Commercial Property Review – October 2022

Rising yields and flight to quality

Most commercial property yields rose in September, according to the latest ‘Market in Minutes: UK Commercial’ report from Savills, leading to an average prime yield of 5.23%, compared to 4.95% the month before.

A total of seven sectors saw an upward trend in September 2022, including shopping centres and leisure parks. Despite this, investment volumes for the year to the end of Q3 remain about 3% below the same point in 2021.

Prime yields for offices rose too, though data for the office sector remain mixed as occupiers try to work out how much space they need in their next office acquisition. In the ‘Big 6’ office markets, for example, companies moving to new premises over 10,000 sq. ft in 2021 and H1 2022 required, on average, 8% less space than previously.

Although some occupiers are reducing their office provision in response to hybrid working, many are prepared to pay higher rents for higher-quality space. The number of transactions over £35 per sq. ft have risen by 210% since 2019.

Commenting on this trend, Stephen Lang, Director of Commercial Research at Savills said, “With the continuing flight-to-quality in the markets, occupiers taking smaller spaces are willing to pay higher rents for a better office space.”

New lease of life for Battersea Power Station

Almost 40 years after it was decommissioned, Battersea Power Station has been transformed into a mixed-use development – costing £9bn and taking eight years of labour.

The renovation, backed by a group of Malaysian investors, has turned Battersea Power Station into offices, flats, shops and more.

The famous Art Deco building, experts say, still retains much of its original character. The two turbine halls have become retail areas and the control rooms are now bars. 254 luxury apartments, restaurants and cafés sit side-by-side with a theatre and event spaces.

Most prominent, perhaps, is the boiler room, which has become an office space. Apple has taken 500,000 sq. ft of this across six floors, with room for 3,000 employees.

Overseas investors drive investment in Scotland

The declining value of the pound could see overseas investors’ share of investment in Scottish commercial property reach record levels, according to Knight Frank.

Q3 data showed that overseas investors are responsible for more than half of current volumes, propelling a year-on-year rise of 37% in the year to September.

Of the £1.46bn invested so far in 2022, offices led the way, representing more than a third (£486m) of total investment volumes. Industrial property, meanwhile, almost doubled to £300m, resurgent after its pandemic slump.

Alasdair Steele, Head of Scotland Commercial at Knight Frank Scotland, commented, “There has been a great deal of uncertainty this year, starting with the complications of the ongoing pandemic, the conflict in Ukraine, and rising inflation and interest rates; but Scotland’s commercial property market has continued to fare well. This is particularly true for assets that are in high demand, namely prime offices and industrials.”

All details are correct at the time of writing (20 October 2022)

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.

Steering you through troubled waters

Even experienced investors are likely to find the current investment environment a challenge, particularly when one considers the array of uncertainties in the post-COVID economy which are so fundamentally different to those faced during the last two years. Opportunities, however, are still available to investors who can steer a safe course through choppy waters.

Uncertainty abounds

One look at the latest economic forecasts released by the International Monetary Fund (IMF) gives a strong hint of the challenges that lie ahead. The international soothsayer described the current outlook as ‘gloomy and more uncertain’ as it reduced its global growth forecast to 3.2% this year and 2.9% in 2023, downgrades of 0.4 and 0.7 percentage points from April’s predictions.

Risks skewed downwards

The IMF noted several shocks that have hit a world economy already weakened by the pandemic. These include higher-than-expected inflation worldwide which is triggering tighter financial conditions; a worse-than-anticipated slowdown in China, and further fallout from the war in Ukraine. It also stressed that risks are ‘overwhelmingly tilted to the downside.’

But opportunities remain

This economic sea-change clearly presents a serious challenge to investors. However, while managing portfolios in a high-inflation environment may require some change in course, there are still opportunities out there.

Help at hand

And of course, we’re always here to help. So, if you want to take stock of your investments, get in touch and we’ll be happy to help steer you through any troubled waters.

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.

Controlling your investment emotions

While Rudyard Kipling may not have been thinking about investments when he penned his famous poem ‘If’, his words will certainly resonate with investors at the moment. The current investment landscape undoubtedly presents a challenge, even for experienced investors, but those who can keep their head when all about are losing theirs definitely have the best chance of success.

Emotional roller coaster

It can be extremely difficult for investors to keep their emotions in check when there is so much economic and geopolitical noise being reported on a daily basis. But market volatility is normal and investors who hold a well-diversified, risk-appropriate portfolio and stay focused on their long-term objectives, goals and aspirations are historically best equipped to get through such periods.

Clear goals are essential

Setting clear goals and developing a corresponding plan to achieve them is invariably the key to investment success. Although plans may need to be adapted from time to time to take account of changes in individual circumstances or investment goals, having a well-thought-out strategy helps investors deal with unexpected events and remain calm when markets become turbulent.

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

“We now need stability and unity”

In another whirlwind week in UK politics, Liz Truss resigned last Thursday, the shortest serving Prime Minister in British history. Speaking outside Downing Street she said she could not deliver the mandate on which she was elected. Her resignation after just 44 days kickstarted a contest to find the next Conservative leader and PM.

A fast-tracked leadership contest saw the benchmark set high, with hopefuls needing to receive the backing of 100 MPs by 2pm on Monday. Sir Graham Brady, 1922 Committee Chair commented on the urgent need for stability, “We’re deeply conscious of the imperative of the national interest of resolving this clearly and quickly.”

Boris Johnson, Penny Mordaunt and Rishi Sunak threw their hats in the ring. Johnson pulled out of the race on Sunday, and with Mordaunt seemingly unable to get the backing of 100 MPs, Mr Sunak was named the next Prime Minister, the UK’s first British Asian PM and the youngest leader in over two centuries.

In a brief address on Monday afternoon, Mr Sunak warned the country faced “profound economic challenges” adding, “We now need stability and unity, and I will make it my upmost priority to bring our party and our country together because that is the only way we will overcome the challenges we face and build a better more prosperous future…I pledge that I will serve you with integrity and humility and I will work day in day out to deliver for the British people.”

After meeting King Charles, Mr Sunak gave a speech outside Number 10, saying that he would restore trust, rebuild confidence and lead the UK through “a profound economic crisis” before he set to work on appointing his cabinet.

Dominic Raab has been confirmed as Deputy PM, Grant Shapps was appointed business secretary and Jeremy Hunt remains as Chancellor.

Inflation continues its ascent

According to the most recent data from the Office for National Statistics (ONS), food and non-alcoholic beverage prices in the UK are increasing at their fastest pace in over forty years, since April 1980. In the 12 months to September, food costs leapt by 14.6%, up from 13.1% in the 12 months to August. Key drivers to the rise were price increases in meat, cereal, bread and dairy products.

As food price rises continue their ascent and people struggle with the cost of key household staples, Karen Betts, Chief Executive of the Food and Drink Federation commented on the rise, “Food and drink manufacturers continue to do everything they can to keep product prices down, but huge rises in ingredient, raw material, energy and other costs mean they have no choice but to pass some price rises on.”

She continued, “Recent economic turbulence in the UK has made a difficult operating environment for businesses in our sector worse.  Companies urgently need a stable economic outlook and a coherent policy framework to enable them to make investment and other critical decisions that are central to their businesses and to the prosperity of their local communities.”

IHT receipts

The latest Inheritance Tax (IHT) figures released last week have intensified the debate over government intentions. Total HM Revenue and Customs (HMRC) receipts for April 2022 to September 2022 were £3.5bn, which is £0.4bn higher than in the same period last year. Government IHT receipts were bolstered by £557m taken during September, and high receipts in June were attributed to a ‘small number of higher-value payments than usual.’

Markets

The markets reacted positively to the departure of Liz Truss, with European stocks closing higher on Thursday. On the same day, in the UK, the FTSE 100 closed up 0.3% and sterling rose 0.7% to reach $1.13 against the dollar. On Tuesday, following Mr Sunak’s first speech, the pound hit its highest level against the dollar since 15 September at $1.14. The FTSE 100 ended the session down 0.07% to close on 7,013.48 and the FTSE 250 was up 2.85% to close on 17,831.63

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 (26 October 2022)

In the News – Home Finance

Gardens uprooted

A quarter (25%) of homeowners in the UK with outside space have turned all or part of their garden into a driveway and a further 17% plan to make this change1. As well as parking space proving to be popular, one in ten homeowners with outside space have replaced at least some of their garden’s natural lawn with artificial grass; a further 29% are considering making the swap. In contrast, 12% have replaced part or all of their garden with a wildflower meadow and 7% have turned their driveways into a planted garden.

Stamp Duty

On 23 September, the government outlined a series of tax cuts and measures, most of which have since been reversed. One of the surviving tax announcements was a reduction in Stamp Duty Land Tax (SDLT) in England and Northern Ireland, raising the residential nil-rate threshold from £125,000 to £250,000, with immediate effect, and First Time Buyers Relief from £300,000 to £425,000. The maximum amount that an individual can pay for a home while remaining eligible for First Time Buyers’ Relief, was increased from £500,000 to £625,000. As SDLT is devolved in Scotland and Wales, the Scottish and Welsh Governments will receive funding through an agreed fiscal framework to ‘allocate as they see fit.’ 

1Aviva, 2022     

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

Money/Wealth – In the News

With the next 30 years set to witness the largest ever intergenerational passing of wealth, the need for inheritance advice has never been greater. Intergenerational planning, however, can also help with more immediate financial needs, particularly when generations work collaboratively to find solutions that support the whole family both now and in the future.

Healthy dividends

UK listed companies paid out £37bn in shareholder dividends between April and June, up 38.6% from the same period last year, making Q2 the second largest UK dividend payout on record1.

Large one-off special payments were a key driver, but underlying dividends, which exclude these volatile specials, jumped by 27% to £32bn, boosted by weaker sterling.

Pausing pensions could be costly

Analysis2 has revealed that reducing or stopping pension contributions, even for a relatively short period of time such as a year, can have a significant impact on your final pension pot, with savers potentially being thousands of pounds less well off in retirement. Almost all (93%) of those surveyed said they are feeling the impact of increasing costs and inflation. Whilst 77% expect to have to make cutbacks on spending or saving, an encouragingly low figure of 6% said they would reduce their pension contributions.

1LINK Group, 2022

2Standard Life, 2022

The value of investments and income from them may go down. You may not get back the original amount invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

News in Review

“We need to act now to reassure the markets of our fiscal discipline”

Last Friday, in response to the mounting political crisis over his tax-cutting Growth Plan, Kwasi Kwarteng arrived back earlier than scheduled from the International Monetary Fund (IMF) conference in Washington, and headed straight to Downing Steet, where the Prime Minister sacked him from the role after just 38 days.

Jeremy Hunt, former Foreign Secretary and Health Secretary, who also competed for the Conservative party leadership twice, was named as the new Chancellor. Hunt will now deliver the Medium-Term Fiscal Plan on 31 October, alongside the Office for Budget Responsibility (OBR) forecast.

Rounding off another challenging week for the UK economy and the government, Liz Truss held a Downing Street press conference on Friday where she announced that Corporation Tax will rise from 19% to 25% next year, another major U-turn on the tax-cutting Growth Plan, unveiled just three weeks previously. Truss admitted that her radical agenda had rattled financial markets, admitting that her borrowing-fuelled plan “went further and faster than markets were expecting,” before adding, “we need to act now to reassure the markets of our fiscal discipline.”

The government has come under intense pressure to take action to reverse aspects of the Growth Plan, in order to alleviate market concerns.

“The most important objective for our country right now is stability”

The fourth Chancellor in as many months, Mr Hunt made an emergency statement on Monday morning in a bid to stabilise financial markets, before addressing the Commons later in the afternoon. Declaring “the most important objective for our country right now is stability,” he set out his intentions to scrap almost all the tax measures set out in the Growth Plan not yet legislated for in Parliament. These include abolishing the planned reduction to the basic rate of Income Tax from 20% to 19% next April, abandoning the Dividend Tax rate changes, in addition to ditching the VAT-free shopping scheme for non-UK visitors. The government will also not be proceeding with reversal of the off-payroll working reforms introduced in 2017 and 2021, or freezing alcohol duty rates as previously pledged.

He also announced a significant amendment to the government’s energy plan, which will now only run to April 2023, with a Treasury-led review introduced to determine how to support households and businesses thereafter.

The planned reduction to Stamp Duty will proceed, as will the reversal of the 1.25 percentage point increase in National Insurance contributions.

Saying he remains confident about the UK’s long-term economic prospects, the new Chancellor did caution, “growth requires confidence and stability, and the United Kingdom will always pay its way. This government will therefore make whatever tough decisions are necessary to do so.”

Markets

The Prime Minister’s appearance on Friday erased any gains made following Kwarteng’s dismissal, as she failed to outline a new policy direction. However, Mr Hunt’s reversal of most of the mini-budget’s tax cuts and announcement of spending cuts to come, saw market confidence improve with the FTSE 100 ending Tuesday’s session up 0.24% at 6,936.74, and the FTSE 250 ahead by 0.15% at 17,529.31.

Mortgages rates at a high

Average mortgage interest rates are the highest they have been since the 2008 financial crisis, with the average rate for a two-year fixed rate loan at 6.53% and 6.36% for a five-year fixed deal, according to Moneyfacts.

Countering the Cost-of-Living Crisis

In its latestWorld Economic Outlook entitled ‘Countering the Cost-of-Living Crisis’, released last week, the IMF cautioned that the combined impacts ofinflation, the war-induced food and energy crises, and dramatically higher interest rates were threatening financial market stability and driving the world to the brink of recession. With the cost-of-living crisis ‘tightening financial conditions in most regions’, the outlook deduced that global economic activity is ‘experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades.’  With global inflation forecast to increase from 4.7% last year to 8.8% this year, declining to 6.5% next year, the outlook suggests that in order to restore price stability, monetary policy should stay the course and fiscal policy should aim ‘to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance.’

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 (19 October 2022)

Can green home improvements add value?

With energy bills soaring, the advantages of improving energy efficiency are becoming evident to many homeowners seeking to reduce their outgoings.

Research1 suggests that over a quarter (26%) of British homeowners want to carry out improvements in order to make their home more energy efficient.

Give your home a price boost

Not only could energy efficiency improvements make a huge dent in your annual energy bills (up to £1,878 according to a study from WWF and Scottish Power)2, but they could also add an average of £10,000 to the value of your home.

So, what are the top green home improvements and how much could they add to the value of your property?

•             Air-source heat pump: £5,000 to £8,000

•             Solar panels: £1,350 to £5,400

•             Electric vehicle charging point: £5,400 to £7,400

The smallest actions can make a difference

Despite their clear long-term benefits, the cost of installing low carbon technologies can be prohibitive – the average installation cost of an air-source heat pump is nearly £11,000! Don’t worry – even the smallest actions can chip away at your energy bills and reduce your carbon footprint.

According to the Energy Saving Trust3, these are the top ten energy savers that you can try without splashing too much cash:

  •  Keep showers to four minutes: £70 per year
  • Avoid the tumble dryer: £60 per year
  • Ensure appliances aren’t on standby mode: £55 per year
  • Draught-proof windows, doors and floors: £45 per year
  • Insulate your hot water cylinder: £35 per year
  • Wash clothes at 30 degrees and less frequently: £28 per year
  • Don’t overfill the kettle and fit an aerator to your tap: £36 per year
  • Turn off lights when leaving rooms: £20 per year
  • Only run dishwasher when full: £14 per year
  • Replace baths with showers: £12 per year

Taken altogether, these actions could shave £375 per year off your bills!

1MAB, 2022

2WWF & Scottish Power, 2022

3Energy Saving Trust, 2022

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

Your financial wellbeing hub

The past couple of years have undoubtedly been a challenge for us all but, by pulling together, we have managed to get though an extraordinarily difficult period of time. Now, as we emerge into the post-COVID economy, we face a different set of challenges which, in their own way, appear no less daunting. One thing though does stay the same – we’re still here, by your side, and determined to continue steering you safely through any financially choppy waters that lie ahead.

Economic uncertainties

Although the economy did stage a tentative recovery last year and in the early part of 2022, it’s fair to say the outlook has become increasingly challenging in recent months. Surging inflation has curtailed our spending power and, with energy bills set to rise further over the autumn and winter months, the cost-of-living squeeze looks set to continue for now. Higher-than-expected inflation has also triggered a rise in interest rates, while fallout from the war in Ukraine adds to a cocktail of economic uncertainties.

Planning is paramount

No one is immune from these difficulties; while some will struggle more than others, we will all be impacted to some degree. In many ways, though, times like these serve to emphasise why people seek professional financial advice in the first place. Economic downturns are normal but having a sound, structured plan helps to ensure our financial goals and aspirations are not derailed when one does occur.

Financial wellbeing

Arguably, protecting your financial wellbeing has never been so important and the best way to do so is by sticking to your financial plan. It’s therefore essential to try to maintain any ongoing commitments such as pension contributions, protection premiums and regular savings policies if you possibly can.

We’re here to help

It’s also vitally important to keep talking, so do get in touch if you need our help. We’re here for both you and your family; ensuring your financial wellbeing is, and always will be, our primary concern.

The value of investments and income from them may go down. You may not get back the original amount invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

Intergenerational planning – a growing need

With the next 30 years set to witness the largest ever intergenerational passing of wealth, the need for inheritance advice has never been greater. Intergenerational planning, however, can also help with more immediate financial needs, particularly when generations work collaboratively to find solutions that support the whole family both now and in the future.

Inflation concerns

Currently, financial pressures are proving a key challenge across all generations, especially the impact of soaring energy bills as we move towards the winter period. The cost-of-living squeeze, though, is not only impacting people’s current spending power but also their future decision-making capabilities with regard to key issues such as housing, private education or university.

Balancing current and future needs

This has resulted in families increasingly adopting integrated strategies, especially in relation to gifting, in order to address imminent financial challenges. While reducing future Inheritance Tax liabilities inevitably remains at the heart of intergenerational planning decisions, the growing necessity to balance today’s and tomorrow’s needs is resulting in the focus shifting to support for children and grandchildren now.

Involving the generations

Intergenerational planning tends to be most effective when the process is not just focused on those who currently hold wealth. While funding a comfortable retirement and quality of care for the ‘caretaker’ generations remain fundamental elements of intergenerational planning, delivery of support for the coming generations and ensuring wealth passes efficiently to the right individuals at the right time have become increasingly important dimensions.

More families share an adviser

Greater involvement across multiple generations has also seen sharing a financial adviser become increasingly commonplace. This trend offers significant benefits, particularly when it comes to joining up a whole family’s needs with inheritance and gifting strategies, while treating all family members fairly.

Encouraging conversations

If your family needs help with any aspect of intergenerational planning, then please get in touch. We’ll be happy to assist by encouraging more open financial conversations across the generations.

The value of investments and income from them may go down. You may not get back the original amount invested. Inheritance Tax Planning is not regulated by the Financial Conduct Authority.