UK interest rates...
The combination of recent turmoil in the financial markets, the US Federal reserve's
prompt response in cutting borrowing costs and recent reports of inflation falling back
within the UK government's target levels have given rise to expectation of UK rates
being pegged, at least for the short term. Indeed, there is an emerging view that the next
move by the Bank of England may be to cut interest rates. This would help restore
confidence which has been eroded somewhat, particularly at the lower to mid reaches of
the UK residential property market.

In the upper market bracket (broadly defined as £1.5-5 million) there remains strong
demand and we have seen little evidence of any deterioration in demand to date, though
the summer is traditionally a quiet time for house purchases and sales. In the so called
super-prime market place of ultra high priced properties there remains a dearth of
quality stock and buyers, especially in London, are still paying ever higher prices. Neither
of these markets is particularly interest rate sensitive.

Knock-on effects...
What is less certain at present is the degree to which disarray in the US sub-prime and
leveraged loan markets will have a knock-on effect over coming months. Firstly, this
depends on the scale of contagion from the known problems and the duration before calm
is restored. Secondly, this will determine the dimension of City bonuses in early 2008 and
the outlook for the year ahead. Earnings levels to date in the UK financial sector have
been good in 2007 but these could be dented and curtailed if the outlook deteriorates
because credit availability to finance ongoing buyouts and M&A activity diminishes. It is
too early to confidently predict the scale of this potential knock-on effect. However, if
bonus payouts are reduced in Q1, 2008 demand for £1.5-£10 million houses in London
and the South East will slow. This will only affect developments already well under way.
Future developments in this sector will be impacted by bonuses and confidence in 2009.

There is no expectation that the current financial sector problems will create any lasting
deterioration in the health of the global economy. If that is the case, the ongoing inflow of
capital from around the world to buy UK residential property will mean that price levels
are unlikely to deteriorate even if the volume of transactions remains restrained. The lack
of availability of stock is acute. This means that the super prime housing market is likely
to remain the most robust sector of the UK market. Apart from political and social
considerations the UK economy is predicted to outperform the US, Japan and EU average
with GDP growth of 3% this year and 2.7% next year. The industrialised nations as a
whole are expected to achieve 2.5% this year and next.

Ian L. Davies: 20th August 2007
Managing Director of Gascoignes International
Gascoignes International are Associates with Best of Bulgaria