October 12, 2015

The Nearly Unanimous Sentiment Is Fear

London SE1 reports from the UK. “Neo Bankside was a joint venture between developers Grosvenor and Native Land. The scheme’s four hexagonal towers were designed by Rogers Stirk Harbour and Partners. The penthouse at the top of pavilion B went on sale 18 months ago with an asking price of £22.5 million. The price tag soon dropped below £20 million and was until recently at the £17.75 million mark. This week the same penthouse has been advertised for sale at £15 million, a one-third reduction on the original price.”

“Research by Private Eye magazine into UK property acquired by foreign businesses shows that 44 of the 217 homes at Neo Bankside are registered to offshore companies. 36 flats are owned by firms registered in the British Virgin Islands and 4 to Singaporean companies. Others are owned by companies in the Netherlands, Panama, Malta and Hong Kong.”

From ABC News. “The former head of Australia’s anti-money laundering agency has called for tough new rules to force solicitors and real estate agents to report suspicious transactions and prevent Australia from becoming a safe haven for foreign corrupt funds. Despite highly credible warnings that large volumes of illicit money leaving China were being laundered in Australia, a Four Corners investigation found no Australian agency was charged with identifying the true source of foreign funds being invested into the economy.”

“Head of Washington DC-based Global Financial Integrity Raymond Baker said many governments did not want to ask the questions and simply wanted the money to flow in. ‘Well, I’m sorry, you do that and you expose yourself to a great many risks, not only in your own country, but you’re also damaging the countries out of which that money is coming,’ Mr Baker said.”

“As a FIRB board member of 10 years and former Tasmanian Liberal MP, Chris Miles said the organisation needed a more investigative approach, particularly with regard to the reach of the Chinese government. ‘I think you have to be cautious of the state-owned companies,’ Mr Miles said. ‘There was one operation I was involved with [while on the board of FIRB], the information there was that the company involved was totally independent … but in actual fact the information didn’t come back through the commercial side of the company, it came back through the foreign affairs side of the country … basically through the embassy, and that’s a concern for us.’”

The Australian Financial Review. “Demand from Chinese investors for loans to invest in Australia property is proving more than some lenders can handle. Firstmac, an Australian-owned financial services group managing about $7 billion of mortgages, has put the brakes on loan applications from mainland Chinese investors. A letter sent to its network of 100 brokers warns that to ‘decrease the risk of investors from China becoming over-represented in our lending portfolio we will temporarily halt non-residential transactions.’”

“In his letter, James Austin, chief financial officer, said the lender was worried investors in its securitised mortgage portfolios might become concerned about over-concentration of loans to overseas Chinese investors. Mr Austin said it also feared breaching a regulatory 10 per cent ’speed limit’ on the growth of mortgage portfolios. ‘To keep the confidence of our backers, we cannot have concentration of applications from any one area,’ Mr Austin said.”

“It follows earlier moves by Westpac Group to also clamp down on lending to overseas property investors from buying residential property in popular suburbs.”

The International Business Times on Australia. “On the first auction day of October, Sydney vendors’ expectations have come crashing down as they had to drop their prices much below their expectations. Although more than a thousand houses were hammered in the auction, the dropping of prices has hit them hard. ‘Clearly sellers are more motivated to sell given the weakening market over recent months,’ Dr Andrew Wilson, a senior economist at the Domain Group said.”

“Damien Cooley, of Cooley Auctions, conceded that vendors or agents need to set realistic prices in order to sell their houses this year. ‘We are telling owners not to hold out for that extra AU$5000 to AU$10,000 – they need to get it done before Christmas,’ he added.”

The Business Standard on India. “Suraj Parmar, who killed himself on Wednesday, was promoter of Cosmos, a Thane-based realty group. In a 15-page suicide note, he has cited being subject to a series of approval delays for his projects and a stuck decision making system for the step he would take. ‘Parmar used to fight politicians and officers over corruption. Most of us settle the matter and close it (but) those kind of margins are no more left in real estate to pay politicians and officers,’ said the managing director of a Mumbai-based developer. He declined to be identified.”

“Builders, he said are caught between stagnant sales on the one hand, and corruption and delay in approvals on the other. The housing market in the Mumbai Metropolitan Region has recorded its worst half-yearly performance since the financial crisis of 2008, with sales weakening even as 200,000 units remain unsold, according to property consultant Knight Frank. New housing project launches fell by 47 per cent in the first half of this year.”

“‘Politicians and officers are exploiting and squeezing developers. It has become difficult to run the business. Most of the developers are under distress and the balance sheets of developers are under stress due to delay in approvals,’ said the founder of another large group in Mumbai. This person, too, declined to be identified. ‘Like farmer suicides, soon you will hear of developer suicides,’ he predicted.”

From Fortune. “Since landing in San Francisco on Wednesday, I’ve met with an assortment of senior venture capitalists, bankers, entrepreneurs and crossover investors. All of them have, in one way or another, been involved with so-called ‘unicorn’ companies. As in the past, they are nearly unanimous in sentiment. The difference now is that their sentiment is fear.”

“The reality is that record-high private market valuations have been driven by two things: Wall Street’s lust for growth at all costs, and relatively high tech multiples in the public markets (and, more specifically, applying the former to the latter). But a variety of macro economics factors (China, the inscrutable Fed, etc.) have cut public equity prices and moved the spotlight to unit economics, which means some pretty large biz model disruption for the disruptors.”

“‘This shift is only five or six weeks old, so most companies haven’t felt it yet,’ a senior tech banker explains. ‘But I know of many companies who raised money at $1 billion valuations last year that are now being told that, to raise money now, they need to take around $700 million or $800 million. Probably with some serious structure that protects investors, like ratchets, on top of it.’”

“This isn’t to say that the bubble is popping so much as to argue that the ever-rising valuation peak is in the rear-view mirror for later-stage companies. For now, all I see is wistful sadness, like children at the end of summer vacation.”

Bits Bucket for October 12, 2015

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