the labels off heir sunglasses after they buy them). Road-rage is just prevalent as it was before the congestion charging, and there is non-stop renovation and gentrification work nearly everywhere, despite the seemingly preponderance of "ToLet" signs mushrooming on every peripheral street. And though the builders in the trade remain as they were, the names of companies and their vehicles have gone decidely upmarket, with a cleverness that makes them sound more like a Soho Design Firm, than a contractor. And, since last time I opened the real-estate-porn mags the estate agents shovel through the letter-boxes, prices must have increased another 30% (at least in the Chelsky-Prospekt and surronding postal codes with a few miles of Oligarch ground-zero).

Tired of Hotels, I contracted a short-let in fashionable part of town, through the internet. Now I must admit to being skeptical so I kept a Hotel reservation in my pocket just in case it was fraudulent, and when the agent chap was late and not picking up his phone at the agreed meeting time, I thought I'd been "had". But eventually he showed-up and I breathed a sigh of relief - less about the money than about the possible compromising of my judge of character and bullshit-detection skills. My dealings prior had been by phone, and I reckoned the agent to be a hungry 25 yr old sowf London errand-boy working hard on behalf of landlords. I'd thought he'd show up on scooter to deliver keys, or perhaps a Vauxhall. Wrong!! Property has, to date, apparently been good to lots of folk, and he turns up in a spanking shiny and new black Range Rover. And he was not just the errand boy, as he too is leveraged-up on a portfolio of short-let flats, as are his mates.

But the revealing thing was when I questioned him about yields. "Phfwooor, yields? Ha ha! No one cares about yields". "It's going up baby!". "He continued, "Take this flat here (FYI - a renovated basement studio lipsticked with recessed halogen lights, large flat screen entertainment centre and Franke fittings and Bosch turbowasher (but still shitty plumbing!) went for GBP210 a year-and-a-half ago, now its GBP405! He continued, "My mate, he bought a flat a year ago for 400, had 30k of carry for the year, and 20k of rental income and flipped it out 12mo later for 550. Yield? Who needs yield when prices are rallying like that??" "Ummm errr yes I interrupted, but, I was here in 1988 and I could swear I remember the secretary's all talking about their real estate triumphs in precisely the same language with exactly the same enthusiasm, but it too ended in tears". "It ain't gonna happen", he chimed. "At least not here. Not now, not to me. Things are different now. We've got Russians coming. It's a unique micro-climate. Everyone wants one. [insert additional reason of choice for denial here] And anyway prices HAVE kept going up, right?" He looked at me for confirmation that I couldn't give.

Anecdotally, over the past few days, there seems to be a whole lot of flats empty & warehoused like that which I seen in my walks. I wonder if they are lereaged, and if so, by how much? I wonder whether the huge scale of gentrification is being undertaken speculatively and with leverage or whether its been comissioned privately, for cash, from LAST year's city bonus. And what would Shiller say about historical values, affordability et.al. after the continued run-ups? I'm not forecasting doom, for the restaurants remain full, and city is bubbling with life and wealth. Perhaps it will continue. But it is worth considering the impacts of deleveraging and US recession upon London Real estate, arguable the BEST asset class amongst its peers. For something that is leveraged, illiquid, with large bid-to-spreads that has doubled in the last year or two, and where lots of inventory is held by the specs for speculation, could just as easily see a quarter to a third taken right off the top, even before margin calls or negative equity kicked in. The rapidity with which residential values have compressed and transactions all but seized-up in some US markets is an awesome sight to behold. And the certainty with which that sees the market at this point in the cycle just smacks of classical overconfidence, and those exposed should, at the very least, take note.