October 2020

October 2020

Commentary

This monthly report comes as summer has well and truly worn off and we trudge into what may be a slightly tedious winter season, hopefully nothing worse than tedious for those of us at home with our spreadsheets and families. There was a Financial Times opinion piece in the last week which articulated quite nicely how for many of us spending more time with families and close friends has had absolute positives, but for those not directly affected by health or income issues the lack of wider social engagement is of course the main Covid negative (to coin a phrase not heard in the last week on the other side of the pond).

However, against that backdrop the (relatively) new government appears to be becoming more engaged on a range of policy issues. 10th September saw the release of more details on the next Affordable Homes Programme, covering the years 2021 to 2026. The total stated size at £12bn is meaningful and it’s split 50/50 between rented homes and ‘routes into Home Ownership’, the latter being primarily shared ownership. It is in substance and presentation a focus on ownership models rather than primarily low-cost rental.

It may be that we look back and see the Johnson government reforms of town planning as more significant. The August “Planning for the Future” White Paper contains some potentially more substantive changes to the processes around planning decision-making and also to the mix of affordable housing provided through planning gain (with “First Homes” being a planning system construct rather than creature of government grant).

However, in terms of the AHP there are some substantial changes of detail on the existing social housing norms. These affect the terms on which both new rented homes and new shared ownership homes are provided, and frankly there is quite a lot more work to be done on implementation. Key points include:

  • Right to shared ownership, for new rented homes.
  • Shared ownership minimum first tranche purchase down from 25% to 10%, along with more granular staircasing arrangements (minimum 1%).
  • Also on shared ownership, the transfer of the responsibility for the cost of repairs for the first ten years away from the buyer and back to the landlord.

The details so far are scanty. Potentially the most significant is the point around shared ownership maintenance costs. The right to shared ownership seems potentially financially ok for all parties so long as the practicalities are understood; the likelihood of people buying first tranches closer to 10% than 25% is perhaps low and likewise very small staircasings seem just a practical challenge for the buyer and administrative one for the seller. Whereas allocation of cost risk is only possible when it is clear what costs one is allocating – is it just costs passed down through a lease, or does it go wider and in which case who decides whether the costs need to be incurred? Does it introduce a misalignment of interests e.g. an incentive for the RP to defer major spend? How do sinking funds work?

Also on shared ownership homes, the tenure is already less favoured by lenders in terms of valuation uncertainty and liquidity. Introducing more complexity and cost risk will only add to that and in turn have a knock-on effect on capacity.

The views we have heard from clients have included a number along the lines of “this is simply not going to work”. In terms of a response, it seems the most important thing is to use whatever engagement the government offers with associations, at political or regulatory level, to get the groundwork done to ensure that the programme is successful in delivering more homes which are and which remain affordable. The same applies to the ongoing grind of establishing ways of dealing with legacy fire safety issues which are remotely practical and affordable – there is a great deal of work clearly still to be done on that front also. The political profile of housing remains very high, even with all of the competition for headlines and policy priority.

In capital markets news in September, there was retained bond sale by Moat and taps by Richmond Housing Partnership, Optivo and MorHomes.  Optivo was the largest at £150m of which £50m was retained. Pricing has of course remained extremely attractive by any sort of historical comparison; see the following pages for data on rates movements in the month.

Financial Markets & Economic Overview

 

Data releases last month showed the UK economy expanded for the third consecutive month in July at 6.6%, although the economy remained 11.7% smaller than in February and the month-on-month expansion was at a slower pace than in June. Nevertheless, the expansion was largely driven by a boost in the services sector, which accounts for around 80% of the economy’s output. The manufacturing sector experienced growth of 6.2% as well, but this was weaker than June’s increase of 11%. The quarterly GDP output figure was also revised last month, indicating that the UK economy had contracted by 19.8%, making it the largest quarterly fall on record.

UK inflation in August saw its first expansion, at 0.2%, since February. The growth was fueled by an annual expansion of 9.3% for pubs and bars, and the first growth in spending on clothing since February. Airlines and travel agents, however, reported that spending was down 61% in August compared to last year.

Following the record level rebound in the UK housing market in August, house prices continued to soar to an all-time high in September. Nationwide’s housing price index indicated average prices increased by 0.9% between August and September. The rebound likely reflects pent-up demand coming through and the stamp duty holiday.

With the Bank of England (BoE) looking to combat the ongoing pandemic and Brexit uncertainties ahead, they indicated last month that it had begun “structured engagements” with banks on the operational details associated with negative interest rates. However, subsequent messages by the BoE have left the prospect of heading into a negative rate environment an ambiguous topic. Sterling typically rallied on the indications of a push back against negative rates.

Globally, the lead up to the US presidential elections added greater volatility to the already fluctuating FX and equity markets (due to fears of a second wave). At the end of last month, the Federal Reserve also warned that the US economy would require a new fiscal stimulus package to enable an economic recovery, which led to a fall in US stocks.

Interest Rates

Inflation

Capital Markets

Bank Credit