April 2019

April 2019

Commentary

As we start the new financial year, we thought of flagging a few themes we expect to differentiate the 2019/20 year from the one just finished:

Firstly, the market environment is very different. A number of clients are experiencing slower sales and taking a closer look at the potential for impairments of development assets than in previous years, particularly in London and the South East. The non-cash impairment factor is never a great deal of fun but not the real issue (any covenant discussions may need to be approached differently, we would acknowledge…) – the real issue is the impact on cash flows and levels of indebtedness, particularly if associations need to switch tenures in order to optimise the financial return or the “place-making outcome” on a project or both, and the knock-on effect for future capacity.

We will have to see whether, when and how the Brexit saga is concluded but it is unlikely to all suddenly flip to robust economic confidence given the headwinds in the US and (rest of) the EU. The world seems to be starting to fret a bit about how to unwind quantitative easing and in the UK we still aren’t seeing the productivity come through to support what used to be proper earnings growth on which everything else hangs, as the following chart based on ONS data demonstrates very clearly.

 

Secondly, we seem to be seeing a flourishing of financing sources, from the launches of THFC’s bLEND and MORhomes to the government’s announcement of a further round of government-backed cheap funding to the flurry of, in some cases, very keenly-priced bonds and private placements. The last group includes what may be the start of real growth in overseas investors wishing to bid down pricing on decent-sized issues from good credits. Our view is that there are more useful things which government can be doing than shaving funding costs in the context of underlying interest rates being at the lowest they have ever been – if the headline of building 300,000 new homes each year is what they want then improving the speed and flexibility of the planning system would be vastly more useful.

We’re also seeing a real appetite from banks to be more imaginative than the vanilla five-year RCF and more comprehensive refinancing exercises we have been involved in in recent months have been very well received by lenders.

Thirdly, the end of the 1% rent cuts, with tenants about to feel the benefit of the fourth and final instalment which has no doubt helped to improve things on the home economics front in many cases but has been expensive for landlords. It seems possible that in England the CPI+1% will come under pressure again, particularly if underlying inflation starts to rise, whether as a consequence of pulling back on quantitative easing or imported inflation if Sterling experiences more significant moves. But in the short term at least the political support for CPI+1% seems pretty solid.

The Welsh system of course is at a different point in the cycle, with the first real dip in the waters of cost reduction by Welsh Government in this context, but not a change on the scale of the four years of minus 1%. The objective in this area is surely to build on the political support from all parties by making a success of the various funding initiatives from central and devolved governments to build new homes at a faster pace.

Financial Markets and Economics Overview

March 2019 was originally set to be the month in which the UK was to leave the European Union, however, the debates rumble on. This week saw the EU Withdrawal Agreement rejected by 58 votes, with the House of Commons searching for a consensus. The UK now has to make the tough decision, by the 12th April, of whether to leave the EU with a no deal (with no transition period) or alternatively consider a long extension to Article 50 and determine a new path. If the UK government do decide to extend, they would have to participate in the upcoming European elections. Donald Tusk (European Council President) has scheduled an emergency summit for the 10th April to respond to developments.

Indicative votes from MP’s didn’t see a decisive consensus on the eight options being considered, with the two favoured options being a second referendum and a customs union option. Prime Minister Theresa May also announced that she would step down once Brexit has been delivered.

The 30 year Gilt yield fell by c.27bps since February, largely driven by a combination of a global slowdown and increased uncertainty around Brexit.

UK March PMI data will be closely watched by the Bank of England policymakers this week. Manufacturing results have been following a downward trend over the past couple of months and services showed some unexpected growth in the index level last month. Official January GDP figures showed the UK economy starting the year on a strong footing, with the Bank of England currently forecasting Q1 GDP growth of 0.3% on the previous quarter.

GBP/USD ended the month at 1.30, having dipped below the 1.3 level over the last week of March. This fall was largely due to heightened uncertainty around Brexit negatively impacting Sterling and the Dollar strengthened after global growth concerns eased and news that China will resume talks with US officials, leading to increased optimism over US-China trade relations. GBP/EUR also ended the month lower than February at 1.158.

House prices, as measured by the Nationwide index, shows a positive increase since March 2018 at 0.7% (nationally). However, in London, house prices slumped by 3.8% in the first quarter of 2019. This is the fastest pace of decline since 2009 and the seventh consecutive quarter in which prices have declined in London. England recorded its first annual price fall since 2012, largely driven by a decline in the South East.

Sources: The Telegraph / Nationwide House Price Index


Interest Rates

Inflation

Capital Markets

Bank Credit