September 2018

September 2018

Commentary

It is with slightly heavy hearts that we watch the magnificent Summer of 2018 fading into the Autumn and return to the always busy month of September as clients return from holidays full of vim, vigour and challenging deadlines for their advisors. In recent years, we have remarked upon the apparent death of the traditional “summer lull” and this year was no exception. Mergers, group re-structures and corporate finance strategies stand still for no one and with holiday breaks across the team it felt like all hands to the pump at times during August.

Before you reach for your violins, we are now back to virtual full strength, bolstered too by the very welcome recent arrivals of Tony Oakley and Barry Greyling to the Centrus Team. Both bring with them a wealth of housing and wider financing experience and underline our commitment to the housing sector and ensuring that our clients have access to the very best advisory support possible.

So, as we kick on to the calendar year end, we thought it might be worth posing some general questions and observations on matters which might impact housing sector finance over the coming months;

  • Political turmoil as Brexit reaches crunch point – the machinations of the past two years now appear to be boiling down to 3 clear options, Chequers, Canada +/++/+++ or No Deal. Complicating all of this are the parliamentary splits, wafer thin government majority and the campaign for a second referendum. All of which points to a very jittery Autumn politically with likely volatility in Sterling and Gilts as the clock ticks down to March 2019. Turbulence ahead, please fasten your seatbelts.
  • UK housing market sees biggest monthly falls since 2012 – according to Nationwide, UK house prices suffered their biggest monthly fall (0.5%) since 2012 in August with a warning that overstretched consumers and lower levels of economic activity would continue to drag on price growth. This will be concerning to those developing associations which have higher exposure to market sales and if they do delay commitments as a result this could have a knock-on effect into their funding plans.
  • Delivery time for new aggregators – with much fanfare, new aggregators have been announcing major plans, and in some cases, ambitious claims on pricing. Having promised major activity earlier this year, will we see proof of the pudding during September and October? A number of borrowers will be watching with interest to see whether they really deliver better value than own name public or bi lateral private issuance.
  • The shifting sands of credit ratings – with both Moody’s and S&P ratings for housing associations under downward pressure during 2017 and 2018, have we seen the last of the down ratings in this sector? Headwinds include the potential for a disorderly Brexit to impact the UK sovereign rating with a knock-on impact to HAs through the government support methodologies and more ambitious and commercial development programmes colliding with a slower housing market.
  • More new lenders joining the party? – on a more positive note, we saw two major new bank lenders in the shape of BNP and Sumitomo making their debuts in the housing sector earlier this year. Centrus was instrumental in these deals as well as advising on IFM Investors’ first foray into housing with a 9-year unsecured floating rate private placement with A2Dominion. Wider investor interest underlines the fundamental appeal of the sector and its credit profile and provides a useful broadening of the market for those borrowers seeking to widen their banking and investor relationships. Further conversations are underway so watch this space!

So an interesting run up to Christmas beckons on a number of fronts and we look forward to catching up with clients and their plans over this period.

Financial Markets and Economics Overview

Events and data have continued to pile up this summer. UK inflation increased for the first time since November 2017 to 2.5% in July, driven mainly by an increase in petrol prices. Some positive signs were seen in the UK economy, as retail sales rose more than expected in July, due to the good weather around the World Cup period and online sales. Additionally, UK consumer confidence rebounded in August to a four-month high and UK unemployment fell to 4% in the second quarter, which is the lowest level since 1975. However wage growth slipped to 2.4% over the same period. UK Manufacturing PMI also fell to its lowest level in more than two years.

Brexit continues to dominate headlines in the media. A no-deal Brexit is still a possibility, as there have been no indications of a breakthrough. However, there is still some optimism that a deal could be achieved in October, although officials believe that a deal won’t take place before the 17-18th October EU summit. A more realistic timeframe now appears to be the second half of November.

The US trade war has intensified over summer, with the trade between the US and China particularly affecting emerging markets, weakening their growth prospects and leading to outflows of capital. The US imposed a 25% tariff on $50bn worth of Chinese imports and the Chinese have reciprocated in kind. Donald Trump noted that new tariffs on $200bn of Chinese imports could be initiated within the next couple of weeks. He has also threatened to pull the US out of the World Trade Organisation if they do not start treating the US more fairly. The IMF indicated that trade tariffs and other measures could reduce global GDP by as much as 0.5% by 2020.

The damage to some emerging markets have been worsened by domestic politics and bad policy decisions. The Argentine Peso crashed to a new record low, which led to the central bank in Buenos Aires increasing interest rates to a world-high 60%. The crisis has thrown Argentina into turmoil, casting doubts over the potential $50bn IMF bailout. The Turkish Lira has also suffered during the summer, collapsing in August further down c30%.

In contrast, the US economy has seen a growth of 4.2% in the second quarter, which is the fastest rate in almost four years. US consumers are in a good shape, showing the highest confidence level in 18 years and US equities have risen 5% since mid-June.

According to Nationwide’s house price index, August saw the largest monthly decline (-0.5%) in UK house price growth in six years. So far this year, house prices have been unpredictable and industry experts expect that this volatility will continue in the next months as well.  Nevertheless, house prices are expected to remain within the 2%-3% growth rate and a drastic decline in prices is not expected due to the lack of stock to satisfy buyer demand.

Interest Rates

Inflation

Capital Markets

Bank Credit