Peston's Picks

Over-valued markets

• Robert Peston
• 27 Mar 07, 10:22 AM

The Financial Services Authority - the City watchdog - has today made it easier for all of us to invest in hedge funds, but Gerald Ronson wouldn't trust many hedge-fund managers to go shopping for him at Tesco.

Ronson speaks as an investor who has learned from his own mistakes. He has had his fair share of setbacks: severe financial difficulties in the early 1990s; imprisonment for his role in the Guinness affair.

But the legendary property magnate has rebuilt a fortune and his annual City lunch testified to the goodwill he has also nurtured: the 350 or so guests at the Savoy Hotel yesterday included property tycoons, bankers, assorted entrepreneurs, heads of charities, and senior policemen.

The lavish event marked the 50th anniversary of Heron, the Ronson family company, which remains a formidable force after numerous cycles in the property and financial markets. So his views on those markets are worth hearing.

I quote what he said at some length, partly because he made me laugh, partly because it’s a fool who ignores the voice of seasoned experience:

“What a year it’s been in the property sector. We’ve seen extraordinary levels of liquidity wash over the world’s asset markets. There have been remarkable flows of capital and yields have fallen to a level not seen in over two decades.

Investors will have to rely on significant improvements in capital values to generate acceptable returns. There is not much room for further yield compression and much of the anticipated improvement can only come from above average rental growth.

Never before has there been this kind of global liquidity propelling the market. A big part of the story is hedge funds together with property funds. It seems everybody is starting one, although I wouldn’t hire some of these start-up fund managers to do my shopping at Tesco’s. Yet they are still in charge of massive sums of investors’ money.

They only know one direction, the bull market, and in some cases their analysis and management skills are poor. There can only be one ending and we’ll look back and talk about how obvious the signs were.

The current property market however is unlike the one that collapsed in the late 1980s and early 1990s. We have low inflation coupled with relatively little new build and rents are rising not falling. But though the past few years have been profitable for anyone that invested in real estate, the next few years will require more than an ability to write a cheque.”

Just to be clear, Ronson told me he’s not liquidating all his property holdings. But he’s being selective about where he invests. Intriguingly, he believes the prospects remain good for central London office property and “quality” residential.

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