Liquidity and Property, part 1

Let’s try to focus more on this liquidity issue that we’ve been discussing on and off over the last few months. The liquidity surfeit that all markets have enjoyed over the last few years, why that will change and what the consequences of that are likely to be?
Let’s look at UK property which has been rampant over there during the easy monetary conditions - for the past 5 years interest rates have been exceptionally low and lending extremely easy to arrange. Individual buyers have been easily able to change properties, acquire investment properties and in some cases even acquire second/holiday homes. Developers have been easily able to launch new projects, virtually willy-nilly. Money supply (M4) has seen a consequential rapid growth to reach a 12-year high. It is likely, of course, that increases in the quantity of money are also likely to be contributing to asset price growth. As Milan Khatri, the chief economist at the Royal Institution of Chartered Surveyors, said last year: “Low interest rates have been the primary fuel for a surge in property demand, though by the end of 2006 these will rise.”
Let’s look at speculative development - a survey by de Montfort University, in Leicester, England, has shown that in 2005 there was £23 billion of development finance out of a total market size of property lending in the UK thought to be between £164 billion and £175 billion. Six years earlier at the turn of the millennium, there was only £9 billion of development finance. In that year, £3 billion was for residential development for sale, and £6 billion was for fully pre-let commercial real estate development - i.e. there was nothing whatsoever for speculative commercial real estate development.
Though this category hovered between zero and £3 billion for the five years up to 2004, it shot forward to £5 billion in 2005. By May 2006, The Times newspaper of London said of this news that “banks have rapidly stepped up their exposure to speculative development finance, from virtually nothing five years ago to £5 billion at the end of 2005 ... Lending to speculative commercial developments, where no business tenants have been signed up in advance to rent the building, is regarded as risky. In the early 1990s, excessive bank lending to speculative projects came unstuck when the economy crashed and developers could not repay their loans ... the rapid increase in lending to these (speculative) projects is beginning to cause concern among some property analysts, who fear that banks should be more careful not to repeat past mistakes.”
The mentality of development is dictated by underlying condition - a typical property boom feeds on itself becoming a race to borrow, buy, build and sell. Transactional justifications become ever weaker and deals conclude that logically should never have been done. Individual and corporate borrowers overstretch, banks distort their lending criteria beyond what is appropriate and margins everywhere become totally unsustainable. The assumption that booms continue forever leads all participants to act as though this one will with no thought for the consequences.
This is readily highlighted in a micro example. There are 13 occupiers in the city who currently occupy 1 million square feet or more; one can only wonder what may happen as they grow their need for space. Some of these occupiers have forecasted that they will grow their businesses at 5 percent per annum and that therefore they will each need a further 200,000 square feet of space within a few short years. Assuming that these forecasts are accurate, that is another 2.5 million square feet of extra office space. Many large firms looking for space in the City have started to identify locations, fuel site assembly plans and, together with a commissioned architect, design before pre-letting the accommodation from a friendly partner developer. Essentially, these firms are becoming property developers to satisfy their new real estate requirements based on an assumption that they will achieve continued above trend growth. If they fail to hit these targets, they’ll find themselves holding empty real estate.
Not a problem, they can rent it to someone else who’s growing like crazy. But what if everyone stops growing like crazy at the same time? And what if everyone has assumed that they will grow like crazy and corporates and developers are suddenly awash with property? And what if interest rates are higher on these heavily leveraged properties at a time when rents, and therefore capital values, which are in the commercial world determined almost exclusively by real rental yields? Suddenly a booming market is contracting more dramatically than it was growing and all those ‘what if’ questions that were never asked are suddenly coming home to roost.
An early warning sign in the UK could be the retail sector, where many retailers are finding trading conditions difficult, yet the property from which they trade is becoming increasingly expensive in rental and yield terms.
In the US the early warning signs are appearing more and more in the residential sector. The well-known problems in the sub prime mortgage sector (which all the eternal optimists are having to work overtime to explain why this should be contained within this sector when logically this should be the harbinger of wider problems) are migrating up the risk spectrum, with borrowers now insisting on at least a 5% down payment for Alt A bonds (loans between sub prime and prime).
Let’s just take a step back - borrowers will now ONLY lend 95% of asset value to borrowers who aren’t prime and in many cases can’t/won’t document their income. Not only were they lending 100% to this category before, in many cases they were lending more than 100%. The assumption here seems to be that lending 100% today to non-prime borrowers (remember that the importance of the security or the loan to asset value becomes more significant as the credit status of the borrower worsens) will be Ok because the loan won’t go wrong and if it does then in a year’s time the asset will be worth 115% of today’s value, so a 100 or 105% loan to value doesn’t constitute risk. Consumers borrowed 100 percent of their home’s value on about 18 percent of Alt A loans made last year, according to Bear Stearns, the largest mortgage-bond underwriter. Another 16 percent had loan- to-value ratios above 90 percent as well as limited documentation, they say.
To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]@mbmg-international.com.com

Snap Shots: by Harry Flashman

Contre Jour – another French deviation?

Unfortunately for those of British stock derivation, the French were first into photography, so I suppose they are entitled to give us photographic terms such as ‘Contre Jour’ (literally ‘against the light’)

However, most photographers (French included) seem to be a little in awe of Contre Jour photography, and stick to the old maxim of having the light source (generally the sun) coming from behind the photographer. If you do this, you will be assured of a reasonable, but ordinary photograph, which will record your friend at the beach, and otherwise be totally unmemorable.
No, if you want something a little better, it is time for ‘Contre Jour’. The only difficulty with back-lighting, which is the other (English) name for ‘Contre Jour’ is in getting the correct exposure. Going back to the analogy of the girl on the beach, when you take a full-length shot, the person takes up around 15 percent of the image in the viewfinder. So 85 percent of the shot is not really wanted, but from the camera’s point of view, that 85 percent will predominate in the exposure meter’s electronic brain.
Now I know that better cameras have ‘center-weighting’ etc etc etc, but unless you have ‘spot’ metering, the overall exposure decided by the camera will be an average of the bright back light and the shadowed subject in the front. This will give you a dark subject, or even so far as a silhouette, in front of a well exposed background (in this case, the beach).
With today’s automatic exposure cameras you must understand that it doesn’t know what it is that you are photographing. It doesn’t know that the person’s face in the picture is the most important item. All the camera’s brain can see is a mixture of bright lights and dark areas and it will give you an exposure to try and equalize these out. Unfortunately, in conditions of high contrast in the tropical sun, or back lit, the camera reaches its limitations and the end result will be underexposure of the part of the photograph you want. It’s not the camera’s fault - it just means you have to get smarter.
There are a few ways you can demonstrate your ‘smarts’, and the simplest is by selective metering. You want the subject to be correctly exposed, so walk in close to the subject, so the person fills the frame, and note the exposure values. Now go to the manual mode in the camera, set the aperture and shutter speed as per the noted values, then walk back and compose the shot. The subject person will be correctly exposed against a bright background. Great shot!
Another one of these methods is by Fill-in flash. Fortunately, these days many compacts and SLR’s do have the Fill-in flash mode built in, but many of you do not use it - or even realize that you have this facility! If you have it - then use it.
Now, for those of you who have the whole kit and caboodle - an SLR with an off-camera flash, this section is for you. The whole secret of fill-in flash revolves around flash synchronization speed. Some of the very latest, and expensive cameras will synchronize flash and shutter speed all the way through to 1/2000th of a second or better, but the average SLR will probably say that the synch speed is 1/125th or even only 1/60th and it is this figure which drives the exposure setting.
Take note of the exposure settings from the position from which you are going to take the photograph. Now set the off-camera flash to around the f-stop indicated by the camera’s exposure meter. In other words, if the camera is going to use f5.6, then try two shots - one with the flash on f4 and the other on f5.6. Flashes are notoriously unreliable as to their exact setting, but by taking the two shots, one will be OK, and the other will be perfect. A correctly exposed subject against a correctly exposed background.
The third method is to meter for the entire scene and use a reflector to lift the exposure on the subject.
Brush up on your French and try ‘Contre Jour’ this weekend.

Modern Medicine: by Dr. Iain Corness, Consultant

Breast Augmentation – yesterday and today

One of the commonest cosmetic procedures all over the world is breast augmentation. And people come from all over the world to Thailand to have this done. Why? Well cost is a prime factor in promoting medical tourism, but even before that, there must be a demand for the procedure.
Breast size and women’s well-being have been inexplicably intertwined for centuries. Perhaps it is the result of the young male baby being weaned at an early age and longing for those palpably bounteous days again for the rest of his life! For whatever reason, an “acceptable” breast size means much to many.
There is also the fact that none of us like getting older, or appearing older, and most women after feeding their children end up with smaller breasts, and less fulsome. Consequently, breast augmentation and breast lifting returns the woman’s figure to that which she had in her late teens, early 20’s.
Chasing the ideal shape has even resulted in patents being awarded to various ‘strap-on’ devices, such as Mrs Anne McLean’s patented cone-shaped wire spring devices in 1858.
The medical profession was also interested and a brave chap by the name of Gersuny (and an even braver female patient) tried paraffin injections in 1889, with disastrous results (for the lady and to his reputation). He was followed by Czerny, who made the first recorded surgical attempt to enlarge the breasts in 1895, when he attempted to transplant a lipoma (fatty tissue tumour) from the back of an actress to her breasts. This did not result in a string of actresses with lipomata beating a pathway to his surgery! Surgery gave up (temporarily) at that point.
After this, it was a return to the ‘smoke and mirrors’ approach with various push-up or push-out and “push-off you dirty old man” brassieres. Or various creams and potions of doubtful value and little pleasing result, other than for the not unwilling male masseurs.
However, immediately post WWII, Berson in 1945 and Maliniac in 1950 performed a dermafat flap, while Pangman introduced the Ivalon sponge in 1950, and various synthetics were used throughout the 1950s and 1960s, including silicone injections. Unfortunately, all of these resulted in long and short-term disasters.
However, while handling a bag of blood in 1961, Baylor University surgical resident Frank Gerow noted how much it felt like a woman’s breast. He and Thomas Cronin then went on to invent the silicone breast implant. It is reported that at the time, it was seen as a safer alternative to injecting silicone straight into the breasts, a method pioneered by Japanese prostitutes in postwar Yokohama and later popularized by San Francisco stripper Carol Doda.
By 1963, Cronin and Gerow had developed the first silicone gel breast implant in conjunction with the Dow Corning Corporation. This was the start of reproducible results, and the art of breast augmentation really kicked on. Dow Corning were of course not alone, and many manufacturers produced implants for flat ladies all over the world.
However, in the 1970’s there were claims that the silicone gel produced all kinds of ailments, and as soon as the lawyers became involved, manufacturers were left with mounds of quivering gel, while the courtroom battles ensued. Quite frankly, it is difficult to defend your position against a claim, when the American courts make you prove that whatever is claimed against your product couldn’t happen. There is always a ‘possibility’ that something ‘could’ happen with human biology.
But the demand from the ladies was still there, so saline implants were next, but there are even problems here too. Every augmentation has its risks.
So what are the common problems? First off, deflation. In one large study in the USA, deflation occurred in 21 (2.1%) of 960 implants. Next is infection. Overall, infections occurred in 6 (0.63%) of 960 implants. Capsular contractions are another large (or enlarged) problem. In this study, a total of 25 of the 960 implants had problems, making an overall rate of 2.6 percent. The end result indicating that 95 percent had no problems.
For whatever reason you would like augmentation, it is a (relatively) ‘safe’ procedure that can change your outlook (and how you look) for ever. Just remember to consult a registered cosmetic surgeon!

Learn to Live to Learn: with Andrew Watson

The Joy of Scholarships

One of the most beautiful things about being an administrator in a school is being able to “do good” - to “be of use” as John Irving puts it. Regular readers won’t be surprised to learn either that I consider myself a little bit of a subversive, or that I consider that quality (and I mean ‘quality’) to be a necessary part of becoming a good, or indeed a great teacher (as do gurus from Drucker to Collins). Call it a ‘healthy disregard for authority’ if you will, or a ‘maverick tendency,’ but for me, a sense of the subversive allows me to both remain empathetic towards students, whilst simultaneously it affords me a level of introspection which ensures that, as an administrator, I never take myself too seriously.
Most of all, it helps me to on the one hand, identify social injustice and secondly, to address iniquity wherever and whenever it may raise its ugly head. I think that in part, this stems from my own school experience and a couple of incidents in particular, which stand out in my memory. Small fragments perhaps, from a life in education, but nonetheless experiences which have informed my approach to students, who (is this really so revolutionary?) must always come first.
I was in my second year of secondary school and wasn’t doing very well academically. I had been placed on report and the teachers, probably for good reason, bless ‘em, were ‘after’ me. In retrospect, the school culture was oppressive, characterised by a bullying and detached relationship between teacher and student. Whenever I’ve recognised the same in teachers and administrators in schools since, I don’t suffer the fools well, I’m afraid. But as Howard Gardner recommends, “If you can’t change the school culture, then do your best and then leave and find a place which shares your ethical values” (If you can find one which has any at all!). But I digress.
One evening at home, faced with a mountain of homework, I decided to change, to turn over a new leaf. I worked as hard as I have ever worked on a piece of Geography homework. It was a beautiful piece of work, the result of hours of concentrated and dedicated activity. Arriving at school the next day, I was actually excited by the promise of reward rather than reproach from the teacher, an admittedly cold, removed character, but someone who knew his stuff - he wrote the textbook that we were using. When he called me up to show my homework I was filled with unfamiliar feelings of pride and excitement. He didn’t look up. He glanced fleetingly at my work - work which I had given my heart to - and marked it with a dismissive flick of his hand, with a ‘C’. My shock and disappointment must somehow have manifested itself because only now did he look me in the eye, whereupon he must have seen through my expression to my utter devastation. I’ll give him credit now, because he did respond. He had another look at my homework as I mumbled about the time I’d spent on it and he remarked it, like a baker’s man, with a ‘B’. It was a better grade, but not much better. From that moment, I was determined that I would never let great work go unrecognised, neither would I let dereliction go untouched. Now, I am grateful that once again I am in a position to do something real to help people who deserve it.
Five years later, (this is the second experience) I had just played a football match on a Saturday morning in November, dewy with a slight chill in the air, leaves on the ground; perfect conditions. On Sunday evening, I received a phone call from an American coach who had come to watch the game, offering me a soccer scholarship to an American University. It was one of the most beautiful feelings I have ever known. ‘Someone has recognised me for what I am good at” I thought and you know what? I was slightly envious of the coach who had brought me this incredible news, a messenger with beauty and grace in his heart, giving something to somebody in this world, who deserved it. (Trust me I deserved it)
“In giving we receive?” You’re damn right. It feels great. I am fortunate enough to be working for a progressive, imaginative, dynamic school who genuinely want to recognise and reward the best students, wherever they might be, locally, regionally and globally. Think about it; in this competitive capitalist climate, there is a school (actually there are plenty around the world) who want to put their money where their mouth is and say, “Sure we’re a business, but rewarding the best students is good business and in fact, it’s great educational practice as well.” It’s also a model for the future.
Surely, you might very well conjecture, there cannot be any critics of such schemes? If there were, they must surely come from the past? Scholarships are a paradigm too far only for the remedial, a cut into profits too far for the greedy. How perverse it would be for any school losing students to the paragons of initiative and altruism who offer scholarships, to cry “Foul! It’s not fair!” For whom, precisely, is it not fair? Surely, what they would really mean is, “We wish we had thought of it first!”
Worse still if the opportunity to start a scholarship programme was turned down on the whim of arrogant, apathetic greed? Ignorance and belligerence would convince them that scholarship schools are “poaching” instead of celebrating and following an example of best educational practice. Well, if ever such schools existed, they had their chance, but blew it. But wait a minute, why doesn’t everybody offer them? I just love that idea! If you’re going to “play profits” in the education sector, let’s bid for the best students around and you know what? The students who deserve it most, will reap the rewards. Brilliant! And what, you might ask, will the school get out of it? First, they will find that they have leaders of the student body in their midst who can by their example, play their part in inspiring those fortunate enough to come into contact with them. Second, they will be able to rest assured that they have done the right thing, morally, ethically and educationally. They will have fulfilled one part of their moral obligation to education. Tremendous.
Andrew Watson is a Management Consultant for Garden International Schools in Thailand. andreww @gardenrayong.com
All proceeds from this column are donated to the Esther Benjamins Trust. www. ebtrust.org.uk email: info@ ebtrust.org.uk
Next week: Eating you up inside.