Issue 16: 2015 08 20: BUSINESS AND THE CITY

20 August 2015



NEWS, the word in pink on a grey background

NOFLATION: The new word for lack of inflation, and indeed, lack of deflation. That seems as though it might continue to be the state of the price indices in the UK for a while yet. Having escaped the fear of deflation last year, the expected uptick in prices has not yet occurred, or at least the rise in prices of some articles – housing of course, for one – is offset by the falling prices of others, especially food and clothing. What lies under this is, not least, our old friend the oil market and the falling prices of crude. That drives so many things – manufacturing costs generally, extraction costs of many raw materials, and nearly all transportation costs. There is a further benefit from this if your outgoings are linked to an inflation index, either formally or otherwise. So power costs should continue to be held down and, for commuters, very good news – rail ticket prices are pegged at inflation plus 1%, the operative test being performed in July. That means that for next year ticket prices will pretty much go up just 1%. Not so good, of course, if your income is linked to inflation rates – there are going to be quite a lot of very low pay rises this year, unless bosses think that employees have performed beyond expectation – or might leave for better paid jobs, a real trend in low paid jobs in London.

GYMS GET FITTER: Gyms have become big business in the UK, following the USA, but many of them suffered in the downturn. That expensive membership does not look so good when money is tight – and you might want to be spending more time in the office to impress the boss in difficult times. The gyms did not recover very quickly from that downturn either, with operators speculating that once people break the habit they are resistant to picking it up again – and also blaming the craze for cycling and running for the slow take up of new memberships. However, things seem to have changed this summer with a big pick up in gym memberships, though it is noticeable that it is the budget operators such as EasyGym, Anytime, and Pure Gym who seem to be doing best, whilst the more expensive ones – the growth area pre 2008, are not doing so well except in one or two areas (the City and Chelsea especially). The budget operators usually offer very low membership costs but with a pay per visit approach which appeals more to users who are tight for cash or uncertain about their commitment.

THE CYCLING CYCLE: As we suggest above, Britain is going through a cycling craze at the moment with cycle shops, both independents and chains (no pun intended) such as Evans, Cycle Surgery and Halfords, pedalling their wares in almost every street. Or at least it feels like that. Nor are the retailers the only ones pedalling for growth – Brompton, a great British success story as the developer and leading proponent of the commuters friend, the folding bike, is also expanding fast. New materials and technologies have made their bike lighter and faster to fold up so it is almost as easy to carry as a brief case, and hip colours and finishes are keeping them popular. Now Brompton are to expand their output by building an 86,000 sq. ft. new hub (ok, no more) at Greenford which will be a manufacturing and distribution centre for the UK. No doubt that is one building which will have plenty of cycle racks for employees.

CASHING IN AT KINGS CROSS: The Government, through London and Continental Railways which was the vehicle for HS1, the line from the Channel Tunnel to St Pancras, owns a 36% interests in the land around Kings Cross and St Pancras stations, now well advanced with the huge office and housing development project led by Argent Group. Yesterday, with the project well proven, record rents (rumours of £65 per square foot on offices) and a glittering array of tenants, with Google’s European headquarters as the core attraction, the government announced that it would be selling. The estimated sales value is around £600m, a useful addition to the government coffers along with that generated by sales of Lloyds TSB Bank, Royal Bank of Scotland, and Eurostar. It is hoped the sale will be completed by the end of the year.

THE SHIPPING NEWS: Not good, is the market consensus. Volumes are down – at a seasonal point when they are normally picking up – and freight rates are falling with fierce price competition, especially on key routes Asia to the USA, and Asia to Europe. This reflects continuing troubles in China with production down, but also the growth in manufacturing in the USA which is importing less cars and engineering goods, with a similar, if less pronounced picture in some European countries – Spain and the UK.

SURPRISING DEVELOPMENTS: Firstly, Derwent, the commercial office developers who operate in what might be defined as the central London prime edge, building hip buildings for cost conscious but trendy tenants. They announced that demand for space was at record levels in their portfolio with rents rising fast, and that investors were equally keen to buy if given the opportunity, driving yields on valuation down and values up. This happy situation is pushing Derwent’s income and values up, and reducing the proportion of debt to assets in its balance sheet, every property company’s dream scenario. The only problem is buying the raw material for future developments. Old building and vacant sites have gone up in price too.

Secondly, it is a similar story round at Persimmon, the national house builders headquartered in York. The order book for its new houses, aimed mostly at buyers in the lower third of the market, is up 12%, sales were up 6% to 6,855 homes in the first half of this year, and average sale prices rose 4%. Profits were the best news of all – up 31% to £272m in the first half. Not such a future supply problem for them though – Persimmon controls 92,000 building plots.

Thirdly, even some tenants are happy. They are those that live on New Era residential estates in Hoxton who have been fighting off plans by USA landlords Westbrook to redevelop the estate and raise rents to market levels. Westbrook sold out to a charitable landlord, who has now announced that it will change the basis of rents from market related to income related. The richer tenants will be paying more, the poorer ones less. We can’t see Derwent moving to that model any time soon.

KEY MARKET INDICES: (at 18 August 2015; comments refer to change on week; $ is US$)

Interest Rates:

UK£ Base rate: 0.5%, unchanged: 3 month 0.58% (slight rise); 5 year 1.49% (falling).

Europe€: 1 mth 0.7% (steady); 3 mth 0.5% (falling); 5 year 0.29% (steady)

US$: 1 mth 0.23% (rising); 3 mth 0.42% (falling); 5 year 1.63% (falling)

Currency Exchanges:

£/Euro: 1.41, £ steady

£/$: 1.56, £ steady

Euro/$: 1.1, € steady

Gold, oz: $1118, steady in new band

Oil, Brent Crude barrel: $48.74, continues weak in new range.

Wheat, tonne: £120.15, steady

London Stock Exchange: FTSE 100: 6,526. FTSE 350: 3,631

Briefly: The quiet August continues, in spite of turmoil in the China markets and consequent spillage into other Far Eastern markets. This, if it continues, must affect Western markets but not much sign of it so far. Maybe all the dealers are on holiday…. Certainly volumes are down and not much price movement in most markets outside recent trading ranges.


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