29 October 2015
Week in Brief: BUSINESS AND THE CITY
SHUNNING THE FLEXIBLE FRIEND: In news that should cheer the Chancellor of the Exchequer, the latest statistics on personal borrowing show a marked slowing of the rate of take up of debt. The level of this has been seen as a structural danger throughout the recessionary years, as real wages fell and consumers let their credit cards (and personal unsecured loans) take the strain. In September the rate of repayment of credit card debt almost exactly matched the rate of new drawings on cards (ignoring interest charges). Total credit card debt at the month end stood at £41.6bn. Drawings on personal loans – which tend to be used more for buying consumer items, not for general living, did edge up, by £116m. This appears to show increased consumer confidence, in that people are prepared to take on longer term debt for consumer capital expenditure. Mortgage debt take up continues to rise quickly, partly as home buyers re-enter the housing market, but also reflecting two other factors – rising house prices, and also remortgaging – existing householders taking on new mortgage debt to release equity or to lock into lower interest rate fixed term to avoid possible interest rate hikes.
All this contrasts with lending to business, where total business debt to banks fell by £1bn in the month, to £260bn, and this in spite of increased lending to the property industry which is going through something of a boom in both property investment and development. Again, this reflects both rising values and rising activity, with property players climbing onto an up escalator moving at ever increasing speed.
But this may be a little misleading. New money raised on the bond and equity market has risen £16bn since January this year and it is also known that some of the hedge and opportunity funds have also become fairly significant funders, supplementing investors or owners; so total capital flows into both general business and property appear to be actually rising – it is just that the banks are getting a smaller share of it.
THE NEXT HOUSE ARRIVING…: All government bodies in London have been asked to look at their land holdings to see if they can release land for development, preferably for housing to ease London’s housing shortage. Transport for London (“TfL”) who run London’s public transport network, have already been on the case and have come up with a list of 75 sites, a total of 300 acres, which they think have possibilities. TfL says that it owns 3,000 operational sites in the Greater London area, which total 5,700 acres, and it is in the early stages of examining the commercial potential of all of them. It thinks that it could raise up to £3.5bn from development, assuming the property market does not crash (quite a bold assumption in the volatile capital).
Many sites will be in the suburbs and not so valuable, so the first batch are mostly in central London – Zones 1 and 2 in TfL speak. They tend to be above Underground railway stations – such as Southwark, or entail the rebuilding of bus garages, such as Aldgate where a one million square foot office scheme, on the edge of the City of London and over the its principal bus station, was felled by the 2008 recession and remains stalled. They will not all go for residential development – some will be more suitable for offices, depending on how best value can be maximised; some will involve careful operational considerations to keep services running, a matter that might be regarded somewhat cynically by those many road users affected by the chaos caused by the construction of cycle super-highways at the moment.
TfL is determined to maximise its returns from the proposed developments – it is drawing up a shortlist of around 75 “approved” commercial developers who it will invite to tender as sites come up for development. TfL will then become a development partner, working with the commercial developer to ensure best use of the sites and to get as large a profit share as possible. At the moment the transport supremo has five employees in its development department but it intends to expand this to twenty nine with immediate effect, and then further as its new business grows. At least that should create some demand for the new offices it will be building.
DERIVING A PATTERN: HSBC, which has long been rumoured to be considering a move of its headquarters out of the UK, perhaps back to Hong Kong but more likely to Singapore, has announced that it will move the location of its derivative trading book to Hong Kong. The traders themselves will mostly stay in the trading office in Canary Wharf in London, but the book itself will be domiciled in Hong Kong and new trades will be booked there. HSBC said that this is because of rising costs in London, not just back office salary and resources costs, but increasingly those relating to regulation and capital allocation costs for the derivatives activity
EVERY LITTLE HELPS: Tesco, the UK’s leading food retailer, but struggling with increased competition and high fixed costs, has announced a diversification which it hopes will spread overheads across a wider range of products and bring more shoppers into its stores to counteract the appeal of the discount supermarkets. It has signed a deal with Arcadia, owned by the Green family and run by Sir Philip Green, to sell their Burton’s, Evans, and Dorothy Perkins brands. Initially this will be in just four supermarkets and will be on a trial basis but, if it works, will be rolled out across the country. If the experiment is successful it also offers a low cost opportunity for Arcadia to get more floor space at lower costs – especially on out of town retail where rents are still rising and planning restrictions make it difficult to build new outlets. Tesco have also signed similar arrangements with Claire’s Accessories, Sock Shop, and Pavers, who will take smaller concessions for their speciality fashion items. Tesco has its own fashion range, F & F, in some larger stores, but this has not been a great success; shoppers seem to prefer strong high street brands.
GOOD BANKING NEWS: Metro Bank, probably the leader of the so-called challenger banks – the new entrants to the UK retail banking market following the banking crash seven years ago – has announced that it intends to obtain a quote on the London Stock Exchange. The bank was founded in 2010 and has a strong web presence but has also taken large branches – which it calls “stores” – in key locations, mainly in London and the South East, with the intention of building a national network . It says it now has over 600,000 accounts and that deposits nearly doubled last year. Also well up is lending – 116% up in the last year says the bank. It is focussed on the wealthier echelon of private customers, but not on those who expect a traditional super high quality but expensive private banking service. Like its Swedish rival, Handelbanken, it has been able to expand by cherry picking locations and offering focused service – but has concentrated on private accounts, whilst Handelsbanken has derived a lot of its growth from small business, an area recently neglected by the large UK clearers. The bank is rumoured to be looking to raise £300m in new capital, to add to the £600m so far provided by its private shareholders.
KEY MARKET INDICES: (at 27th October 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (steady); 5 year 1.27% (steady).
Euro€: 1 mth -0.13% (steady); 3 mth -0.09% (steady); 5 year 0.14% (steady)
US$: 1 mth 0.30 (falling); 3 mth 0.43% (steady); 5 year 1.37% (rising)
Currency Exchanges:
£/Euro: 1.38, £ steady
£/$: 1.54, £ steady
Euro/$: 1.10, € falling
Gold, oz: $1166, falling
Aluminium, tonne: £956 falling
Copper, tonne: £3407, rising
Oil, Brent Crude barrel: $47.54, fall
Wheat, tonne: £115, rising
London Stock Exchange: FTSE 100: 6,400 (rise). FTSE 350: 3,556 (rise)
Briefly: The markets continue relatively steady with the FTSE indices trading in their new raised patterns. Interest rates even up to five years remain low and steady, though the three month dollar bought and sold rates are an extraordinary 33bps apart. Commodities generally continue weak though copper has held some of its gains.. Oil is again showing a steady downward drift.
