Outlook: Hopes of engineering a rescue at Invensys look forlorn

Jarvis/Moayedi; Housing bubble
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The Independent Online

It must have been through gritted teeth that Martin Jay, chairman of the process engineering company Invensys, signed off on a letter to shareholders which said the company will run out of money next June, when a $1.5bn (£885m) revolving credit facility expires, unless the disposal programme goes as planned. After that, he'll be lucky to avoid a self-fulfilling prophecy, for knowing his desperation, potential buyers will grind him into the ground.

Proceeds from the disposal of the company's metering business, which necessitated last weekend's cash crisis admission, have already fallen well short of expectations, and the company admits that realisations from the disposal programme as a whole will be below initial guidance.

With total net debt of £1.6bn, Invensys has few places left to hide. Corus has achieved success with a rescue rights issue, and something similar cannot be entirely discounted for Invensys. Yet Corus at least had the backdrop of an improving steel price to point to. At Invensys, the story seems to be one of continued deterioration. In any case, with a market capitalisation of just £630m, even a one-for-one wouldn't get the company out of difficulty.

Rick Haythornthwaite, chief executive, remains stoical about his predicament, but he cannot have dreamed such a brilliant career would become so mired in fire sales when he agreed to take up the Invensys chalice (sorry, challenge). Unfortunately for him, he cannot quit now, or he would be accused of lacking backbone.


Fast back six years to 1998 and, for the second year running, Jarvis, the facilities management company, was one of the best performing shares on the stock market. There was another glorious spell in 2001, when investors began to believe that eventually the whole of the public sector would be outsourced through public private partnerships. Under Paris Moayedi, then chief executive, Jarvis had been brilliantly positioned to take advantage of the outsourcing phenomenon, from railway maintenance and highway control, to airport and school management. With the Government desperate to get as much spending as possible off balance sheet, the possibilities seemed almost boundless.

Then came the Potters Bar rail crash, which Mr Moayedi still vainly protests was the result of sabotage rather than poor track maintenance. Little evidence has been produced to support his contention. Rather, the gathering weight of incidents involving Jarvis elsewhere strongly point to lax maintenance.

The last of these was when a train bizarrely found the track had been removed overnight while coasting out of King's Cross railway station, leading to derailment. Fortunately it passed without injury, but it also coincided with a visit to the station by the Prime Minister and his Transport Secretary to open the first section of the High Speed Channel Tunnel rail link. They failed to see the funny side and within weeks, all responsibility for rail maintenance had been taken back in house. A one time growth industry for the private sector had shrunk to nothing.

Mr Moayedi might have survived even these humiliations were it not for the fact he's 65, runs Jarvis like a private fiefdom, and occupies the unacceptably un-Higgsian position of executive chairman. It's always a shame to see an entrepreneur axed, but Mr Moayedi cannot say he didn't see the train hurtling down the track at him.

Housing bubble

According to John Wriglesworth, economist at the housing data organisation, Hometrack, "there's more chance of finding Elvis on the moon than there is of a house price crash next year". An exaggerated way of making the point, perhaps, but it's a good sound bite, and given that the economy is expected to return to trend growth or above next year, with unemployment remaining exceptionally low, he's probably correct in his suggestion that there will be no generalised fall of any significance in house prices over the next 12 months.

Yet there's still good reason for doubt over the long haul. Relative to earnings, house prices are at record levels. Ignoring the house price crash of the early 1990s, which with the benefit of hindsight looks like little more than a hiccup, there has never before in the history of Britain, or anywhere else for that matter, been such a sustained and dramatic rise in house prices as the one spanning the past 25 years. The most worrying feature of this rise is that the psychology of house buying has changed from one of utility - that is housing bought for the purpose of providing a roof over one's head - to that of investment, with the possibility of sharp speculative gains fuelling an ever growing asset price bubble.

Common sense alone would tell you that the market must eventually correct. This needn't necessarily happen with a crash, although that is generally the way with markets, where the tendency is to overshoot and then correct violently. The Bank of England expects a softer landing, with prices plateauing for a period of years, allowing the correction to occur without the trauma of a crash. Similar predictions were made for the stock market when it peaked at the turn of the century (though not by the Bank of England), and look what happened there.

Britain's house price bubble is primarily a consequence of two factors. One is rock bottom interest rates, which have substantially decreased the cost of servicing a mortgage, boosting disposable income and allowing people to borrow more for the same apparent cost. The second is a shortage in supply, with very little public sector house building taking place any longer and insufficient private sector construction to match the growth in demand.

Both these issues are the subject of Treasury commissioned reports due to be published around the time of the pre-Budget report early next month - the first by Professor David Miles of Imperial College, the second by Kate Barker, a member of the Monetary Policy Committee. Both reports may be more instructive than billed, but instant solutions seem unlikely. Professor Miles' brief is to look at why the British mortgage market is so dominated by variable rate or short-term fixed rate deals, a phenomenon which in the past has deepened the peaks and troughs of the UK economic cycle by making consumption more sensitive to short term movements in interest rates than is generally the case elsewhere.

The trouble is that even if the Government accepted the case for introducing an American style system of widely available long-term fixed rate deals, which to work would have to be backed by an implicit state guarantee of the finance, it would take years for such a root and branch structural change in the market to take hold. Furthermore, it's not entirely clear that it would be in Britain's best interests anyway. Britain's attachment to variable rate mortgages gives monetary policy here more piston than it has on the Continent, which has enabled the Bank of England to support consumption and demand through the downturn more effectively. For all these reasons, it will be difficult to embrace change.

The same is true of any recommendations Kate Barker has to make over the private sector's failure properly to cater for the explosion in demand for housing. Planning consents are undoubtedly part of the problem, but so too are risk averse private house builders, whose interests are often better served by restricting supply than by satisfying demand. Here, too, there are no quick fixes.

Housing none the less remains an Achilles' heel of the British economy. Any significant fall in house prices is likely to lead to a considerable demand shock in the economy. This would be the case whether or not it resulted in wide scale negative equity, by making householders feel poorer and more conscious of the size of their debts. No wonder policy makers are so keen to talk down the prospects of a crash. As for Elvis, perhaps not the moon but I can definitely confirm he was in Dorking only last weekend.