Commercial Property Review – August 2023

Higher interest rates dampen investment 

The results of the Q2 2023 RICS UK Commercial Property Monitor point to a renewed setback for the commercial property market, with an upward shift in interest rate expectations weighing on investor demand and placing downward pressure on capital values.  

The survey shows a clear majority of respondents (68%) are now of the opinion that the commercial market overall is in a downturn phase of the property cycle, with the deteriorating credit environment playing a significant role in this downturn. However, there are pockets of resilience across occupier markets – the industrial sector in particular (alongside some alternative asset classes) continues to show positive rental growth projections for the year ahead. 

Away from mainstream sectors, nationwide rental growth expectations remain comfortably in positive territory across multifamily residential, aged care facilities, life sciences, student housing and data centres. 

In Scotland, both office rents and industrial rents are expected to rise, with a net balance of 21% and 32% of respondents expecting an increase respectively. In retail, a net balance of -4% of respondents expects rents to decline – up from -51% in Q1. 

Alternative future for London offices 

With London office landlords seeing lettings tumble in recent times and the clamour for warehouses in the capital that took place during the pandemic calming, the less traditional sector of life sciences looks to be increasing its presence in London.  

There has been a recent flurry of investors looking to create specialist sites in London for the UK life sciences industry and there are more opportunities to do so as traditional offices are less in demand.  

Property giant British Land is looking to boost its presence in this sector, with a major overhaul of the 1970s Euston Tower. The plan is to change the office space into net zero workspace featuring labs for start-ups and scale-ups. 

Another example is Canary Wharf Group, which together with developer Kadans Science Partner, has planning permission for a 823,000 sq. ft tower providing workspace for the likes of genomics, medical tech and biotechnology.  

Sustainable buildings lead the way 

Recent research, polling 250 UK office landlords, reveals the current state of play as well as outlining the challenges and motivating factors facing the commercial property market as it moves toward net zero targets. 

An encouraging 72% of landlords currently have individual sustainability policies in place. However, the minority (30%) lack an overall strategy and say they are struggling to get to grips with sustainability. Notably, 49% of landlords say it is difficult to keep up with regulations on energy efficiency and that the cost of improvements is too high. Even more (53%) say that they are unsure how to effectively go about this. 

Many landlords are turning to experts –- the survey reports that 92% of landlords are already, or are planning to outsource the implementation and development of sustainability policies to a third party. 

All details are correct at the time of writing (21 August 2023) 

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. 

News in Review

“Inflation has fallen rapidly over the past six months”

The latest inflation data from the Office for National Statistics (ONS) has shown that the Consumer Prices Index (CPI) measured 6.8% in the 12 months to July 2023, down from 7.9% in June, the lowest rate since early 2022.

Prime downward contributors during the month derived from the housing and household service division, specifically lower gas and electricity prices. Food and non-alcoholic beverages, including milk, bread and cereals also helped temper the rate; while flight and hotel prices, the cost of eating out, alcohol and tobacco prices continued to rise.

Although considerably lower than its peak last autumn, if you exclude food and energy prices, core inflation increased at an unchanged annual rate of 6.9%; prices in the services sector increased at a faster pace, recording 7.4% in July, from 7.2% in June.

Looking over a six-month period to July 2023, the monthly reduction from 7.9% to 6.8% was the sharpest six-month fall in inflation since September 1992. Research Director at the Resolution Foundation, James Smith commented on the new dataset, “Inflation has fallen rapidly over the past six months, but the UK still has the highest rate in the G7 and the Bank faces a daunting task in further taming price pressures… The UK has experienced the third largest price pressures of any advanced economy since the pandemic. This highlights just how painful this cost-of-living crisis continues to be and how unwise it would be to meddle with policies like benefits uprating that are designed to protect families from price pressures like this that are beyond their control.”

Looking ahead, Suren Thiru, Economics Director at ICAEW thinks that although “another interest rate rise in September looks inescapable, this drop in inflation may drive a more notable voting split in the Monetary Policy Committee next month, particularly as worries over the UK economy grow.”

Weather dampens retail sales in July

The soggy summer weather took its toll on retail sales last month, new statistics from ONS have highlighted. Estimates show that retail sales fell by 1.2% in July, following a rise of 0.6% in the previous month. Economists polled by Reuters had forecast a 0.5% fall in volumes. It was a poor month for supermarket sales, demonstrating the impact of interest rate hikes, combined with wet weather, resulting in reduced footfall. The 2.6% fall in retail sales volumes at food shops can be partly attributed to a reduction in food sales, but a large proportion was due to a tailing off in clothing sales at supermarkets.

However, with people avoiding the weather, choosing to shop from the comfort of home, online promotions meant the proportion of sales made via the internet increased from 26% in June to 27.4% in July, the highest level since February 2022.

Card use on the rise

Newly released card spending data from UK Finance has shown that both credit and debit card transactions have increased year-on-year to May 2023. In addition, outstanding balances on credit card accounts grew by 8.8%. Transactions have been dominated by contactless payments for both debit cards (76%) and credit cards (63%). The report highlighted, ‘The total value of contactless transactions was £24.5bn in May, a 11.5% increase on £22bn in May 2022… the number of contactless credit card transactions was 10.2% higher than May 2022, the number of contactless debit card transactions was 7.1% higher than May 2022.’

Q2 savers confidence on the up

An uptick in savers confidence was noted during Q2 in a survey by Paragon Bank, which showed almost two thirds of savers (62% of 1,750 surveyed) felt confident in their financial position, an increase from 44% recorded in Q1 2023. Almost one fifth (18%) of respondents lacked confidence in the quarter, versus 25% in Q1. Levels of confidence varied by age groups, with 69% of those aged 65 to 74 declaring confidence in their financial position, versus 61% of those aged 55 to 64 and 56% of 45 to 54 year olds. Although there is an improvement in confidence, savers are continuing to adjust their spending by cutting back on food shopping, dining out, holidays and home energy usage, to cope with inflationary pressures, according to the survey.

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 (23 August 2023)

Home insurance for home renovations 

Home renovations are a popular way to give your property a new lease of life. When undertaking large-scale projects, there is a lot to think about – and the impact on your home insurance should be part of this planning.  

In the loop  

As well as producing detailed plans, seeking planning permission and choosing your contractors, a priority at an early stage should be getting in touch with your home insurer. This is because, if you don’t tell your insurance provider about your building work and your plans for adding an extension, you could accidentally invalidate your policy.  

Risks and rewards   

There are two main types of risk associated with renovation projects that your insurer will need to consider:    

  1. Structural risks   

Knocking down walls could cause unexpected accidents or damage. Furthermore, structural work could expose your home to the elements for long periods of time, potentially at risk of causing damage to your property.     

  1. Security risks   

During building work, your home may be less secure. You might temporarily move out and scaffolding can make intruder access easier.  With a lot of tradespeople coming and going, there is a risk that windows and doors could be left open.  

By contacting your insurer, you can check if your home will be covered and find out whether you’ll need additional or specialist cover for it to be fully protected.   

Rebuild costs   

Remember too that having an extension added will likely increase how much it would cost to rebuild your home, which  could mean you need a higher amount of  home insurance cover. 

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

How up to date are you with your pension? 

Here are a few things to consider. 

How much is in your pension pot? 

According to research1, three quarters of UK adults don’t know how much is in their pension pot. This figure rises to 79% of 55 to 64-year-olds who say they can’t put a figure on the value of their pension – especially worrying as this is a crucial stage for retirement planning. The research highlighted that women (81%) are more likely than men (68%) not to know how much they have accumulated in pensions saving. 

Consider the gender gap 

Research2 has again found a widening of the gender pension gap from the age of 35. The gap between women’s and men’s contributions for 35 to 39-year-olds is 21%, up from 18% in the previous year. Other research3 has highlighted how pension inequality is exacerbated for minority women, with over half (54%) of Black women saying they don’t have any retirement savings, compared to 40% of South Asian women and 35% of White women. 

State Pension passes £10,000, but watch the tax 

There was a welcome boost to pensioners’ incomes in April. The single-tier State Pension is now £203.85 a week or £10,600.20 a year. Those in receipt of the basic State Pension now get £156.20 a week, which may be topped up further by the Additional State Pension. 

However, the freezing of the Income Tax personal allowance since 2021-22 means that the State Pension takes up 84% of the allowance, meaning pensioners will only need to earn £1,969.80 before they start paying Income Tax. 

1Standard Life 

2Aviva 

3Scottish Widows 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.  

Wealth planning – striking a balance 

While recent financial challenges have taken their toll on everyone’s pockets, it comes as no surprise that parents are putting concerns about their children’s finances above their own, as highlighted in a recent survey of advisers1. 

Over half (55%) of the advisers surveyed noted that adult children were taking priority in clients’ wealth planning at present, with many taking action to assist with their children’s financial struggles amid the cost-of-living crisis. 

The main requests by parents wanting to lend a financial hand include releasing funds (25%) for their adult children, while over half (55%) of the advisers have clients choosing to access their pension savings in order to enhance their disposable income to support family members, with 18% of those clients taking an additional lump sum specifically to help their offspring. Reportedly 53% of advisers have clients keen to adjust their finances, with 40% requesting advice on ensuring investments stayed ahead of inflation. 

Although people are understandably concerned about their children’s financial circumstances and are keen to help, it’s important to be mindful about striking the right balance and not to lose focus on your financial objectives for your own future. For help in striking that balance, get in touch. 

1Royal London, 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. 

BTL landlords choosing to ‘retire’ 

Older buy-to-let (BTL) landlords are selling up in large numbers, new analysis suggests1, leaving a void when they ‘retire’ from the business. 

Ageing population 

The median age of individual landlords was 58 in 2021, according to the latest English Private Landlord Survey, significantly older than the general population. In contrast, only 15% were under the age of 45. 

Around 140,000 landlords left BTL behind last year, the analysis shows, close to three quarters of all such property sales. The figure could keep rising over the coming years, with around 96,000 landlords across the UK due to turn 65 every year. 

Selling up 

The recent surge in selling comes partly from a shifting landscape, with a flurry of unfavourable changes making life harder and profits lower for landlords. In the coming months and years, the new Renters Reform Bill, updated Energy Performance Certificate (EPC) requirements, as well as changes to landlord licensing, Making Tax Digital and Capital Gains Tax (CGT), look likely to have adverse effects on BTL landlords. 

Higher mortgage rates are also dragging down profit margins, which is especially acute for newer investors, who are more likely to need to borrow to fund their purchases. 

Here to help 

This is undoubtedly a time of change for BTL landlords but good opportunities remain for patient investors. We’re here to help you make sense of it all and ensure your portfolio is well prepared for years to come. 

1Hamptons, 2023 

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

It’s your retirement – don’t do it a disservice 

The Institute for Fiscal Studies (IFS) has warned that 90% of those currently in their 30s and 40s are saving less than they need to if they want to have a decent standard of living in retirement. Whilst the IFS researchers found that the current generation of pensioners is doing better than any before it, they also concluded that future generations are unlikely to fare as well. 

Saving enough 

IFS found that many employees are saving very little for retirement; 60% of middle-earning private sector employees who contribute to a pension are saving less than 8% of their earnings. Fewer than one-in-five self-employed workers save into a pension at all. 

Paul Johnson, IFS Director, commented, “Despite the number of self-employed people growing considerably, many fewer of them are saving in a pension. Most private sector workers are left having to manage considerable risks – not least over how long their retirement will be – which for many will be incredibly difficult to balance well.” 

When can I retire? 

Although current rules let you take money from your pension at age 55 (57 from 2028), you may not have enough in your pension pot to make this a viable option. Discussing your options with us can give you the bigger picture and help you to be realistic with your plans – even small contributions, made regularly, can help boost your pension pot and you’ll get tax relief too. 

So, whatever your circumstances, we can help you to plan for an enjoyable and fulfilling retirement. 

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. 

News in Review

“This is good news… we are making progress”

Last Friday, newly released data from the Office for National Statistics (ONS) revealed a better-than-expected uplift in UK economic growth.

The UK’s gross domestic product (GDP) rose by 0.5% on a monthly basis in June, beating market expectations of a 0.2% rise. This higher growth rate, the fastest since October 2022, followed a 0.1% fall in May, indicating that the economy expanded by 0.2% between April and June.

The increase was partly explained by the month’s warm weather, which benefited pubs, restaurants and the construction industry, according to the report. Production was a star performer, with a rise of 1.8%, its biggest since August 2020, thanks largely to manufacturing (2.4%), which provided the biggest boost.

Darren Morgan, from ONS said, “The economy bounced back from the effects of May’s extra bank holiday to record strong growth in June. Manufacturing saw a particularly strong month with both cars and the often-erratic pharmaceutical industry seeing particularly buoyant growth. Services also had a strong month with publishing, car sales and legal services all doing well, though this was partially offset by falls in health, which was hit by further strike action.”

Although June’s growth figures showcased more resilience than expected, the UK is still the only G7 country not to see its GDP return to 2019 levels. Analysts including the Centre for Economics and Business Research (CEBR) are still predicting that the UK economy will fall into recession by the end of 2023.

Sam Miley of CEBR said, “Though GDP picked up in Q2, it should be noted that growth remains poor by historic standards. The future outlook is also weak, with the economy continuing to face several headwinds, notably the impact of tighter monetary policy.”

In response to the June GDP figures, Prime Minister Rishi Sunak commented, “This is good news. At the beginning of the year I made growing the economy one of my top priorities and we are making progress. There’s still more work to do, but today’s figures show the plan is working.”

“The new normal” – higher mortgage rates

According to analysis of the most recent mortgage cost data from the Bank of England, average monthly mortgage payments on a detached house have surpassed £2,000 for the first time. This represents a weighty increase from £1,200 recorded back in 2021 and means that borrowers nearing the end of a two-year fixed rate mortgage will have to contend with an average monthly increase on their mortgage payment of £800. For those living in the capital, the average mortgage payment on a detached property has increased to almost £5,000 a month, a huge rise from £3,200 recorded just 16 months ago.

Although several lenders have recently reduced their mortgage rates, there are expectations in the market that rates will settle at a higher level. Zoopla’s Executive Director, Richard Donnell is expecting sub-5% mortgages to return to the market later in 2023, adding that rates between 4% and 5% will be “the new normal.”

Wages grow at record rate

In Q2 2023, annual growth in regular pay (excluding bonuses) was 7.8%; this is the highest regular annual growth rate since comparable records began in 2001. In real terms, taking into account the Consumer Prices Index (CPI) measure of inflation, average regular pay fell by 0.6%.

There are signs in the ONS data that the UK employment market is easing. The jobless rate rose from 4% to 4.2%, driven by people who have been unemployed by up to six months. The economic inactivity rate decreased by 0.1 percentage points on the quarter, to 20.9% in Q2, largely driven by those inactive because they are looking after family or home.

Price of food staples drops

Research firm Kantar has found that the prices of food staples such as oil and milk are finally ‘edging down’ even though shopping bills remain high.

Fraser McKevitt, Head of Retail and Consumer Insight at Kantar said that UK grocery prices overall were “still up year on year across every supermarket shelf“, but that consumers “will have been relieved” to see the cost of some staples fall compared with earlier in the year.

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 (16 August 2023)

News in Review

“Inflation is falling and that’s good news”

Last Thursday, the Bank of England’s (BoE) Monetary Policy Committee (MPC) voted to increase Bank Rate to 5.25%, a fourteenth consecutive rise that has taken Bank Rate to its highest level in 15 years.

At the MPC meeting, the nine-member committee was split three ways, with six voting for the winning quarter percentage point rise, two favouring a more aggressive 0.5% rise and one opting to hold rates at 5%.

Equally significant was the BoE’s statement that rates will stay higher until inflation is back under control, the first time that this signal has been given so strongly. The MPC’s minutes stated that it plans to ensure rates stay ‘sufficiently restrictive for sufficiently long to return inflation to the target [of 2%]’.

Speaking after the MPC meeting, Andrew Bailey, BoE Governor said, “Inflation is falling and that’s good news. We know that inflation hits the least well-off hardest and we need to make sure that it falls all the way back to the 2% target. That’s why we’ve raised rates to 5.25% today.”

Mr Bailey now expects the UK’s next inflation figures, for the year to July, to drop to about 7%. Some analysts urged caution, however, pointing out that six of the BoE’s past eight inflation forecasts have been overly optimistic. Mr Bailey also said that the Bank expects inflation to fall to around 5% in October.

The latest Bank Rate rise will result in higher mortgage and loan payments for millions of people at a time when soaring prices are already squeezing household budgets. On the other hand, higher rates should lead to better returns for savers. Overall, the economy has been “much more resilient” than some had feared, according to Mr Bailey.

US credit rating downgraded

Last Wednesday, the US government suffered a setback when Fitch downgraded the country’s credit rating from the top level of AAA to AA+.

Concerns over the state of the country’s finances and debt burden, as well as a ‘steady deterioration’ in governance over the past two decades played a role in the decision, according to Fitch, which is one of three major independent agencies that assess creditworthiness.

Responding to the downgrade, US Treasury Secretary Janet Yellen called the downgrade “arbitrary” and said that the decision had been made based on “outdated data”. The US now occupies the second highest rung of Fitch’s ratings, alongside the likes of Austria, Finland and New Zealand.

Wet weather dampens summer shopping

July’s wet weather stopped shoppers updating their summer wardrobes and stocking up on other seasonal goods, latest figures from the British Retail Consortium (BRC) suggest. BRC said rising interest rates were also squeezing shoppers’ budgets. The value of retail sales was 1.5% higher in July compared to a year ago, but volumes were lower once inflation was taken into account. Online sales also continued to slide, falling nearly 7% year-on-year.

As the UK faced its sixth wettest July since records began in 1836, a drop in footfall of 0.3% compared to July 2022 was reported by retail analysis firm Springboard. High Streets in coastal towns were hit especially hard, the analysis suggests, with footfall dropping by 4.6%.

EV demand keeps growing

In good news for UK car sales, the latest data from the Society of Motor Manufacturers and Traders (SMMT) showed that some 143,921 new vehicles were registered last month, up 28.3% on the same period last year.

Last month was the best July since 2020, with demand for electric vehicles especially gathering pace. On average, a new battery electric (BEV) car was sold every 60 seconds in the UK in July, the report noted.

Starting next year, the government’s proposed a zero-emission vehicle target would force manufacturers to ensure that 22% of their total car sales were from BEVS.

SMMT Chief Executive Mike Hawes commented, “With inflation, rising costs of living and a zero-emission vehicle mandate that will dictate the market coming next year, consumers must be given every possible incentive to buy.

“While the growth in electric vehicles hitting UK roads is significant, it must move even faster if it is to outpace the rest of the market and enable the UK to meet ambitious but necessary environmental targets.”

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 (09 August 2023)

Summer retirement lowdown

The last few years have created an increasingly complex backdrop for retirement planning. Not only has the post-pandemic era seen attitudes to work alter significantly, but macro-economic headwinds from Russia’s invasion of Ukraine and the cost-of-living crisis have created significant unhelpful market volatility. In combination, this has inevitably heightened the need for everyone to engage in retirement conversations at the earliest opportunity. Some recent research sets the backdrop for your summer retirement round-up, spotlighting key trends. 

Changing face of retirement 

A recent study1 of UK employees has shown how people are re-evaluating plans for work and later life, with evidence that partial retirement may become the new norm. In total, over half of all workers said they like the idea of continuing to work through retirement. The research also highlighted a strong sense of semi-retirement positivity, with nine out of ten saying they were ‘much happier’ after reducing their working hours. 

Low levels of confidence 

Another study2, however, has highlighted a distinct lack of confidence among 55 to 75-year-olds when it comes to financing retirement. Indeed, nearly a third said they were either not at all confident or not very confident they would enjoy a comfortable lifestyle in retirement, compared to less than one in five who felt very or extremely confident. 

Mind the gap 

The research also highlighted a sense of unpreparedness, with a notable divergence in anticipated levels of retirement income and expenditure. For instance, while average expected spending five years into retirement was predicted to be 92% of pre-retirement levels, average income was only expected to hit 78%; other evidence suggests this latter figure is an aspiration few pensioners are likely to achieve. 

Planning is essential 

These findings suggest many from the next generation of retirees will need support if their finances are to see them through retirement, and this vividly highlights the need to develop a sound strategy tailored to an individual’s unique circumstances long before retirement looms. Planning ahead can address potential income requirements and offer solutions that build resilience to ensure you enjoy the retirement you deserve. 

1Aviva, 2023 

2The Wisdom Council, 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. The Financial Conduct Authority (FCA) does not regulate Will writing, tax and trust advice and certain forms of estate planning.