Property & Construction Daily

The Property & Construction Daily provides a sector-specific comment from leading analyst Alastair Stewart. His daily perspective provides a round-up of market statements, news, economics and views from the property and construction sectors.

December 20, 2023

HOME | Economics – Below expectations inflation data fuels rate cuts hopes; House prices fall, ONS | News – Over 150,000 new homes for Cambridge, Gove | Viewpoint – What might 2024 have in store? | Fortnight ahead

Company news

Home REIT (HOME, shares suspended)

Real estate investment trust funding the acquisition and creation of properties providing accommodation to the homeless. Property valuation and portfolio update. Portfolio valuation by Jones Lang LaSalle, 31 August, £413m, comprising 2,473 properties (28 February, £423m). Extracts: “The Board acknowledges that there has been a very material reduction in the valuation of the property portfolio with the August 2023 valuation representing 42.3% of the unaudited historical acquisition costs of £977m excluding purchase costs. The reduction in the valuation is principally a result of a re-assessment of the quality of the assets and of the covenant strength of the tenants, several of which have gone into liquidation in 2023. The majority of properties are now valued on a vacant possession basis. In all cases, JLL has considered the rental value for the existing uses of the properties and local housing allowance rates. The comprehensive inspection programme has also led to a significant re-assessment of the quality of the property assets. This has resulted in many properties found to be in need of extensive renovation or that may need to be reconfigured to provide an appropriate number of rooms to suit the local market. In addition to the above, the valuation of the assets has also been impacted by a deterioration in the housing market and an increase in property yields more generally following a rise in interest rates. Initial evidence from AEW’s ongoing asset management initiatives indicates a larger than expected proportion of the portfolio is private rented sector rather than homeless accommodation backed by exempt rents from local authorities. The Board and AEW remain committed to the restoration of trading in the Company’s ordinary shares and fulfilling Home REIT’s mission of providing accommodation to vulnerable people as soon as is practically possible. Lynne Fennah, Chair, commented: “The Board is extremely disappointed by the significant value reduction announced today which reflects the information that has come to light regarding the quality of the Company’s assets and tenants. This information is in contradiction to reporting provided to the Board during these periods.  The Company reserves all of its rights in respect of the matters referred to in today’s announcement and is still considering the conclusions and implications of the revaluation exercise with its advisers, and what consequential actions it may take”.

Economic data

Borrowing costs. Prospects of a mid-year (or possibly earlier?) rates cut improved following this morning’s far better than expected inflation data for November from the ONS. Headline Y/Y CPI for fell from 4.6% in October to a 25-month low of 3.9%, compared to consensus expectations from economists of c. 4.4%. On a M/M basis, there was a fall of 0.2% (Oct, 0.0%) versus expectations of +0.1%. More importantly for rate setters’ future decision making, ‘Core’ CPI, excluding energy, food, alcohol and tobacco, fell from 5.7% to 5.1%, against consensus of 5.5%. Gilt yields reacted by falling sharply (with swap rates, closely linked to mortgage rates) and housebuilders’ shares were sharply up.

Viewpoint: Surely Bank of England Governor Andrew Bailey needs to have a re-think of his “Higher-for-longer” stance? The latest CPI figure is below the Bank’s forecast for the end of Q1 2024 and interest rate swaps are now fully pricing in a first BoE cut in May and a greater than 50% chance by March, with a total of c. 140 bps of loosening by the end of the year.

CPI Data

House prices. Average UK house prices fell by 1.2% in the 12 months to October, to £288k, down from a revised decrease of 0.6% (revised estimate) Y/Y fall in October according to ONS. On a seasonally adjusted basis, price decreased by 0.3% in October, following a month-on-month decrease of 0.7% in September. Y/Y prices fell 1.4% to £306k in England and by 3.0% to £214k in Wales, but rose by 0.2% in Scotland to £191k and by 2.1% to £180k (to September) in Northern Ireland. The North East was the only English region which registered an increase, of 0.2%, while London saw the largest fall -3.6%.

Viewpoint: The ONS data is the most comprehensive of the house price surveys, taking in total housing transactions including cash, as opposed to those of mortgage lenders such as the Halifax, which are based on their own home loans. But it is based on completion of homes rather than mortgage offer stage, so a picture of market conditions some months earlier. The Halifax and Nationwide have indicated a recovery in prices in the past two or three surveys, suggesting there could be a similar recovery in the months ahead – possibly supported by the slowing rate of M/M decline.

ONS data

In other news …

Housebuilding. More than 150,000 homes could be built in Cambridge under the direction of a new development corporation, new plans set out by Michael Gove have revealed, Building (paywall). The Housing Secretary used a wide-ranging speech on planning and housing delivery yesterday to announce his intention to create a new body to oversee a massive urban expansion of the city. He also acknowledged that upfront public investment would be necessary. While Gove’s announcement included bolstered powers for rural authorities to limit development on the green belt, he said that Cambridge would be the exception to this new rule: “Cambridge is a unique and special case and I know that the development corporation, which I do not want to pre-empt, will recognise that the national interest in Cambridge means that a different approach is going to be required”.

Merry Christmas and a Happ(ier) New Year

This is the last ‘Daily’ of the year. Normal service will resume early in what, hopefully, will be a better new year. 2023 was tough for many, especially supply chains and, in particular, housebuilders that had to hunker down. A few random thoughts. My increasing view is that the housing market has already turned the corner – a view given weight by today’s inflation, RICS, mortgage data and – always the best guide – industry chatter. Build-to-rent should be supported by the ‘rental crisis’. In terms of infrastructure, the truncation of HS2 did not improve the mood music, but anything to do with water or electricity generation of distribution is going to see massive investment. In commercial, the general office and retail sectors remain challenged but high-end ‘statement’ offices seem back in favour. Public construction will, however, be constrained by budgetary pressures. Private housing RMI may tick up as spending as, at least for some, household finances ease; public housing RMI also faces stretched budgets, but recladding, de-carbonisation and mould remedial work should provide a steady baseload of work. Yes, 2023 has been a rough ride, but to end on the very un-Christmassy adage from 19th Century atheist philosopher Friedrich Nietzsche: “That which does not kill us makes us stronger”. Happy New Year …

Fortnight ahead*

* Extended

Construction and property company and economic news

Prices are as at the previous day’s close. Where quoted, net debt is pre-IFRS16 (excluding leases) unless otherwise stated.

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