Sunday Supplement – 14/02/2021

Feb 14, 2021

Sunday is with us – and not any old Sunday, but Valentine’s day no less. There’s no romance in what I’m going to write I’m afraid…’ll have to get that from elsewhere!

Firstly a massive thank you for all of those who liked, shared and contributed to the post last week. I felt really good about it when I had finished the draft and it took off more than any of the previous ones have (not sure how long these have been going on now, I’d guess 9 months but Covid makes all judgement of time and what’s gone before utterly impossible – for me anyway).

Please feel free to like, share and comment again! I’m going to stick with one half looking at granular/micro issues and one side looking at the macro situation and developing that a little further.

Firstly on the detail side – there’s a case that landlords need to be aware of if they are investing within limited companies. One of the most often asked questions of the last 6 years is “should I use a limited company”. The answer of course is “it depends” and “speak to a qualified tax advisor” but often the best rule of thumb I’ve seen is “What are you doing with the income?”. If you want to control income drawdowns (usually because you are trying to build a portfolio of multiple properties) then the limited is usually the way forwards (and its extra costs justified).

This case threw a spanner in those works however. The high Court have now ruled, effectively, that the companies act 2006 overrules the housing act when it comes to serving prescribed information correctly. It is key to note the actual outcome of the case (as always) rather than reading a headline and panicking.

The case is Northwood Solihull Ltd v Fearn & Ors (2020). There are 2 issues it was addressing:

Where the landlord is a company, does i) a Section 8 Notice and ii) the deposit prescribed information confirmation certificate have to be signed in accordance with section 44 of the Companies Act 2006 (so signed either by two directors or a director and company secretary).

i) in this case the property manager had signed it but had left “landlord” as the option unredacted, so s.44 would apply and the director and secretary or co-director signature would have been required. Had they left “landlord’s agent” unredacted, the s8 would have been fine. So this is a backdoor conclusion to an incorrectly executed s8 – in itself not overly worrying. It was actually still deemed to be valid because as a pre-emptory warning notice with several options in ways to serve it it was effectively deemed within the spirit of the law. So there was “no harm done” here and actually this is helpful to know if you are ever in county court with a s8 with a clerical error on it!

ii) is more significant. This established that pre-deregulation act 2015 the deposit certificate MUST be signed in accordance with s.44 of the Companies act I.e. executed by 2 directors or director + secretary. In this case it wasn’t and thus the deposit protection was invalid (and a 3x reclaim could be the appropriate penalty).

So what? The dereg act 2015 offers some solace here and also post-validates what went before it. In short – if the landlord protects the deposit then they must have done everything in accordance with s.44 of the companies act. If the “initial agent” protects the deposit it must be they who have signed. If you protect it – make sure it is you who signed it!

This is a good talking point because it highlights the typical journey on a legislative issue at the moment from landlords and who can blame them as they feel under assault. Panic from some quarters as “another ruling goes against us!”. This is just the law being exercised and tested. Very little is of significant consequence here in 99.9% of tenancies. If your agent is lazy on this stuff there are likely bigger issues at play where you will get caught out before we get to this ruling! Compliance has got to be done right. Is there a bloodbath of deposit reclaims to come on the back of this? No. It is a simple – check process, quite a lot of work to do if process is weak – worth checking if openrent (for example) ask if there are 2 directors or more if there is a limited company owner, and get signatures from at least 2 – I’m pretty sure they don’t so you might want to check for JVs where you are the effective agent but are not doing it through an agency setup – and ensure process is robust from hereon in. Would like to see comment from openrent if anyone sees any or can highlight this article to them – because landlords may feel aggrieved (and may have a case to feel aggrieved!) – there is potential loss here.

If you are still reading after the deep dive into the law…..Great! Next up is rents. There were some good figures released from Zoopla this week around rents and their movement last year.

UK rents down 1.2% for 2020. Many will be surprised but you take out the 8.3% fall in London and it becomes +2
3% for “rest of UK”. As always in these situations this is too broad brush.

If you read this and are a London landlord you’ll have done very well to avoid this pain. Perhaps you signed 2 year asts at the end of 2019 in which case – phew! But the glut of supply in what were short stay units as the tourism market dried up completely last year, alongside the lesser need to live near the office, are the 2 factors. There are matters of debate here yet to be settled.

Some are very busy banging the drum for home working forever. Personally, I don’t like it much (the correlation with home schooling may or may not be a factor!). But I don’t because it doesn’t suit my personality type. I bounce off others and our office gets a massive lift from overhearing other conversations. That’s how process improvement takes place or starts in our organisation, sometimes. I also am psychologically “there to work”. Until 2012 I had worked from home for a 6 year stretch in one go and it worked really well until our first child was born – then it became a conflict between work and baby and that wasn’t a nice feeling. So mentally, I’d decided I don’t like it and didn’t want to do it any more/again. My productivity is far higher at the office.

However. Many won’t be like this particularly the younger element of the workforce. There seems to be some evidence that productivity has gone up massively in some industries and what’s really needed I think is more granular studies around the age of the workforce, and their family situations. We all know that anyone home schooling at this time simply CANNOT be as productive as they would normally be… seems obvious.

I personally believe that companies will want to hold onto this productivity boost (and also manage costs down) so I see a lower need for city centre offices going forwards in an economy dominated by services.

BUT….I hear you say – office as a sector actually GREW last year! Why? Well, in the UK the minimum space for a desk/employee under H+S standards is 50 sq ft (tiny, but maybe massive compared to living in a 70 sq ft HMO room!) and in London it was pretty much down at that number for obvious reasons. Covid made that balloon to 150/sqft per desk being demanded which is obviously trebling the price of a desk.

The question is – how long does that space requirement prevail? The other point of order would be – if you have a 5 or 10 year lease, you are going to halve the number of desks in a space that you are already contracted to pay for (or cut them in 3). There’s no other way out (contractually). It is only at renewal time and after the pandemic is under control and we are finally “living with covid” in the government’s eyes that the truth will emerge.

I’m still on the side that the city is less desirable than it was in the post-covid world. It isn’t an immediate thing because there are also other factors….company providing correct equipment for homeworking for example to ensure wellness of staff and fulfil their obligations.

I’ve certainly heard from many that they don’t feel their superiors will stand for home working in their office. They don’t trust the productivity. However what we’ve had now is a massive long experiment and real data and the reality of companies and business is that if it is legal (sometimes they don’t worry about this bit) and it makes more money then it is OK.

So I’m still bearish on the medium term future of city centres. 9/11 is often cited as a relevant pushback because people got back on planes RELATIVELY soon afterwards but what needs to be borne in mind is a) the worldwide impact this time and b) the duration and the impact that has on people’s habits and mindsets rather than one colossal one-off event.

With that in mind – to resi rents. The resi rents are flat in large metropolitan areas. London took a hammering but has the SA stock issue also in the mixer (and affordability issues particularly in prime). West Midlands would seem to be impacted by its smaller cities and density, and its metropolitan centre in Birmingham. The North West lagged a bit, arguably due to Manchester. The east mids, my darling sector for some years, did very well with its balance of lesser sized cities and large towns. The reasons for a whole lot of this seems to be encapsulated by the above, to me at least. Either that or I am experiencing confirmation bias…..I don’t THINK I am, but I’m always wary and definitely not immune to these things!

So moving onto the economic big picture – this week’s phrase and topic will be “secular inflation”. A lot of switched on characters are seeing the return of this phenomenon – not any minute now but on the horizon. What does it mean? Persistent inflation, the type associated with a healthy economy but on the “wrong” side of the bank of England target of 2% (wrong in the historical context). I wrote last week about repression as one potential way out of this mess.

We are at a pivotal and dangerous time in economics here because we have not trodden the modern monetary theory path, that we are flirting with, before. Whenever we cannot really refer to economic history for a possible scenario or answer, I am more uncomfortable. For example you may have seen the doomsday headlines of our “worst economic performance for 300 years” – but it may feel meaningless. Things certainly don’t seem THAT bad. One reason why not is of course the giant government “airbag” or firehose of money that’s been shot at this problem.

So if the return to secular inflation (and we have to go back to the 70s to see it, in the context that all the numbers were bigger back then – GDP growth, productivity growth, interest rates, inflation and indeed unemployment) is to happen, where are the risks and what should we do?

Firstly, it needs to be noted that a genuine period of secular inflation is likely to massively benefit property investors, particularly when combined with a suppressed interest rate (and indeed potential financial repression). House prices go up because wages go up and all prices go up. Debt is inflated away. You can see the attractive of this from the government’s perspective. It can be pitched as “growing out of trouble”.

Great. Sounds easy. Where do we sign up? But. Growth in reality is heavily, heavily dependent on productivity growth. And in the UK since the GFC in 2008 we’ve struggled with that. Big time. In a way it pushes against some wider policy measures (certainly against austerity, for example) – investment has been down, markedly, and lots of crap lower end jobs have been created to move a large number of potential workers back into the workforce and onto lower amounts of the methadone that is the state benefit system.

My fear is a phenomenon yet to be coined and I’m going to coin it today. “Fakeflation”. This will be inflation that is not the by-product of a healthy economy but is engineered. The test-tube baby of inflation if you will. Inflation for inflation’s sake.

And this isn’t only the future. We’ve already had this. In the last decade our only really significant period of inflation above target was caused by an event that 90% agree was short-term economically harmful…..the Brexit referendum (note, I will skilfully avoid any debate over the medium and long term impacts of Brexit, but it seems to me that many leavers accepted there would be short term disruption – their belief is that there will be medium and long term gains). And why was there inflation? Because of a devaluation of the currency as capital fled from sterling. So not inflation as a sign of healthy growth – we were below 2% annualised after the referendum on GDP terms and had ground to a halt in Q4 2019 before the pandemic destroyed the figures as a workable metric.

Inflation went above the 2% target at the end of ’16 and stayed there until mid ’19. Only in 2019 did we really start to see some health in the wage growth metrics which had stagnated for a decade and with the non-vanilla disruptive policies of Corbyn/McDonnell defeated in Dec 2019 the stage was set for a new dawn. The treasury in March last year promised 600bn (yep, 1.5 times the debt increase since covid hit) in infrastructure investment in this parliament. Rarely if ever referred to. Of course Covid has put paid to that (but good to note it says a lot about how much of a Keynesian Boris is).

So this was our first bout of recent “fakeflation”. The next could be a lot more damaging to the underlying system. This is on the basis that it comes from manipulation of monetary and fiscal policy rather than a healthy economy. To put it another way – I see it as a kind of idol, the “God” of inflation that will get us out of this mess. (Or from a governmental perspective, get this debt under control/inflate it away). My fear is that they will want this inflation so much it may come at all costs – inflation for inflation’s sake. It should be a by-product of a healthy economy rather than a silver bullet solution.

However – back to property – most solutions other than deflation are good news, long term – so perhaps I am worrying about nothing. But it definitely doesn’t feel right at the moment. Or have I just got “budget fear” because this is the most important budget for over a decade? Perhaps I have……

Until next week – stay safe, look forward to good news at Boris’ press conference next week – this situation and ALL associated metrics will likely move faster than we are used to. And please like comment and share of course – give me a thumbs up if you made it to the end!