Commercial Property Review – December 2023 

‘Grey’ warehouse space on the rise 

According to recent analysis by Jones Lang LaSalle (JLL), real estate and investment management services provider, ‘grey’ warehouse space is increasing.  

Classified as available space unofficially marketed for either sublease or assignment, grey warehouse space has historically been limited to smaller pallet storage space, less frequently associated with warehouses or full units. Grey space is typically unfinished or partially built areas within a building that have not been fully customised or allocated for specific tenants or purposes. 

According to the data, levels of grey space which comprise of whole or large parts of buildings, have been rising, with around 600,000 sq. m now available in the UK. At such high levels, increasingly third-party agents are being engaged to develop solutions to unload unused space. 

The current rise in levels of grey space can be attributed to several factors, including e-commerce providers being left with excess warehouse space when the post-pandemic recovery faltered due to elevated inflation impacting sales. In addition, ongoing economic uncertainty is causing an uptick in restructurings and bankruptcies which has seen grey space coming to the market for sublease or assignment. There is also pressure from green legislation requiring capital expenditure to meet requirements.  

Regional office investment 

Savills latest regional office ‘Market in Minutes’ research has shown that weaker market sentiment has impacted regional investment volumes in the sector. 

With £1.9bn of transactions recorded at the end of Q3, this was 62% below 2022 volumes. And with just over £500m transacted in the quarter, this represents the lowest regional quarterly total since Q3 2008.  

While weaker investor sentiment is pervading the regional office market, Savills note ‘an uptick’ in activity across occupational markets, adding, ‘The polarisation in letting and rental performance of prime and secondary assets has accelerated post COVID-19, notably in the Greater London and South East region, where 75% of take-up recorded in the first three quarters of the year was Grade A standard. This was the highest proportion ever recorded.’ 

Looking into 2024, corporate occupiers are likely to continue to pursue ‘best-in-class’ office space, which is sustainable and has a good offering of amenities, to attract and retain staff, something landlords and investors need to be mindful of. 

UK hotels defy expectations 

According to Knight Frank’s recent trading performance review of UK hotels in 2023, profits have exceeded pre-pandemic levels, with hotel trading performance defying expectations across most segments. 

Robust trading achieved by ‘pro-active and competent’ hotel operators has proven successful in generating strong cashflows, which has countered ‘softening yields,’ the research deduces. 

London has experienced a strong rebound, with the 12-month occupancy to September 2023 increasing 16 percentage points to reach 77%. Supported by overseas visitors, this takes the capital’s occupancy rate ahead of ‘Regional UK’ for the first time since the post-pandemic recovery commenced. Occupancy levels have also benefited from strong growth in meetings, events, and leisure demand. 

All details are correct at the time of writing (20/12/23) 

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission. 

A financial and wellbeing safety net

Life has a funny way of turning out differently to how we expect it. When faced with the unpredictable twists and turns of fate, it is comforting to have the support of the right protection cover for your needs. 

Rising bills reinforce need for protection 

Increased household bills, mortgage and rent costs, mean that protection is more important than ever right now. Have you considered how you would be able to afford your monthly outgoings if your family were to lose the income of the primary earner through death or illness? 

Longer-term mindset 

In response to these challenging conditions, some households are considering reducing their level of protection – and are therefore at risk of leaving themselves vulnerable to financial shocks. 

It may seem tempting to save a few pounds a month by cancelling or postponing taking out cover. But there is a risk that, should the worst-case scenario strike, you and/or your family will be left in a difficult financial position. 

Support for your wellbeing as well 

Did you know – mental health issues are one of the top reasons for claiming under income protection? One leading provider1 paid £6m in income protection claims last year of which a third (£1.91m) related to mental health claims. Many life and critical illness policies also include support services for mental health issues. 

Essential 

Protection is an essential part of long-term financial planning for everybody. Having the right insurance cover for your unique needs is an indispensable financial and wellbeing safety net for you and your loved ones. 

1Zurich, 2023 

Gender division and money matters

Despite women’s earning power increasing significantly over recent decades, the division of financial responsibilities does not appear to have evolved. 

A survey1 of 4,000 UK adults earlier this year found that women still typically have greater oversight of domestically focused financial matters, such as household costs (67% of women versus 51% of men) and utility bills (74% of women versus 66% of men). In contrast, men continue to hold more responsibility for longer-term products, such as investments (35% of men versus 19% of women) and pensions (43% of men versus 31% of women). 

Redressing the balance 

When it comes to financial planning, if one person in the couple takes on the role of spokesperson, it’s important that they do not only speak for themselves in any meetings or discussions, as this raises questions about how suitable any advice will be for both parties. 

Are things changing? 

Worryingly, according to the survey, women under 30 years old are twice as likely as women over 30 to believe that they are naturally bad at managing their finances. This is despite younger generations saying that they’ve had a better financial education than older generations. 

Financial confidence 

We are here to guide and support all our clients, irrespective of their gender or their level of confidence in financial matters. 

1Handelsbanken, 2023 

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. 

Your behavioural biases

As an investor, you will have your own financial personality and preferences, which your adviser will consider when helping you to make financial decisions. 

Parallels with F1 

You may not think so, but parallels can be drawn between Formula One (F1) and investing. In F1, drivers may make suboptimal decisions during races due to cognitive biases, such as overestimating their abilities, ignoring risk factors, being overconfident or relying too heavily on past experiences. 

Immediate gains 

A driver may also adopt a herd mentality, such as following a similar strategy to another competitor and may focus too much on immediate gains rather than the overall race or championship. Emotions can also affect F1 drivers, potentially leading to aggressive driving or mistakes under pressure. 

Systematic decision-making – in the driving seat  

Just as in F1, recognising and managing behavioural biases is essential for successful investing. We can help you to counteract these biases by setting clear investment goals, diversifying your portfolio, maintaining a long-term perspective, using expertise to seek out diverse viewpoints and employing systematic decision-making processes that minimise emotional influences. 

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

BOMAD do their bit

The Bank of Mum and Dad (BOMAD) is being called upon to help with more than just a house deposit these days. As more parents and grandparents reach deeper into their pockets to help their offspring, it is vital not to compromise your own financial security.  

Mortgages and more  

One in four parents with assets (including property) in excess of £250,000 is helping grown-up children cover rising mortgage bills, research1 suggests. Remarkably, almost four in five are stepping in to support with other everyday costs.  

While BOMAD has long been a reliable contributor towards house deposits for many, the latest figures show 20% of parents now helping to cover shortfalls in their children’s rent.  

Be wary  

Every parent wants to help their children as much as possible. However, it is important not to spread yourself too thin. Worryingly, the research shows that one in five parents has sacrificed their own financial stability for the good of their children. This could be through reducing pension contributions, selling other assets or taking equity from property. 

1Saltus, 2023  

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments 

News in Review

“I don’t think that we can say definitively that interest rates have peaked”

Last week, during their final meeting of 2023, the Bank of England’s (BoE’s) Monetary Policy Committee (MPC) voted by a six to three majority to retain Bank Rate at 5.25%, with the minority voting to the rate by 0.25%. This outcome was widely predicted, with all but one of 68 economists in a recent poll expecting the BoE to hold Bank Rate.

BoE Governor Andrew Bailey said that it’s “too early” to speculate about when UK interest rates will be cut, adding, “I don’t think that we can say definitively that interest rates have peaked. I hope that we are at the top of the cycle.” Although encouraged by the efforts made to cool inflation in the UK so far, Mr Bailey said there is still a “persistent element” to inflation which “we have got to take out.”

From an inflation perspective, the MPC’s December summary outlines that Consumer Prices Index (CPI) inflation is expected to stay close to its current rate around the turn of the year, with a temporary increase in service price inflation expected in January. The report reiterates that, ‘monetary policy will ensure that CPI inflation returns to the 2% target sustainably in the medium term.’ The next MPC meeting is scheduled to conclude on 1 February 2024.

And across the pond

Also last week, the US Federal Reserve held its key interest rate steady for the third consecutive meeting, with the Federal Open Market Committee voting unanimously to retain the benchmark borrowing rate in a targeted range between 5.25% – 5.5%. With inflation easing, US policymakers indicated the likelihood of multiple cuts in 2024, assuming quarter percentage point reductions. Fed Chairman Jerome Powell cautioned, “It is far too early to declare victory. There is a lot of uncertainty and we’ve seen the economy move in surprising directions so we’re going to need to see further progress,” he added that the key interest rate was now “likely at or near its peak for this tightening cycle.”

UK economy shrinks in October

The most recent GDP data from the Office for National Statistics (ONS) shows the UK economy contracted by 0.3% in October, following growth of 0.2% in September. The reduction was higher than the widely anticipated 0.1% reduction predicted, with bad weather and higher interest rates impacting consumers and taking their toll on growth. The manufacturing, construction and service sectors all contracted in the month. Responding to the data, Jeremy Hunt said that while interest rates are elevated to combat inflation, it is “inevitable GDP will be subdued.”

Consumer confidence

Data released last Friday showed that consumer confidence rose in December, with households more optimistic about their future financial situation. Confidence has risen for the second consecutive month, up by two points to -22, making it an improvement on the -29 recorded the same time last year. GfK Client Strategy Director Joe Staton commented on the dataset, “Against the backdrop of flatlining economic growth, interest rates at a 15-year high and price rises potentially eroding disposable income for years to come, the consumer confidence index shows a modest improvement this month… Although the headline figure of minus 22 means the nation’s confidence is still firmly in negative territory, optimism for our personal finances for the next 12 months shows a notable recovery from the depressed minus 29 reported this time last year.”

He continued, “Despite the severe cost-of-living crisis still impacting most households, this slow but persistent movement towards positive territory for the personal finance measure looking ahead is an encouraging sign for the year to come.”

Christmas dinner more costly in 2023

If you favour a traditional festive meal on Christmas Day, this year you’re likely to find that it will cost you 13% more than in 2022, according to research. Thanks to inflation elevating food prices and energy bills, combined with poor growing conditions for vegetables, people will have to pay at least £4.14 a person for their festive meal, compared with £3.67 in 2022. This is based on analysis of the cheapest price for a basket of 11 Christmas dinner items. While the rise in cost is almost triple the overall current rate of inflation, the increase is lower than the 35% jump in the cost of Christmas dinner recorded last year (2021 to 2022).

Here to help

Financial advice is key, so please do not hesitate to get in contact with any questions or concerns you may have.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

All details are correct at time of writing (20 December 2023)

News in review

“This balanced proposal provides much-needed predictability and stability to EU car and battery makers at a time of fierce global competitive pressure”

Last week the European Commission proposed a three year postponement on the imposition of tariffs on electric vehicles (EVs) traded between the UK and the EU. Originally agreed as part of the Brexit deal, the tariff exemptions were due to end on 31 December 2023.

Although the European Commission initially rejected notions of a delay to the implementation of the rules, they agreed that a one-off extension until 31 December 2026 was required to support the bloc’s car industry, currently grappling with the residual affects of the pandemic, the war in Ukraine and fierce competition from US subsidies.

The plan, which was supported by both UK and European carmakers, is expected to be approved by European Union member state ambassadors this week. Without approval, 10% tariffs will apply to EVs traded across the English Channel.

In a statement, the EU’s trade chief Valdis Dombrovskis commented, “This balanced proposal provides much-needed predictability and stability to EU car and battery makers at a time of fierce global competitive pressure.” He continued, “It is the result of intense engagement with industry across the entire EV supply chain and with trade unions, which had expressed concern about rules that would have seen tariff barriers hit our EV exports to the UK, our largest export market.”

A spokesperson from the UK government said they have ‘listened to the concerns of the sector,’ and have prioritised finding ‘a joint solution with the EU on electric vehicle tariffs that works for both sides.’ Continuing, ‘We have a shared ambition to grow domestic electric vehicle manufacturing and battery supply chains, and this proposal is a positive step towards providing long term certainty to the industry while ensuring it remains globally competitive.’

Crucially the delay will provide an opportunity for the UK and EU battery industries to increase production.

Cash use on the rise

A new report from the British Retail Consortium (BRC) shows that cash transactions have increased for the first time in a decade, accounting for 19% of all transactions last year, up from 15% in 2021. This rise can be attributed to the fact that cash has allowed households to budget more effectively during the cost-of-living crisis, as well as an organic return following the rise in contactless payments at the peak of the pandemic. Over three quarters (76%) of transactions were made by card, down from 83% in 2021, with debit cards being used for 80% of these transactions. Trade body UK Finance expects the use of cash to decline over the coming years, once cost-of-living pressures have subsided.

Household mortgage borrowing over the longer term

The latest Financial Stability Report from the Bank of England (BoE) has highlighted that fewer households will find it hard to keep up with their mortgage payments than previously estimated, as many households are opting to borrow over longer time periods to manage higher interest rates. Over a tenth (12%) of new mortgages are for terms of over 35 years, with the proportion of new loans extended by over 30 years now topping 28%.

By the end of 2024, nearly half a million households are expected to spend over 70% of their post-tax income on their mortgage, down from the figure of 650,000 households predicted by the BoE in the summer. However, the report does highlight the scale of payment shocks faced by some mortgage holders, with estimates showing just under 900,000 can expect their mortgage payments to increase by over £500 a month because of higher interest rates.

Average mortgage rates fall

Ahead of the Monetary Policy Committee decision on Bank Rate this Thursday, Moneyfacts has revealed that average two and five-year fixed mortgage rates have dropped to 6.04% and 5.65% respectively and now sit at their lowest levels since June 2023. The data also shows that mortgage availability rose for a fifth consecutive month to its highest level in over 15 years, standing at 5,694 products. Providers are competing to attract a smaller pot of new homeowners and to keep hold of existing customers.

Here to help

Financial advice is key, so please do not hesitate to get in contact with any questions or concerns you may have.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

All details are correct at time of writing (13 December 2023)

‘Dog funds’

According to the latest data1, the number of ‘dog’ funds have increased by 27% since February this year, that represents 56 equity investment funds versus 44 earlier in the year, but a reduction on the 86 dog funds identified in January 2022. 

A ‘dog’ fund is defined as one which has failed to beat its benchmark over three consecutive 12-month periods and has underperformed by 5% or more over that entire three-year period. 

Almost three-quarters of the dog funds’ total asset value (£32.14bn, up from £4.49bn) can be attributed to the global sector, where the number of dog funds rose from 11 to 24 during the period. 

A sense of perspective 

We all know that investment performance can be impacted by many factors and as the risk warning says – past performance is no guide to the future. If a fund has found itself in the doghouse it doesn’t necessarily mean it should be disposed of immediately. The fund managers are likely to be taking action to improve the performance, perhaps changing managers or redesigning the fund’s investment strategy. Sometimes it can be worth retaining a fund while it’s undergoing this process. Importantly, knowing why a fund is underperforming will inform the right course of action. That’s what we can determine. 

Review review review 

Trust us to identify any poor performers and advise you whether it’s worth sticking with those funds for the time being, or whether it’s time to look for other opportunities. There are many factors to consider in addition to fund performance before taking any action, such as your risk attitude, tax position and overall asset allocation, so rely on us to advise the appropriate course of action. 

1Bestinvest, 2023 

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

FIRE investing

Many of us dream about retiring early so we can devote more time to things we enjoy; but financial realities inevitably mean few of us actually realise those dreams. A growing number of people though are turbo-charging their chances of early retirement success by embracing the FIRE principles of investing. 

We didn’t start the fire 

The FIRE movement began in the US but now has a growing band of UK-based devotees. The acronym stands for ‘Financial Independence, Retire Early’ with followers adopting extreme saving techniques in order to invest as much as possible during their working years so they can attain financial independence at a relatively young age. For some, the ultimate goal is retirement in their late thirties or early forties, while for others it’s simply the financial freedom to be able to work part time. 

Playing with fire 

Some of the key principles associated with the FIRE movement include maximising savings, with followers setting aside up to 70% of their income every month; paying off all debt, including a mortgage; and living exceptionally frugally. Devotees also save via investment products, such as a stocks and shares ISA, in order to maximise returns while sheltering proceeds from the taxman. 

Eternal flame 

Another pillar of the FIRE movement is the ‘4% rule’, a formula used to calculate when someone has enough money to stop work. In simple terms, 4% is the amount someone can typically afford to withdraw from their retirement pot each year without too much risk of running out of money. So, if someone expected to spend £20,000 a year, they would need a pot worth at least £500,000. 

Light my fire 

Creating a clear, appropriate investment goal is key to financial planning success, and FIRE investors have certainly nailed that. Furthermore, the basic principles do make sound financial sense. So, if early retirement is a burning desire for you, it might just be worth joining the FIRE brigade. 

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Interest-only searches on the up

The number of searches relating to interest-only mortgages soared by 53% in June, as borrowers sought out ways to lower their monthly expenditure. 

More interest in interest-only 

Research1 shows that ‘interest-only mortgages’ was the most common search term in August, ahead of other staples like ‘buy-to-let’ and ‘fixed-term’. 

The jump is likely to be linked to the government Mortgage Charter launched in that month to support homeowners. As a result, many borrowers now have the choice to swap to an interest-only mortgage for up to six months, if needed. 

Here to talk 

In turbulent economic conditions, there is lots of help available if you are struggling to keep up with repayments. Get in touch today to see how we can help. 

1L&G, 2023 

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments