02 June 2016
Week In Brief: BUSINESS AND THE CITY
PARKING A PROFIT: Blackstone, the American owned private equity business which had a good time in the recession buying lots of assets at bargain prices, especially in the property and banking sectors, is cashing in one of its big holdings. It is selling, through the estate agency Knight Frank, a portfolio of 88 mostly multi storey car parks, all of which are let to leading UK operator NCP, at a price which is said to be in excess of £500m. The car parking business is still a good one to be in despite many local authorities’ increasing hostility to private cars in town centres, as those same authorities will readily grant permission to convert car park sites to other uses. That keeps the supply of spaces tight so that prices can be pushed ever upwards and the portfolio also includes several quasi monopoly car parks such as those at Heathrow and Birmingham airports. Blackstone has sold several car parks out of the portfolio for development, especially in the West End of London. Last year it sold one in Mayfair for £75m for residential redevelopment.
Blackstone’s timing may be very good – there is little to buy on the property market at the moment with vendors and buyers both nervous about the possible effects of a “Leave” vote in the referendum on 23rd June – but the financial performance of a portfolio of car parks is most unlikely to be affected whichever way the vote goes, so buyers should have enthusiasm for this portfolio; there is still a lot of capital seeking defensive UK property investments without too many management headaches.
HOOTING AND SHUNTING: Network Rail, which provides the track and facilities for Britain’s train operators, has had a troubled history ever since it was established as part of the Major government’s privatisation of the railway industry back in the early 1990’s. The purpose behind the structure was that, though the business should be “not for profit” and publically owned, it should keep its liabilities off the public balance sheet. Network Rail has consistently failed to keep its borrowings under control, or to forecast costs accurately, so, after several restructurings and changes, this objective was finally abandoned in September 2014. As part of re-absorption into the public sector, the government sacked the chairman, Richard Parry-Jones, and brought in instead a tough businessman, Sir Peter Hendy. Hendy immediately began a review of costs and in particular of the Soviet style forward 5 year plans upon which Network Rail based its borrowing requirements. Not surprisingly he has discovered that funding a railway does not really run in five year cycles; also, there has been little coordination of major capital spending projects. At the top of the spending are the various works needed to deliver George Osborne’s concept of a “Northern Powerhouse”. These involve much upgrading and electrification of cross Pennine railways (the HS2 scheme for the new high speed line from London to Birmingham, Leeds, and Manchester is been funded separately). Hendy immediately postponed a lot of these works whilst his new team got to the bottom of the costs. Now they have, and the news is not good. Hendy is believed to have told the government he needs “several hundred million” extra just to properly prepare for the delayed, but still envisaged, £38.5bn capital spending in the current and forthcoming five year plans. The Department of Transport, into whose budget this extra – and the existing commitments – fall, is said not to be happy and has asked Sir Peter to consider more closely the existing programme with a view to further cuts and reprogramming (i.e. postponing) some of the works.
GOOD DAY FOR BAD NEWS: With both sides focussed on the economic consequences of Leaving – or Remaining – the release of the borrowing statistics for government spending attracted much less attention than normal. Just as well for the Chancellor – last year’s borrowing forecasts were missed, only by about 4% admittedly, with £4bn more added to the overdraft than forecast, but in a good year for the economy, Mr Osborne was no doubt hoping to do better than forecast, not worse. Even more disconcerting for him, he has also missed his forecast for the first month of the current financial year – though there is a bright side – borrowings were down, just not as much as hoped, and not as much as needed to help achieve this year’s intended reduction in debt. The problem is largely social security costs, where the Chancellor’s reforms have been politically thwarted so that spending remains higher than intended, but also on the income side of the balance sheet, where slowing economic growth has cut tax receipts, especially for corporate taxes. Stamp duty receipts were well up in the first month, but that is likely to be because of deals rushed through to avoid the announced uplift in charges on buy-to-let properties.
CHECKING OUT: For many years the Co-op has been a birth to death business, but, as the shrinking and restructuring of the group continues, some members will have to look elsewhere for the final service. The Co-op has sold five crematoriums to its rival Dignity for £43m. The business has been doing well, partly due to the surge in the death rate in recent years, and the Co-op wants to raise more money to invest in the funerals and funeral parlours part of the business. Dignity, which is quoted on the LSE, already operates 39 crematoria and has said that the purchase will not involve any redundancies.
WHERE THERE’S BRASS… there’s fracking. Yorkshireman are famous both for a slight conservatism and for a certain care when it comes to ensuring that income exceeds expenditure. Last week the latter seemed to win over the former for the second time in only a year – last year the North York Moors National Park planning committee approved a new potash mine at Lythe, in the national park. Now the County Council planning committee have shown a similar boldness and approved a fracking application for North Ryedale. Initially there will be test drilling at a site where natural gas is already being abstracted, but if that is successful, then a larger scale area for fracking (for gas, not oil) will be opened up. This is the first fracking application to be approved for five years and is likely to prepare the way for many more.
NO MORE FOLDING STUFF ? Today sees something new from the Bank of England. Not an inflation forecast or a speech from Governor Carney on the dreadful outlook if we Brexit. No, the Old Lady has gone radical – today she introduces polymer banknotes, signalling, perhaps, the end of the old paper money that we are so used to using and abusing. The polymer notes should have much longer lives, thus cutting the cost of the nation’s money – well, of printing it anyway. The new note, a five pound version (to be followed by the other denominations over the next couple of years), features an engraving of Sir Winston Churchill, and will be launched at a place where you might think a fiver to be a rarity – Blenheim Palace, Churchill’s birthplace and the home of his kinsman, the Duke of Marlborough. But beware when flashing the new fiver at the till – tests have shown that they can stick together when new. You can’t be too careful with money.
KEY MARKET INDICES: (as at 1st June 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.62% (steady); 5 year 1.01% (rising).
Euro€: 1 mth -0.29% (steady); 3 mth -0.23% (rising); 5 year -0.12% (steady)
US$: 1 mth 0.48% (falling); 3 mth 0.57% (falling); 5 year 1.32% (rising)
Currency Exchanges:
£/Euro: 1.31, £ strengthening
£/$: 1.46, £ steady
Euro/$: 1.11, € strengthening
Gold, oz: $1,209, fall
Aluminium, tonne: $1,546, slight rise
Copper, tonne: $4,698, rising
Oil, Brent Crude barrel: $48.25, steady
Wheat, tonne: £106.50, falling
London Stock Exchange: FTSE 100: 6,230 (small rise). FTSE Allshare: 3,429 (slight rise)
Briefly: Still a pretty steady market though May has ended with very little net movement in main markets (other than oil) over the month. The pound slowly continues to strengthen but main market interest rates are still varying within the narrow band they have been confined to for over a year now.
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