21 July 2016
Week In Brief: BUSINESS AND THE CITY
BREXIT LANDING: Apart from the banks, the industry which seemed to initially take the hardest knock from the “Leave” vote in the Referendum was property. Whilst gloom still pervades the upper end residential developers in central London – though they were getting pretty glum earlier in the year as enquiries and sales fell – the commercial property industry seems to be cheering up. The real estate funds, fearing a rush for redemptions by overseas investors either put a temporary stop on withdrawals or imposed a sort of “Brexit discount”, a special reduction in the amount payable to recognise a theoretically weaker market and fall in values. They also began selling some of their more easily saleable assets to create liquidity. It is still too early to judge quite what the longer term effects of leaving the EU will be, of course, especially as this will hinge on two components of the business. The first is the demand for space amongst tenants. If occupiers cancel expansion plans or decide that they need to relocate outside the UK that will be damaging, probably mainly to the office market. Secondly though is the attitude of investors to the UK. There was some evidence in the early part of this year that value based investors (as opposed to those who look for safe havens for their cash and are thus less concerned about short term returns) were not seeing the returns they needed to justify investment decisions. If yields do move out, that might actually increase those investors’ enthusiasm for the market and bring more money in. That may be starting to happen – there have been rumours already of investment funds snapping up “bargains”, often from the public funds who have closed their doors to redemptions and want quick sales for cash!
SHOW US THE MONEY: Not surprisingly, the property market is watching for any evidence as to what might be happening and an early indicator might come from British Land, one of the UK’s two big publically quoted propco REITs (the other is Land Securities), whose quarterly results were out on Monday this week. BL saw its share price fall by 34% in the days after “Leave” but they have recovered to about 18% down now. However, the chief executive Chris Grigg was cautiously positive about prospects in his statement, pointing to the exchange of contracts on the sale of the Debenhams store in Oxford Street, London, last week, and lettings also agreed last week on the flagship City office building, the Leadenhall Building, at record rents of over £100 per square foot.
In a further possible mark of confidence to the market, the USA bank, Wells Fargo, itself a major property funder, bought its new UK headquarters building at 33 King William Street in the City for its own account last week. That is an unusual thing for a bank to do – capital being so expensive they normally prefer to rent. Indeed, Wells Fargo may intend to do a sale and lease back in due course to get the benefit of its own covenant for itself – but that also suggests some confidence in the future market
KEEPING THE LIGHTS ON: Last week we touched on the gloomy projections for electrical supply capacity if we have a cold winter – projected supply and demand are almost exactly equal for the sort of winters we have been having – mild. The CEGB, which controls power strategy and supply, has been trying to persuade power station owners to make available extra standby capacity by being prepared at short notice to switch reserve stations on – for extra payments of course. Now they are also suggesting that commercial users might contribute – firstly by trying to keep usage down at peak times – for example by doing high usage processing during the night, turning the heating down a notch, and so on, but also to use all those back-up generators which many large office buildings now have to ensure constant supply if the local power source should fail. Most building generators are hardly used at all – and many blocks have two, especially where occupiers are financial services firms who cannot risk any downtime – so getting those switched in at peak times to lessen the load on the national system is an obvious ploy – so obvious that nobody seems to have thought of it until now. The CEGB says that it is looking at a structure of payments to incentivise building owners and occupiers to participate.
BARGAIN SHOPPING: The South African retailer Steinhoff, recently seen in these pages as the under-bidder for Home Retail Group, owner of discounter Argos, has agreed to buy Poundland (Argos went to J Sainsbury). Poundland has 750 shops, mostly in the UK, but also in the Republic of Ireland and in Spain, from which it offers heavily discounted goods across a range of sectors. Business has been not so good recently – profits for the year ended March 2016 were 83% down on the previous year, at £5.9m. Steinhoff is very familiar with discounted brands – in the UK it owns Bensons for Beds and Harveys, but it has more than 40 brands on its home turf and across Europe, with around 6,500 stores. It is out to build a much bigger business and sees the Poundland purchase as a very useful step that way.
NET MESS: If you intend to settle down later to a Netflix provided movie or the latest installation of that box set you have committed to watching, here’s hoping the TV screen will not go blank half way through. Netflix is in a netfix; rumours that customer growth was way below expectations have been circulating for a while – but the company’s second quarter statement (period ended June this year) showed that things are even worse than supposed. New sign ups fell well short of the (itself lowered) target of 2.5m new subscribers round the world at 1.68m, and “churn” (those leaving) was said to be higher than forecast. The company is now looking at 2.3m new watchers for the third quarter. The share price showed what the investors thought – having dropped from US$108 to $94m in April, the price dropped to $83. The irony is that the company is winning many industry plaudits for the standards of its service and the quality of its programme making (including House of Cards, your correspondent’s personal favourite), but awards do not pay the bill
BIRTHDAY GREETINGS: Happy Birthday to Boeing, the aircraft manufacturer, 100 years young this month, an amazing record for most businesses but especially for the aero industry. The the first powered flight had taken place only just over twelve years before the company was founded in Seattle by William Boeing (as Pacific Aero Products; it changed its name to Boeing the following year). Now the largest and most successful aircraft manufacturer in the world, and a key trading partner of the UK’s very own Rolls-Royce, it is still based in California where it was founded, although head office is now in Chicago.
KEY MARKET INDICES: (as at 19th July 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.53% (falling); 5 year 0.48% (rising).
Euro€: 1 mth -0.38% (rising); 3 mth -0.29% (steady); 5 year -0.28% (rising)
US$: 1 mth 0.48% (falling); 3 mth 0.60% (steady); 5 year 1.02% (rising)
Currency Exchanges:
£/Euro: 1.20, £ rising
£/$: 1.32, £ steady
Euro/$: 1.11, € steady
Gold, oz: $1,332, falling
Aluminium, tonne: $1,644, slight fall
Copper, tonne: $4,838, rising
Oil, Brent Crude barrel: $45.80, slight rise
Wheat, tonne: £122, rise of 12%
London Stock Exchange: FTSE 100: 6,695 (slight rise). FTSE Allshare: 3,623 (slight rise)
Briefly: Summer torpor may have set in to the markets now – certainly they are remarkably steady, and trading in the ranges established in the last couple of weeks. Except for wheat… the price shot from £110 per tonne to £122 as the harvest started to come in – a wet spring and summer storms suggest that yields may be down more than forecast.
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