A simple way into currency for hnws

The first sign of stress in the UK commercial property market, with capital values down 1.3 per cent in March according to the IPD benchmark index, has generated unexpected portfolio losses for high net worth (HNW) individuals and private wealth houses. Consequently the level of secured mortgage debt denominated in sterling, used to fund expansion in office and residential property investment, has increased as portfolios exposed to a hitherto buoyant UK property market have been squeezed. However, where ultra HNWs and sophisticated private wealth accounts would consider FX structured solutions offered by investment banks such as Deutsche Bank and Barclays Capital to smooth out debt contraction in their sterling-based property holdings, products lower down the scale in terms of affordability and arguably ease of entry are starting to take root. “We are trying to make debt work harder for high net worth individuals,” says Neil Staines, chief operating officer at 3D Currency Management (3DCM), a financial product provider which has just launched what it claims is a widely accessible solution for holders of sterling-denominated property debt finance. According to London-based 3DCM, this relatively straightforward FX solution takes matched positions in the currency market against a sterling loan, which so far have comprised of mostly mortgages. But the company believes the FSA-accredited product can be applied to any securitised loan. “Sophisticated high net worth individuals can manage the outstanding value of debt in a tax efficient manner, as the rate of increase in property prices is slowing to a crawl in some regions,” explains Mr Staines. “As the value of a given currency reduces against sterling, so does the outstanding balance of an individual’s liability. Under current tax legislation, reductions in the value of debt through the programme are not subject to capital gains and income tax.” In this scenario, a sterling loan facility is arranged with one of 3DCM’s partner banks. Under Power of Attorney, 3DCM deals directly with the bank’s treasury to manage the debt by expressing in one or more of the seven trading currencies. Effectively the product enables the denomination of the loan to be changed through the lender’s treasury. The following example is given as highlighting where potential savings could be made for the HNW. Between July and August 2007, a debt expressed originally as £1m (E1.25m) but now traded in Australian Dollars would equate to £924,900, a saving of around £76,000 or 7.6 per cent, if 3DCM had used a blended approach to position the fund. And while this is further affirmation of FX as an asset class, in this case it functions as a tool within liability management, rather than as part of the weaponry for targeting absolute returns. Trading performance to date reveals a 3 per cent reduction in individuals’ debt since September 2007, 3DCM claims. But can smaller HNWs take on the risk that their existing property debt is essentially being traded out in currencies other than in where they are domiciled? “We have 24 hour risk management on our FX positions,” adds Mr Staines. 3DCM says clients agree a ‘stop loss’ level, at which their losses are minimised and they are “upgraded to special client status”. “If you’re two per cent away from your agreed stop loss, we will manage this more closely and separately from, for example, new clients with potentially more flexibility,” he adds. Former global head of FX at RBS, David White, now heads up the new venture. “I saw the challenge of offering a simplified solution in a world of increasingly complicated products, and against a backdrop of a depreciating British pound, as a great one,” he says. He names a number of finance houses as supporting the company, including Bank of Scotland, HSBC, and Kleinwort Benson. “We’re developing relationships with Investec and Barclays Wealth Management too,” he says. Explore Capital, the investment arm of UK builder Laing O’Rourke, is also a 3DCM shareholder. The IPD benchmark index, comprising 4,300 UK properties valued at £56bn (2007), found the all-property total return reached a record low of -10.7 per cent in March, from -9.2 per cent in February.

Neil Staines, 3DCM