Just Share Discussion Threads

[loglorry1] 01/10/2018 18:22

The PRA are not daft. They've acted pretty sensibly with the recapitalisation of the banks. I think they'll be sensible here too. I don't think they'll be massive shocks to the system and they'll give firms time to build additional capital.

[topvest] 01/10/2018 17:30

Interesting - seems to be a polite two fingers up to the PRA. The PPA are wrecking the market: you can change the rules prospectively, but the threat of pushing massive changes through straight away undermines the capital markets. They have handled this in an incompetent manner in my view, but they don’t care as they are civil servants and they can do what they like.

[eumaeus] 01/10/2018 13:39

606 - thanks for this, just looking now.

[horndean eagle] 01/10/2018 11:45

eurmaeus - Be interesting to hear what your response to institute of actuaries submission to the PRA

[eumaeus] 01/10/2018 10:57

604 "I have made this point twice already but I'm still not confident you get it."

I think we will have to agree I don't get it, and leave it there.

[dasv] 01/10/2018 10:09

eumaeus 596 and 598 "593 Not hedging the underlying. The contract to be hedged is to deliver a property to you in n years time. That contract is a form of derivative. I hedge it by buying the underlying."

You are hedging it by being a property owner, landlord, responsible for the condition of the property and its maintenance etc. which is a point I made frequently ages ago. You are agreeing with me but you don't realise it.

598 - Yes I'm familiar with graphsofrelativity.

In order for the Black 1976 model for NNEG to be applicable to property, the contract you are selling me would be discounted in line with a deferment rate based on notional rental income.

I.e. I could buy the apartment freehold from you forward 10 years at a discount to today's price of say 23%

So I'd give you £730k, and you'd owe me a Mayfair apartment in 10 years time in the condition a current £1m mayfair apartment is in now.

However you switched the goalposts by then saying I'd have to pay £1m (current price) for a 10 year deferral. As I also said previously, you'd still be out of pocket, but far more so if you sold me the deferment contract priced on the same basis as NNEG's are under Black 1976. I.e. the options model doesn't price property correctly because property is not like other income earning assets (for reasons also listed previously).

"So, a standard 99 year lease on our Mayfair property, assuming vacant possession value £1m, would have a market price of about £950k, with the freehold at around £50k...But using the HPI method, we would get negative leasehold value, with freehold priced at over £1m."

"we would get negative leasehold value" - why? since HPI doesn't preclude a valuation of net yield? Straw man

Re: 597 - I have made this point twice already but I'm still not confident you get it. Life co's who have historically said they will value NNEG using options can't just change now because they don't like the numbers output using futures prices rather than HPI projections.

However I don't think they should be valuing NNEG using this method at all for reasons stated (ad nauseum).

Under NNEG I can buy an apartment (freehold+leasehold) off you for deferred possession 10 years at a fraction of today's price. You don't seem keen to sell me one at discounted at a deferment rate, but you are prepared to sell me one non-discounted even though you would also lose money. Just not quite as much.

[qs99] 01/10/2018 07:35

That's not his "notice" that is what they have agreed will be his departure date, subtle difference no? Didn't quite read as a "go away" (you know, no quote from FD and "to pursue other ventures type stuff") but never great to see an FD leave, despite that the odds say they have to at some point!! Let's see how the markets react.

Does it make them "easier" to sell as per that article someone posted?

[scrapheap] 01/10/2018 07:25

CFO stepping down with a months notice is 'interesting' timing....

[exmooroil] 28/9/2018 16:12

Just Group 2026 9% bond now priced at 115.018%, running yield 7.82% excluding cost of entry. 13.4% off the 133% high, compared with equity 49% off. Appreciate the two are not directly comparable.

[qs99] 28/9/2018 13:32

Will we see blue shortly?

[qs99] 28/9/2018 07:59

Look forward to another blue day

[eumaeus] 27/9/2018 19:16

This site provides the well-known 'relativity' charts which give an estimate of leasehold value as a percentage of vacant possession value. Note this is leasehold, not freehold value, but freehold is simply vacant possession value minus leasehold, minus any marriage value. Note that the leasehold value climbs up to vacant possession value and nearly equals it after 99 years.

However the assumptions used by some firms (based on their annual reports, public domain) gives negative values for leaseholds. So, a standard 99 year lease on our Mayfair property, assuming vacant possession value £1m, would have a market price of about £950k, with the freehold at around £50k. But using the HPI method, we would get negative leasehold value, with freehold priced at over £1m.

[eumaeus] 27/9/2018 16:44

595 So you agree.

[eumaeus] 27/9/2018 16:42

594 I have no inside knowledge of what PRA intends. Nor do I have any connection with any short sellers.

593 Not hedging the underlying. The contract to be hedged is to deliver a property to you in n years time. That contract is a form of derivative. I hedge it by buying the underlying.

[dasv] 27/9/2018 16:41

18BT - yes I think the industry got it wrong. It uses option based pricing for the NNEG valuation but injects prices based on HPI. I actually agree with Dowd and Eumaeus that this is not acceptable. If they are going to use Black 1976 then they can't use HPI future price instead of forward price.

But I think they shouldn't have used option pricing at all for the reasons I've stated (the property market is not like the stock or bond markets).

It's hard to row back from this now in my opinion - i.e. by saying forget our previous valuation method, here's a new one. I guess there's some wiggle room in the consultation but no idea how the PRA would take a change of tack on NNEG valuation, particularly when the formula is given with even specific parameters.

[cthompso] 27/9/2018 16:38

I'm guessing your shorting buddies can't hold back the tide after all.Just what is the law that covers those trading with some inside knowledge of what the regulator, rather than the company, intends?

[dasv] 27/9/2018 16:34

You aren't hedging a derivative by buying the underlying. You are claiming to be "hedging" the underlying by buying the underlying. That's not hedging. That's being an owner of the underlying.That's being a landlord with all the baggage and mess that entails.

[eumaeus] 27/9/2018 16:29

589 "claiming that arbitrage arguments are irrelevant doesn't magically make them irrelevant." Of course. A reason is needed. But the PRA has already given this reason. See 3.16 of the CP.

[18bt] 27/9/2018 16:08

dasv here, here to your summary, One of the industry's mistakes in retrospect was not to make a case that using Black 1976 was very prudent in the imperfect property market.

[eumaeus] 27/9/2018 16:05

589 Taking just one point. "Buying the underlying is not hedging. It's taking delivery."

You can hedge a derivative by buying the underlying.

[dasv] 27/9/2018 15:39

eumaeus 567

1. No the freeholder is responsible for maintenance/repairs. The leaseholder pays a service charge to the freeholder

2. Buying the underlying is not hedging. It's taking delivery.

3. + 4. No, you write to the PRA. That seems to be your speciality?

5. "I get the flat for £1m, lease it for 10 y for £230k, then sell the deferment to you for more than £770k. I have made an instant profit, yes?"

No because you are booking your profits before you've made them, and you face 10 years of maintenance, repairs and refurbishment, and inflation. Also, I'm expecting a flat worth £1m in today's prices, not one which has been trashed by your tenants. Ironically, isn't booking profits early what you are accusing life co's of doing with respect to ERM's?

6. Same point applies? No it doesn't. Inflation and costs erode any profit you'd make.

Lastly claiming that arbitrage arguments are irrelevant doesn't magically make them irrelevant.

To sum-up you claim to be hedging in the property market, but really the only way you can manage the risk is by taking delivery of the underlying and managing the property (which is a point I've already made to you), and which proves my point that the property market is nothing like the commodities, bond or equities market. E.g. it's un-hedgeable. Hence the non-applicability of Black 1976.

[qs99] 27/9/2018 14:46

£1 tomorrow?

[18bt] 27/9/2018 13:25

Mike, it isn't particularly relevant as I am not expecting the PRA to change it's mind except possibly over the length of the phase-in. But capital is supposed to reflect the real world, subject to a 99.5% probability. I think it is just evidence that the real world is different to the PRA's theoretical view. If a market were to develop in ERMs then it might also help as valuations could be marked to a market before they were stress tested.

[nav_mike] 27/9/2018 11:23

The UKAR sale is encouraging, but I wonder how relevant it is that they did this deal just before the end of the PRA consultation period