The value of urban land: Moriarty and Milverton

March 7, 2007 | Capital markets, Holmes on housing, Housing

“Look at that,” said Holmes, his long ivory finger pointing at a discreet announcement, in impeccable copperplate Gothic:


Greuze & Company, Investment Bankers


Moriarty and Milverton

Development Company


£1,000,000 private equity fund

This announcement appears as a matter of record only.


“What does it mean?” asked Watson.


“It means, my dear fellow,” that the capital markets have done what I was never able to do: they have persuaded Professor Moriarty to shift from criminal to legal activities.”




“You have probably never heard of Professor Moriarty?” said he.


“Ay, there’s the genius and the wonder of the thing!” he cried. “The man pervades London, and no one has heard of him. That’s what puts him on a pinnacle in the records of crime. I tell you Watson, in all seriousness, that if I could beat that man, if I could free society of him, I should feel that my own career had reached its summit, and I should be prepared to turn to some more placid line in life.”

— Sir Arthur Conan Doyle, The Final Problem


“And Milverton?”



Charles Augustus Milverton was a man of fifty, with a large, intellectual head, a round, plump, hairless face, a perpetual frozen smile, and two keen gray eyes, which gleamed brightly from behind broad, gold-rimmed glasses. There was something of Mr. Pickwick’s benevolence in his appearance, marred only by the insincerity of the fixed smile and by the hard glitter of those restless and penetrating eyes. His voice was as smooth and suave as his countenance, as he advanced with a plump little hand extended, murmuring his regret for having missed us at his first visit.

— Sir Arthur Conan Doyle, The Adventure of Charles Augustus Milverton


Charles Augustus Milverton is the financial partner, the money-raiser.  Former blackmailer,” Holmes added in an aside.  “He too has found better hunting in the City of London, for the world is awash in capital looking for investment opportunities.  Moriarty and Milverton have merely done the logical thing, they have followed the money.”  He rang for Mrs. Hudson to fetch us a pot of tea. 


“The increasing urbanization of modern life,” continued Holmes, “not just in 1890’s London but for decades and possibly even centuries to come, means not only do cities become more dense, they also become physically larger.  Why, in fact, do cities grow?  Why is farmed land plowed under to sprout row houses, semi-detached homes, or even tenement blocks?”



Seen all over England


“I suppose because someone offers the farmer a good price for his land.”


“Such a price must needs be greater than the land’s value as a farm, yes?  How then does the developer assess land price?”


“Ask an estate agent?






Watson was astonished that Holmes even considered consorting with such rabble.




“What do they know?  They know only what other plots have bought and sold for.  So they simply report the market.  Buyers and sellers make the market, and to understand how they do, we have to examine their economics, by working backwards.”






You can hurt yourself if you’re not careful




“We can make this explicit.  Developers assess what a property will be worth when developed, then subtract costs of development and a desired or minimum profit, and bid accordingly.”




urban land slide 4




“Property prices,” said Watson with a flash of insight, “are in turn determined by borrowers’ ability to make their mortgage payments.”




“Influenced, as illustrated by this helpful slide I had the Banker Street Irregulars conjure up,” by the Weighted Average Cost of Capital.” 


Average cost slide 3

Weighted Average Cost of Capital is the blended cost of debt and equity


“Thus, when our friends on Threadneedle Street






The Bank of England on Threadneedle Street




— or their counterparts at the United States Federal Reserve shift the core borrowing rate, they directly and immediately impact the value of owned homes.”


“If that is so,” said Watson, scrolling back up to examine the as-is property value slide, “changes in interest rates should also affect the value of improvable urban land.”


“Bravo, Watson!  Precisely so, as shown here.”


Urban land slide 5


“Do please note that I use the word ‘improvable’ with some care.  In our modern Victorian society, we have essentially no zoning and few barriers to development.  But we can imagine a future time when the Great British Public, seeking to preserve our green and pleasant land, could impose substantial restrictions on greenfield development.  Should that happen, it chokes off the value of undeveloped land except to the extent one can secure planning permission.  One could even imagine” — he shuddered — “a government that sought to tax the ‘planning gain‘ associated with granting development permission.  But that is a sidebar to be addressed by future generations of housing financial consultants.  For our purposes, we can treat the market as not only efficient but also largely unencumbered by regulatory forces.” 



Holmes was relieved not to have to contend with Section 106.


“Profit expectations and risk perceptions vary by developer and by situation, but they are always material.  Direct hard costs of development do rise and fall with external factors, but tend not to be influenced terribly much by local markets.  What does change is the value of improved property, and hence the value of urban land.  The equations for rental as opposed to ownership property are fundamentally similar, and are here presented” —

Value slide 7


— he snapped his fingers — “for reference.”


Urban land slide 8



Watson was determined to study these slides later, in private.


“Now,” Holmes asked Watson professorially, “in view of these development equations, who then has the most control over urban development in England, or in the United States?  What individual?”


Watson studied the chart and prayed the blogger would be generous.  “Its central banker,” he said finally.



I command house prices to go up this much.


“Capital, Watson, capital.  More than any other single person, the central banker changes the development equation, for when value as improved land is less than unimproved, the market stops developing.  When that equation reverses, nationally or locally, development occurs.  Thus the change from greenfield to brownfield — from farms to homes — represents the tangible demonstration of the development equation in operation.  The way I remember it is,” Holmes finished, “is that the most profitable crop one can grow on any piece of property is people: residential property.”


“In the same way,” he added with a mischievous twinkle, “criminals go straight when it becomes more profitable to do so, and in point of fact the organizational and financial management skills required to be a successful underground emperor are not so dissimilar from those required to be a successful property developer.”


“You mean to tell me that Moriarty intends to become a City of London tycoon?”


His appearance was quite familiar to me. He is extremely tall and thin, his forehead domes out in a white curve, and his two eyes are deeply sunken in his head. He is clean-shaven, pale, and ascetic-looking, retaining something of the professor in his features. His shoulders are rounded from much study, and his face protrudes forward and is forever slowly oscillating from side to side in a curiously reptilian fashion. He peered at me with great curiosity in his puckered eyes.

The Final Problem


Moriarty always had the gravitas of a banker


“Intends?  The good Professor seldom intends, Watson; one knows him by his works.  That discreet announcement is Greuze’s boast that it has raised — not hopes to raise, has actually subscribed — an investment fund with Moriarty and Milverton at its head.  In fact, I shouldn’t wonder if Mycroft’s firm is not part of the equity syndicate.”


“Mycroft?” Watson asked in shock.  We met him at his bank, and I thought him the soul of rectitude and probity.”


“That he is.”



“Sherlock, Dr. Watson, may I present my new business associate?”


“Doing business with Moriarty?”


“Oh, no doubt brother Mycroft will be able to make a shrewd assessment of Moriarty and indenture his collateral, if not the man himself.  That is the role Milverton plays; he is willing to eschew crime in favour of business when the risk-adjusted profit from the latter exceeds that of the former.  And, like many a financier, he is so attuned to the lure of money that he is utterly immoral.  The phrase has no meaning for him.  He once told me that if a thing has no market price, then it has no value.”


“And here I find you, a man of sense, boggling about terms, when your client’s future and honour are at stake.  You surprise me, Mr. Holmes.”
“What I say is true,” Holmes answered. “The money cannot be found. Surely it is better for you to take the substantial sum which I offer than to [foreclose on the collateral], which can profit you in no way?”
“There you make a mistake, Mr. Holmes. An [action] would profit me indirectly to a considerable extent. I have eight or ten similar cases maturing. If it was circulated among them that I had made a severe example of [enforcing my rights in one case], I should find all of them much more open to reason. You see my point?”


— Sir Arthur Conan Doyle, The Adventure of Charles Augustus Milverton






“There is no point, Mr. Holmes, in negotiating into document provisions unless one intends to enforce them.”




“As Mycroft himself has repeatedly told me,” Holmes continued imperturbably, “friendship means choosing whom to trust, and business is the science of forming profitable relationships with those whom one does not necessarily trust.  And property is a civilizing asset, for though the criminal may flee, his property may not, and in that very immobility is society’s guarantee of performance.  Moreover, without the legal and financial superstructure of society, urban land has no value.  No, Watson, you may take it as proven — when a criminal begins buying property, it is the first and most critical step to that criminal’s legitimization.”




He sighed.  “I suppose I shall have to read their offering prospectus.”






I shall pay particular attention to the fine print.