Supplement 03 Sept 23 – The Cup

Sep 3, 2023

“It’s beginning to look a lot like Christmas” Michael Buble, Canadian singer-songwriter.


Welcome to the Supplement everyone. OK, this week’s quote is a wind-up, because silly season is officially drawing to a close now, look out for that traffic on the roads tomorrow morning when it’s back to school time – assuming the schools are open and don’t have too much dodgy concrete in their construction, anyway! It is only just tongue in cheek though – just watch for the first reports of the xmas decs in the shops from now on………fair warning.


This week I’m going to do the macro roundup, and then share with you a really insightful and fascinating conversation I had with a property trader earlier this week, which contained some great stuff about the market over the next 6 months or so (or her view of it) and also some pretty decent philosophy about life, time and effort as well!


Macro news has bumbled on in a relatively quiet fashion, but given that the working week for the markets fell on the 1st of the month, there are definitely a few things worthy of consideration. 


Mortgage approvals fell short of consensus forecasts, as the higher rate and more cautious lender environment slipped another notch tighter on the belt. Meanwhile, the swap rate slipped under 4.75%, which is great news that is sure to filter through to the lending environment in time, but should represent the cost of debt back at 6.75%, with pay rates around 5.75% on a 5-year fee. At the time of writing, there is better available from alternatively-funded deposit taking lenders, which is fabulous given the past few months in the bond markets. It’s still 1.5% ahead of 12 months ago – but 12 months ago, we were just a couple of short, fateful days away from the election of Liz “the Lettuce” Truss – and we know what happened there and then to bond rates after that!


My feeling is still that we have seen the worst of the swap rates, and we are now a more comfortable half a percent away from that. I could still be wrong, of course, but whilst those subject to base rate will continue to have the handle cranked, this month, and several more times most likely before the Bank of England is done, the fixed-rate crew might have seen the worst of it.


Mortgage lending balances were net positive, so lenders still got more out of the door than they received on redemption, which was against forecast. Net lending to individuals was also above the forecast, which might be symptomatic of people borrowing to maintain lifestyle in a more expensive environment/over the summer. We will find out in time. One thing we know for sure – a lot of habits were broken or at the very least changed during Covid, and the world has not yet adjusted to what IS a new normal (hybrid work being a good example, a Central London restaurant chain this week declared that the only worthwhile days to open are now Tuesday – Thursday thanks to hybrid work, but had opened a whole number of suburban locations to take advantage of the new trend that looks here to stay), and what ISN’T yet a new normal (booking everything last-minute for example – there’s much more of that, but is it a permanent thing?)


Car production was well above forecast, so that is one positive – not everything manufacturing-related is bearish. There was a bigger piece of news just dropped into the headlines though – the ONS massively revised previously reported figures about the UK economy and the speed to which we recovered to pre-pandemic levels. 


What does “massively” mean? Well, they have improved (and yes, they always frame it like that of course) the way they calculate output and GDP. For the true stats geeks out there, when you read their blurb talking about the “supply and use tables framework” you can feel their excitement and sense of achievement in being the first country in the world to implement this new and more accurate (they say) method of accounting.


The cynics out there might suggest they have cooked the books but it really doesn’t seem like that. They have restated figures for the past 20 years, without this new method making major changes and indeed the new figures do seem more reflective of the “real world” as far as I’ve seen it since the pandemic. The really significant impacts are:


GDP growth for 2021 is restated at 8.5%, up 0.9% in current pricing terms.


In their own words: “Upward revisions to annual volume GDP growth in 2020 and 2021 mean that GDP is now estimated to be 0.6% above pre-coronavirus (COVID-19) pandemic levels in Quarter 4 (Oct to Dec) 2021; previously this was estimated as 1.2% below.”


In simple terms – that reads like a difference of 1.8% to me. They are busy in the text celebrating how much more dramatically accurate this is, whilst not necessarily stepping outside of the circle and quantifying that this is a revision of nearly £400 billion.


£400 billion…..not exactly pocket change. Readers might think “well what can I trust in the ONS figures” and a bit of me sympathises with that argument! However, if measurement methods ARE consistent, then it is at least fair to say that even if they are imperfect (which of course they are), then as long as they are consistent in their methodology they still measure the same things the same way each period – so the figures do still have significant meaning.


Either way – they are the best we have, so it is also a case of “suck it up, buttercup”. Still – £400 billion! If I was Jeremy Hunt or more likely Rishi I’d be celebrating just how well the Covid economic policies had actually done for the economy, although perhaps moving on from his chancellorship and the “Boris Years” is understandable and a better tactical plan for the moment!


So – we will, on balance, forgive and not forget here. The headlines stayed squarely in the business sector only, although this deserved to be a little more mainstream rather than just a mention or a soundbite. There has been one solid argument made in the press – more countries are likely to follow suit with these Supply and Use tables (the US already have) and so points about comparable performance – how did the UK do versus Germany, or France, or the Eurozone, for example – will also likely be revised. It does completely change the post-Covid narrative though. I simply remain comfortable enough that the ONS is the best in class and is committed to trying to be transparent and accurate about these figures – imperfect but in the right place as far as continuous improvement goes.


That concludes our macro fix and I wanted to move to the “front line reportage” segment with a few anecdotal snippets from the conversations I’ve had this week.


I’m back from an extended stateside vacation and it is the first time in 8 years that I had some segments of a proper switchoff for over a fortnight. We were away for just over 3 weeks and whilst the Supplement carried on (of course – it was a holiday, not a nuclear war), much of the rest was left very much in the hands of my superbly capable team.


It was also a reminder that the United States is both the best and the worst country in the world in differing measures – but there’s some stories there for another time. Safe to say, though, that even ignoring exchange rates and thinking in dollars – my impression, certainly in Florida, is that inflation has hit the man on the street far harder there than it has in the UK. Don’t think for a moment that our supermarkets aren’t incredibly cheap (and yes, I know food inflation ran at 20% etc. Etc.) The “value” ranges for example are just nowhere near as prevalent, and discount retailers like Walmart and Aldi don’t hold a candle to Aldi UK, I can promise you.


That’s meant a week of jet lag but also a week of catching up with people, emails and tasks – and deals that couldn’t wait as well. From talking to people at our Partners in Property 6th birthday celebration on Friday (yay!), it’s clear that new deals are difficult to come by for all involved. We had no magicians in attendance as far as I know and our audience, much like myself, has relied on leverage to build and maintain their investment portfolios.


Those who have closely followed the Supplement for years have fixed their debt at the 2022 rates, depending on when they caved in based on my relentless barrage last year around it being a sensible time to consider fixing rates. This shored up the existing – at HQ this end, a not inconsiderable position. Our drop-off situation starts in volume in the second half of next year when you would expect an improvement (although not a massive one) on today’s available rates.


That’s all well and good but alongside that of course the point about the lack of magicians is that we are all subject to today’s interest rate environment not only for remortgages but also for new deals. Cash is all well and good but if you can’t refinance and don’t leverage, your returns might look (in the first couple of years) really weak compared to a government bond, for example, right now. This has been and continues to suppress volume of new deals and new purchases.


It also means that offers that have to be made to vendors are about as mean-looking as they ever have been, but do you feel this is a good time to cut your margins? Personally – I don’t. Part of the risk management strategy here has always been to do less volume and more quality and whilst in a year like 2019 where we did nearly 100 deals sounds incredibly active, with the funding lines and environment we had at the time we could have done double or treble that if we’d moved the needle by a relatively small amount downwards. It actually would have ended up being very profitable but for reasons that were totally unpredictable, so I’ve no regrets at all about that at this end. 


As at today though I’d rather shoe very little in terms of production but make sure we do the deals that do stack up as at today. This is translating into exceptionally good yield, or good yield with flexible vendors, or relatively significant distress where purchase pricing is little over half where an early 2022 value might have been. Yes – you read that right, 50 pence in the pound. We aren’t making many friends and we won’t be cashing cheques and breaking necks on those numbers, that’s for sure.


That’s the sign of the times, and reading between the lines, a precis of what a fair few of the PIP members are also seeing. Those on floating rate debt are doing more work for less money (certainly in real terms) but coupled with a mentality that’s seen them succeed over some years, they feel they are close to the top on the base rate and can absorb it, and have increased rents accordingly – and are already pursuing more active asset management strategies like HMO, which is affording them some protection by forcing 10%+ gross yields, which is where today needs to be. “Yesterday’s” £2500 pcm HMO seems to be grossing £3500+ and that’s bridging the gap in the margin to an extent.


The surveyors are occasionally appraising these properties (more and more often it seems) at far lower rents than they are actually achieving which is very common in times of boom, and the rental market is booming. The current ramp has been considerable but I was going back and reading some commentary from January 2022 in a private group I’m a member of, and people were already very much reporting double digit rent increases year-on-year back then and obviously we are nearly two years on from that and the market has continued to heat up. RICS are always cautious but this is having more impact than ever at the moment since affordability calculations are strangling a lot of the lending, and suppressed rents are the second biggest problem after the actual size of the interest rate.


At this end focus right now is on one particularly sizeable deal with a workable yield, chunky discount and understanding vendor with deferred consideration included. It still only just about works and won’t yield fruit for years, although there’s no doubt the deal is worth doing and in 5 years time I’m likely to be delighted if we can add this one to the portfolio. Even the concept of one deal dominating the success or failure of production in 2023 though is a complete shift compared to the volume we achieved pre-pandemic. This doesn’t feel like as much of a “choice” as I’d like – more a straightjacket put on by the market conditions. Still, we aren’t in desperate need to chase growth and if the current conditions mean 2, 3 or 4 years more than planned to reach specific goals in investment vehicles – I think we’ve got to be philosophical about it.


Let me frame it in one sentence. When the dust settles from all of those pushed out of the market by this interest rate environment – those who have toughed it out, and survived, will be sitting pretty.


I wanted to conclude with a report back from a valuable chat this week with a property trader who has been instrumental in quite literally thousands of deals (over 10,000 sales all at varying levels of discount) in the past 15 years. There were a couple of fascinating aspects as I alluded to earlier.


Firstly – she sees the market as a 2012-style market at the moment. This is really interesting as it maps my analysis from several weeks back when I compared rates to yields, and talked about the quagmire the rates have currently put the entire sector in. She feels prices will fall – especially on middle-market and second stepper stock – over the coming months and is expecting some blood on the streets.


We both agreed we are already seeing a bit of it – but if you can’t handle 5.25% base, then 5.75%+ is unlikely to help. In spite of recent revelations around GDP, and also signs that slowdown is very much here already, the Bank of England still won’t be in a position to stop hiking until wage growth looks more under control for fear of the wage/price spiral. The coming months are expected to be very active and indeed we are hearing about more repossessions and near-repos than we ever have.


Valuable insight. We also talked about property training and our overall thoughts and opinions on it. She would rather poke out her eyes with a sharp stick (or similar), whereas I talked about the luxury of running what we already do at this end – the Boardroom Club and the business retreat, which I’ve put a last call out about in the teaser posts for today’s Supplement. We have worked with and do work with some fantastic operators within the sector, already established (some extremely experienced indeed), and so those seduced in by “get rich quick” have already dropped off before they get to us. If you can make it in October – there’s no guarantee we will run one next year as commitments only ever go up by the year, not down – so drop me a message to discuss if you’d like to.


A lot of the people we work with have spent tens of thousands on the major labels in training – none of them have wasted that, but some are left with a fledgling business and a network and not much more to show from it when they come to us. The clever artist picks his modelling clay well, though – right?


The latter half of my conversation with the trader, though, focused on her view on what she’s seen make investors successful over the years. These nuggets are – in my view – gold dust. She had a fabulous analogy that inspired today’s image – the cup. I saw it more as a teacup – but she insisted on the pint glass when I told her it would definitely make this week’s Supplement!


The framework is as follows. Everyone has a cup, and that cup is the same size. That’s where the comparison to the “love island” analogy which caused so much fuss a couple of years back – “there’s 24 hours in everyone’s day” – stops.


Everyone is different. Our pint of water starts to spill depending on what we have in our lives. Children. Partners. A full-time or part-time job. Health concerns. Loved ones with health concerns. Exercise. Hobbies. Clubs. Side hustles or further businesses. Education and improvement. There’s dozens more points that could be added to that list, of course.


Whatever water spills is difficult or takes time to replace. We have an element of choice (some choices on some of the above would be unthinkable of course) and control over how we deal with all of those factors and what water it leaves in the cup. We can’t expect to get results in property if we don’t control and measure and leave enough in the cup to put a significant amount of time and effort into property.


Likewise, there are times when the cup gets empty (and times different to today when the cup is running over) – so the overall message is to manage the cup as well as you can, but also to be realistic. Don’t beat yourself up (ever) but certainly not before you’ve analysed your own cup – and got your house in order before wondering why results aren’t necessarily appearing.


One heartwarming story to finish – I was blown away this week when 3 avid Supplement readers made a 150 mile round trip to the PIP 6th birthday meeting to tell me how I’d been instrumental in making sure they fixed a huge portfolio loan last year before rates went wonky, and they paid their ERCs to ensure a nice 5-year runway. The bottle of Grey Goose was of course very welcomed (thank you, gentlemen!) but the real feeling of accomplishment was to have played a part in a massive decision that was absolutely the right one. If anyone ever wonders why I put the time and effort in that is required to write these – even when on an extended holiday – and I know people do, because they ask me all the time – THAT’S why! Or – as the cool kids would say – BOOM.


That draws us to a close – and you know what that means. Be sure to tune into the 9am live on YouTube if you can (or watch on repeat) – if you don’t already know about it, just search up “Propenomix” – and Keep Calm and Carry On!