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08 November 2021

Redmayne Bentley Market Round Up

The housing market has always been difficult to speculate on, and flipping a house is no easy task. Therefore, few experienced investors engage in the strategy, especially given the tight margins and high costs of operation. Over in the US, online property company Zillow realised this sooner rather than later, although the cost was still high for the lesson learned.

The online real estate marketplace company started purchasing homes in 2018, claiming it could leverage the pricing data it collects to make house flipping profitable. In the first quarter of 2021 Zillow earned a profit of US$30K per house on an average selling price of US$300K. Recently though, the company stated that it had overpaid for houses and CEO Rich Barton announced the company would stop purchasing homes, record a write down of US$300m inventory and will let go a quarter of its workforce.

One major reason for the higher costs and small margins was the overpayment for houses due to lack of training amongst employees at the company - house flipping requires an intimate knowledge of the housing market as well as regional trends and utilising established connections which Zillow’s employee lacked. Therefore, the company decided to focus back on its core business of market making which has operating margins of approximately 50%. Due to Zillow’s failed venture, its market value has dropped by 60% from its peak.

In the UK, the Bank of England (BoE) shied away from an immediate rise in interest rates leaving them at a historic low of 0.1% amid the highest inflation in years. The forecasts suggest that inflation would reach 5% next spring as the central bank tried to ease off the perplexed public by indicating the likelihood of interest rate rises in the coming months, a rather vague statement given the rapidly rising cost of living. The announcement came as a surprise given the high expectation baked into the market. Sterling fell 1.5% to US$1.352 after the decision was declared. Short-term UK government bonds also had their biggest one-day rally since March last year, pushing the two-year bond yield back by 0.21 percentage points to 0.48%.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
 
Redmayne Bentley Market Round Up
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