04 May 2017

Week In Brief: BUSINESS AND THE CITY

PUTTING A ROOF ON IT:  Taylor Wimpey drew a firm line under the recent controversy regarding ground rents on houses that they have sold leasehold.  The leases contain, in the normal way, annual ground rents payable by the long leaseholder to the freeholder.   Traditionally this gave freeholders a long term continuing interest in the management of their estates – as with the Duke of Westminster’s London estates – but, in an era of low interest rates, ground rents have become valuable investments.  Owned in large enough quantities to benefit from economies of scale in management, they provide reliable income (leaseholders rarely default on ground rents because of the danger of having their property repossessed for such a small amount) and occasional capital receipts – usually paid if a property owner wants to alter or extend his property and, later into the life of the lease, for lease extensions.  And they do not affect the sale value of the property when new – as they are typically £50 or £100, most purchasers do not take them in to account, but the rents sell well in bulk to specialist investors who will currently pay 20 or 25 times the ground rent, to give a 4% or 5% yield.  That is perhaps £2,500 extra receipts on a £100 annual ground rent on a single house sale, which for a large scale house builder comes to a useful extra sum per year. The Taylor Wimpey twist was to make the ground rent double every ten years, usually until capped at year 50.  TW does not hold the groundrents but has sold most of them on to professional investors. Householders, although usually legally advised on their purchases and able to calculate the cost of their mortgages, seem to have missed the financial effect of this doubling up – an initial ground rent of £100 agreed last year would rise to £3,200 per year by 2067 (at which point the cap cuts in). Of course if we go back to the bad old days of inflation this might look a bargain, but in the current climate it might be a considerable imposition and would affect the sale value of the house.

Some purchasers belatedly spotted this and called a foul and after some fuss Taylor Wimpey have agreed that perhaps it was unusual behaviour (though so is not reading the small print when buying a house, suggests our property lawyer) and that it will put things right. This may not be so easy though, as the investors who now own them have paid good money for their investments, so TW will either have to buy them back, or compensate the householders.  It is now in discussions as to what to do, and has put £130m aside to deal with the financial consequences.  However, the company reported that none of this seems to be affecting 2017 sales – which so far are 16% up on this period last year.

WEAKER FOUNDATIONS:  If volume house builders are having an improving time, it’s not so good at the top.  Residential property sales in the south-east, especially at the upper end of the market, continue to slow down, and the decreasing volumes are affecting residential estate agents.  Two of the largest agencies, LSL and Countrywide, both reported revenues down in the first quarter – Countrywide by 13% (LSL said 3% for them and that they had expected things to be worse).  Estate agency has high fixed costs (all those high street branches) and so is very sensitive to volumes.  The business is also migrating to the internet and becoming more competitive, forcing agency fees down, so for traditional agents with big branch networks there is a double squeeze.  Add in the usual slowing of sales caused by an election and the lookout for the first half figures must be grim, though perhaps the, also traditional, post-election bounce may help the full year figures.

FROM BRICKS TO AIR:  Also having a tricky time are aircraft builders Airbus, which is already considering the effect of Britain’s coming exit from the EU.  Airbus’s main activities are in the UK and France, and the company has traditionally been an example of how to run a cross border business, but recently it has been hit by a whole raft of problems.  It is having difficulty with its supply chain for its well-regarded new jet, the A350, the externally sourced engines for the A320 are suffering reliability issues, and the specialist military jet, the A400, has got major cost problems.  All that has hit profits for the first quarter of 2017 which are down by about half, though the company expects that it will resolve all these issues in the current year and is confident about its profit performance for the year as a whole.  As it should be – the forward order book has orders for a remarkable 6,700 aircraft – the only issue now is getting them into the hangers of the purchasers.

LIBERTY WELL:  The rise and rise of Liberty House in the UK steel industry continues.  Liberty is controlled by Sanjeev Gupta and is part of the Gupta family’s GFG Alliance, an industrial and investment conglomerate.  Mr Gupta has stepped boldly in on several occasions to buy parts of the steel industry that were been shed by Britain’s big steelmakers, Tata and Caparo.  Both said that most of the UK steel business had been rendered unviable by cheap steel imports, especially, but not solely, from China.  Mr Gupta though spotted that there were some specialist “added value” parts of the business, where local demand was strong and some tighter management and better marketing could both cuts costs and gain extra turnover.  His latest and by far his biggest acquisition is of the specialist steelworks at Rotherham which has a modern state of the art electric arc furnace and makes high end alloys for use in planes and cars.  It also is able to use scrap steel, which Liberty say will be an increasingly important aspect to the business – recycling steel is environmentally responsible but also economically sensible.  Not that it will only save old steel – it will also become a very significant customer of the former Tata steelworks at Scunthorpe, now owned by venture capitalist Greybull Capital (who bought it for £1 from Tata) who say the business is now in good heart.  In fact there is a bit of a steel renaissance going on, after some fierce cost cutting but also some relief from competition as world steel over-capacity reduces.  Sheffield Forgemasters, a long established steel casting business which supplies steel for the new nuclear submarines now being built, and which looked in a parlous state two years ago, said 2016 losses were down to £900,000 after being nearly £8m in 2015, and that it is on course to build further sales and to return to profitability this year.

KEY MARKET INDICES:  (as at 2nd May 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.32% (slight fall); 5 year 0.69% (rising).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.10% (rising)

US$: 1 mth 0.99% (steady); 3 mth 1.17% (rising); 5 year 1.94% (rising)

Currency Exchanges:

£/Euro: 1.18, £ steady

£/$: 1.28, £ steady

Euro/$: 1.09, € rising

Gold, oz: $1,255, falling

Aluminium, tonne: $1,929, slight fall

Copper, tonne: $5,688, rising

Oil, Brent Crude barrel: $51.12 falling

Wheat, tonne: £150 rise

London Stock Exchange: FTSE 100: 7,250 (fall). FTSE Allshare: 3,990 (slight fall)

Briefly: This was a very unexciting week, not much money for day traders in this sort of market – unless they are in wheat, which is edging up. Oil down a bit, UK stock market down a bit, copper up a bit.  The dollar is expecting interest rates to rise – as the Fed is signalling, not suiting Mr Trump who would like the dollar weaker.  At the moment it is going the Fed’s way.

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