28 May 2015
Week in Brief: BUSINESS AND THE CITY
THE PROPERTY MARKET: The De Montfort Report, the comprehensive annual survey of debt trends in the UK commercial property market has been published. This long running report, compiled by De Montfort University by analysis of detailed returns from what is believed to be around 90% of property debt providers (by value) in the market, measures not just the amount of debt deployed but also looks at trends in leverage, pricing, sectors, and intentions for the next year. The newly issued report for 2014 shows a sharp uplift in the amount of new debt coming into the market, up 50% to £45bn. This figure has to be treated with a little caution; it includes renewals by lenders of loans that have reached maturity. Bank’s holdings of defaulted loans have more than halved to £21bn. All this shows the recovery from the 2008 property crash is strongly underway.
What may be worrying bankers is the growth in the amount of debt now provided by non-bank lenders, now over 20% of all new money. This is coming from various sources, led by the insurers who are keen to find new instruments with better yields now that conventional investments pay such meagre returns. Also prominent in the pack of new boys are the debt funds, typically USA owned, unregulated, and very swift on their feet. They have realised that buying debt can offer the opportunity to layer funds – so that risk reflects the return aspirations of sophisticated institutional and private investors – and all without having to own the properties which underlie the debt instruments.
The Bank of England may also be reflecting on the De Montfort report. Practically all the participants reported that they wished and intended to increase their activity in the market in 2015. Whilst that aids recovery, it may also be the sign of a bubble starting to grow in the turbulent cyclical oceans of the property business – one of the main drivers of value growth tends to be the supply of money invested in the market and the Bank will be closely watching what is happening to yields on property. Further falls not justified by an expectation of rental growth could spell forthcoming trouble.
EDF TACKLES PRODUCTIVITY: EDF, the 85% French government owned giant power utility, which is a major operator of nuclear power stations and has a leading presence in UK energy supply, has opened negotiations with its 30,000 office and administration employees to increase the number of working hours they spend in the office. Currently the white collar work force is contractually bound to work 35 hours per week (though many work slightly more in return for longer holidays – not untypically, ten weeks). What EDF would like is to increase the current 196 average days worked to 212, in return for a salary increase of around 5%, or one off payments of about €10,000. It seems unlikely that this is a battle that will be easily won, but it is assumed that this stance has not been taken without committed backing from the government of Francois Hollande. The unions have strongly resisted a similar move in the French health service, with several major strikes already and more planned. The utility unions are promising the same for the utility sector, a move which could, if prolonged, start to impact the UK’s power supplies.
HOUSEBUILDING: Since the election most of Britain’s major housebuilders have announced intentions to step up the number of houses they build. The share prices of the major quoted builders have been one of the major winners on the LSE in the last couple of weeks, reflecting a good outlook and a strong economy. However, housebuilding is not something where the supply tap can just be turned on. One of the major constraints is the basic one of supply of land. The housebuilders used to own large land banks, but that brought most of them to their knees in the recession of 1999, and now they try to buy options to produce future supply, whilst they get planning consent and wait for a favourable market. But planning is a contentious issue. Most local residents almost anywhere seem to feel they want more housing – but not near them. Even for land which is already zoned for housing, getting outline and then detailed consent can take two to three years – and for unzoned land it can easily be seven years and up.
And, even for those housebuilders which have got all their pieces of paper lined up and signed, there is currently another set of problems. Building materials are in short supply; bricks and concrete are on waiting lists, windows, especially if non-standard, can take up to six months. And it is difficult to get the specialised labour force to work to the required standards. As many of the most skilled are from eastern Europe, immigration controls are yet another worry on the residential developer’s worry list.
RYANAIR: For the last thirty years the cheap service airline we all love to hate has been at least delighting investors with excellent returns. Now Ryanair is taking a new customer friendly approach to bring back those customers who were tired of spartan service and hidden charges – and it is paying off. Net profit for 2014 is up to €867m, from €523m the previous year. This is from both enhanced revenue per passenger, but also from an 11% rise in passenger numbers. And the outlook is more of the same – projections are of rising numbers, and of falling costs – as long as the oil price stays in its present trading band.
HARD WORK: “Hard work never hurt anybody,” said President Reagan “But I figured, why take the chance?” Now the President’s theory as to the benefits of plenty of rest has been proven by a study by Cambridge University for the health insurance company Vitality Health; the most productive employees are those who get at least seven hours of sleep each night. Even better: smoking, over-eating, and boozing has no discernible effect on output if the workforce is getting that vital seven hours. Preferably at night at home though – not in company time.
KEY MARKET INDICES: (at 26 May 2015; comments refer to change on week; $ is US$)
Bank rate: £ 0.5%, unchanged: 3 month 0.55% (slight decline); 5 year 1.44% (slight decline).
From this week we include €: 1 month -0.1%; 3 month -0.45%; 5 year 0.27%.
And US$: 1 month 0.22%; 3 month 0.38%; 5 year 1.66%
Short term US$ rates have wide spreads e.g, 25bps at 3 months; but for the hard pressed depositor better than the negative yields on short term € – you pay the bank for its trouble!
£/Euro: 1.41, £ slightly stronger
£/$: 1.54, $ improving against most currencies
Euro/$: 1.09
Gold oz: $1204, falling back
Oil, Brent Crude: $65.52, continues trading within recent patterns
London Stock Exchange: FTSE 100: 6996. FTSE 350: 3867
Key indicators continue stable, no doubt due to the confidence given by the election outcome, recent trading results, and even half term!
