8 December 2016
Week in Brief:BUSINESS AND THE CITY
THOSE REAL ESTATE BLUES: They say UK real estate cycles are typically about eight years and the Bank of England, which knows its cycles, is now calling the peak of this one, eight years after the market collapsed in 2008. The Bank’s Financial Policy Committee, which released the minutes of its latest review meeting earlier this week, says that the property market is showing significant signs of slowing, with transactions a quarter down on the comparable quarter last year (and 10% down in the third quarter (post Referendum) against the previous quarter).
The Bank acknowledges that special factors were at play in the period after the Brexit vote, with the unexpected outcome causing some investors to suspend investment plans for UK real estate, and others to attempt to get more liquid. That resulted in something close to a panic among property funds, some of which suspended payouts to investors to conserve cash, or quickly sold properties at knock down prices to increase reserves. The market has recovered from that short term gloom, but, nevertheless, the Bank says that it is clear that inward investment in the South East and central London is slowing. Market commentators tend to agree, though saying that the reason is less Brexit related than the continuation of a trend, already apparent in the later months of last year, with the office market seeing a large number of developments scheduled to be available in the next three years, but with demand starting to slow in the London core, not least because of rapidly rising rents. Rents in the City for best office buildings are now £75 a square foot – around three times those for a comparable buildings in major provincial cities such as Manchester or Birmingham. At that differentiation, Finance Directors tend to start doing sums on location economic.
Still it may well be that investors are looking at simple return economics rather than panicking about another crash – which means the real estate market could be in for a soft landing as in 2003 and 1982 rather than emulating the major dives of the early ‘90’s and eight years ago.
AND THOSE DIY BLUES: Kingfisher is a FTSE100 company which is more familiar to most of us under its trading names – in the UK, B&Q and Screwfix. The former appeals to the amateur do-it-yourself enthusiast and the latter to the more skilled and small scale professional end of the tools and bits market. It is Screwfix that is the star performer at present – the trading figures for the quarter ended 31st October show group turnover a shade under 2% (it was over 3% in the first half) but with the growth coming from Screwfix, 12% up. The international business – mainly Poland and France – is also showing very diverse results. Poland is showing strong growth, as are the much smaller businesses in Russia and Spain, but France is down about 4% – on top of 3% down in the previous quarter. That is a trend which is likely to continue in 2017, with the distractions of the presidential election coming up. For some reason political events seems to put consumers off DIY. Chief Executive Veronique Laury still sees plenty of opportunity to improve performance for shareholders – she is investing more into Screwfix and broadening its appeal, whilst looking very closely at the performance of the UK B&Q units and closing those which do not measure up – and also hoping to make some special payments to shareholders to reflect the more efficient use of capital she hopes to achieve.
GOING, GOING? For those wondering what Brexit may mean for the City of London, here is a sign: UBS, the Swiss bank with a substantial private client business, is to establish a headquarters for this business in Frankfurt. At the moment each country business is run from that country, but UBS has long wanted to consolidate its business in one location to serve the increasingly cross border interests of its clientele. London, Luxembourg, and Milan were also in the running but Frankfurt was seen as a natural hub for the European business – and won. The bank will retain fully serviced branches at country levels, and London and Paris will remain as full local operations for the time being, though UBS says they will be merged into the new headquarters in due course. For Brexit enthusiasts, maybe the news is not that bad – a UBS spokesman said that the decision was nothing to do with Brexit – but it is nevertheless good for Frankfurt which is anxious to attract further financial services business. Whether bankers, and especially private bankers, will want to go and live there may be another matter.
MORE STRAWS IN THE WIND FOR UK REAL ESTATE: The City of London has approved plans for what will be the tallest building in the City – though not in the UK, that distinction remains with Shard just across the River Thames at 1, Undershaft. The new building will replace an existing tower, St Helens, and like it will provide mainly offices on 73 floors, over 900,000 sq ft. The scheme is owned by Aroland Holdings, a property developer and investor domiciled in Singapore. It is likely to take around six years to build – so if Bank of England gloom about the prospects for UK real estate are well founded – see above – the finished building may emerge into the next rising cycle: perfect timing. But to the east, a sign of the times; the government, looking to save rental costs in its central London estate, is to sub-lease 540,000 sqft from Barclays Bank in their Canary Wharf head office complex. Around 6,000 civil servants will be relocated there in offices which will save up to half the rent and rates bill for the places where they currently work. Barclays staff will have to squeeze up a bit – the bank hopes to save £35m per year by intensifying use of its other space in Canary Wharf. It is a sign that Canary Wharf is not the big attraction to financial services which it used to be – rental levels there in the early years of this century were about the same as the City – but are now at a considerable discount.
PRIVATE ENTERTAINMENT: The quiet war of words between the government and Channel Four television is becoming more open. Channel Four Corporation is currently government owned, but run independently and financed from advertising revenue. The government has muttered that it should perhaps be sold off into the private sector, and has recently intervened in new board appointments – it is thought, to reject candidates who might resist the company going that route. Channel Four would like things to stay as they are – though might agree to suggestions that it become owned by an independent trust, to more closely guarantee its independence. The government has also suggested it might move to Birmingham, (it is currently in St James, central London) to diversify the media around the UK. That might sound like being put on the naughty step for many media types – remembering large chunks of the BBC being sent off to Salford.
KEY MARKET INDICES:
(as at 7th December 2016; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.38% (falling); 5 year 0.81% (falling).
Euro€: 1 mth -0.37% (steady); 3 mth -0.31% (steady); 5 year -0.03% (rising)
US$: 1 mth 0.65% (rising); 3 mth 0.95% (rising); 5 year 1.79% (rising)
Currency Exchanges:
£/Euro: 1.18, £ rising
£/$: 1.28, £ rising
Euro/$: 1.07, € rising
Gold, oz: $1,173, falling
Aluminium, tonne: $1,716, slight fall
Copper, tonne: $5,735, slight fall
Oil, Brent Crude barrel: $53.72, rising
Wheat, tonne: £135, steady
London Stock Exchange: FTSE 100: 6,746 (fall). FTSE Allshare: 3,674 (fall)
Briefly: Very much a “marking time” week on the markets with almost everything weakening slightly. The exception was of course oil which following the OPEC agreement on restricting production last Thursday was at $54, 10% up on the previous week, though a little off the peak over the previous week of $56. US$ interest rates continue to rise.
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