Neil Collins in the FT today.
Just a minute Things are grim at Just Group, provider of annuities for those expecting short lives, but better known for its lifetime mortgages. These allow ageing homeowners to cash in on their property gains with loans where the interest is not paid, but rolls up with the debt. This latter business is relatively new, and pricing the risk that the house will be worth less than the accumulated debt at the homeowner’s death is exercising the Prudential Regulation Authority. It will want more capital from the lenders, and Just has already sacrificed its half-time dividend in anticipation, warning of a capital raise to follow. The shares have halved in four months, and at 74p are discounting a thumping rights issue to appease the PRA. Only then can the market price the risk that the mortgaged property will fetch less in 20 years’ time than its value today. It does not seem remotely likely. At this price, Just shares are discounting housing Armageddon.
My emphasis. Wrong. Consider a leasehold on a London flat with 99 years to run. This would typically trade at about 95% of the value of a vacant freehold, and the corresponding freehold, i.e. the right to exclusive possession after 99 years, would trade at about 5% of the vacant value.
Wow! Does that fact spell a housing Armageddon for London or the UK? Does that really mean London property is going to fall to 1/20 of its value in 99 years time? Call Carney to the rescue!
But no, silly. The discount reflects 99 years of lost income on the property, nothing more. No assumption about future house prices is built into the pricing of the leasehold or the freehold.
Although an interesting business idea would be to buy up such freehold interests at a fraction of the immediate possession value, and create a company around this. I could sell the company to stupid people at 20x its market value. Any takers?