Supplement 160723 – BoE Financial Stability Report

Jul 15, 2023

“The stability we cannot find in the world, we must create within our own persons” – Nathaniel Branden, Canadian-American psychotherapist.

Welcome to the Supplement everyone. It’s been a week of good news being bad news, or bad news being good news depending on your perspective. We’ll have a whistle stop tour of those stats, and then get into the bulk of today’s effort – a summary of the Bank of England’s financial stability report that was published this week, a 6-monthly piece of output which offers some really significant insight into the actual size of the problems – or not – facing the UK as a whole right now. Please note – this doesn’t mean some people are not in trouble – they definitely are – and the report has a really disappointing bias towards homeowners with mortgages (versus landlords, and ultimately, tenants, who end up footing a great deal of the bill), but it really does help to give some context versus the standard media circus that just drones on, and on, and on. 

As per the new format I’m going ahead with the bullets up front, sticking to the new number format for the purpose of the NEW ai-generated audio version which I’ve managed to get online with the help of a colleague. 


If you haven’t given me a subscribe on Youtube or the podcast platforms yet, I’d really appreciate it if you do – links are here to Youtube: and here to the Propenomix website: – thanks for supporting me spreading the word, more subscribers will lead to more and better content, and that’s the aim for everyone!


  1. UK Retail sales up 4.2% in nominal terms, down nearly 5% after inflation adjustments
  2. UK unemployment up to 4%, a surprise jump from 3.8% compared to forecasts – good for rates
  3. Average earnings up 7.3% annualised using the last 3 months as the base – bad for rates as seen to be driving inflation
  4. RICS house price balance -46% (so of those surveyed, 73% reported a downwards market in pricing terms, 27% reported sideways or upwards) – back to the negatives of January and February, but at what’s normally a good time of year to sell – this will filter through to Q3/Q4s figures. Tough time to be a sales agent
  5. GDP down 0.4% for the year – avoided the technical recession (remember, two quarters in a row of negative growth) – but the effect is similar – teetering on the brink of abject sideways movement – weak as water
  6. In the Bank of England’s own words this week: “The global economic outlook is highly uncertain, and the risk environment is challenging”. Pope also catholic in shocking revelation……
  7. Homeowner mortgage payments aren’t looking as if they will increase as much as you would be led to believe if you trusted the mainstream media for your economics news
  8. UK banks still look solid and very resilient
  9. UK companies don’t have as much debt maturing in the next 12-18 months as in previous cycles – they are stronger in cash terms, just as households are
  10. Nonbank financial institutions are not as strong or resilient and it is an international task of some magnitude to fix this problem (nonbank FIs would include insurance firms, venture capitalists, currency exchanges, some microloan organisations, and pawn shops)


So, the stats are where they are. We need to continually remember that too many are issued in nominal terms, whereas GDP is issued in real terms – i.e., adjusted for inflation. So – retail sales up sounds good, until you remember inflation. Retailers’ take has dropped 5% or so in real terms when adjusted for CPI. Of course, CPI isn’t the right measure to adjust these things by; instead a blend of producer price inflation, and wage inflation, and energy inflation, and commercial rents would be the better metric. It doesn’t widely exist, so would have to be created. Nonetheless, the point is that it might have sounded positive but it is likely a haircut in real terms, and the sector shrinks rather than growing.


Jobless claims went up as vacancies also continued to fall. Vacancies are still well ahead of where they should be historically but the point at which they hit roughly where they would have been without the pandemic (hard to forecast of course, but I mean the long term trend line) is within a few months at this rate of change. 4% surprised a few, and is not “panic stations”, but is the start of further challenges for the government with an election looming. All else being equal this would have forced gilt yields down, and they did move down this week – although that was more on the back of the USA showing a lower inflation rate in terms of the headline CPI, and also their core inflation – they look to be over the hill, and that suppressed bond yields in the markets worldwide. 


Why? Well, traders see the USA as the flagship that leads the world and the UK (and similar markets) just follow. (largely speaking, I see the logic but I believe it is generally overplayed in the markets). It feels to me we are still 2-3 months away from our peak core inflation, however, whereas the US hit the recent peak in September ‘22 at 6.6%, and put in a surprise 4.8% last month (compared to expectations of 5%). That would put us around a year behind the US cycle, although it may be even more elongated than that, when you consider the amplitude of our base rate path versus the faster and more aggressive US Fed funds rate. In plain English, what goes up faster is also likely to come down faster – so 15-18 months might be the first time we put in a really surprising core inflation number.

Also – we’ve not peaked yet and are at 7.1% on core inflation, but remember we have the same inflation target – 2% – as the US. My number for June’s UK core inflation is 7.3-7.4%, and that should be close to the peak but is not necessarily THE peak. Wages at 7.3% annualised when you use the last 3 months’ figures is what is driving more fear into the bond yields, because the concern is that wages will continue to chase prices, rather than settle down and be based on future inflation expectations, just like the textbooks say. Real people don’t behave in the way that textbooks want, of course, and the fact that people are a few per cent worse off in real terms is what’s leading them to demand more from their employers. Clearly, though, some are getting laid off instead.


The house price balance is an interesting one. Much worse than expected, but inevitably driven by this latest shot upwards in the yields and therefore the cost of mortgage debt. The right sort of conclusion here looks like a very early lead-in to a summer market, and August particularly could be stone dead. Demand does back up though, and, depending on where the yields are in September (likely still high, but, rightly or wrongly, if the US data keeps going in the right direction and the Fed stay on pause with their rate hikes, which looks very possible), prices might well stabilise into the end of the year, although transaction numbers will continue to suffer, as predicted at the start of this year.


The rental market is almost completely the opposite. From the report itself: “In the lettings market, a headline net balance of +40% of respondents saw an increase in tenant demand during June (part of the non-seasonally adjusted monthly lettings dataset). At the same time, the net balance for landlord instructions sunk to -36% (the most negative reading for this metric since May 2020). With rising demand still being met with weakening supply, a net balance of +53% of contributors anticipate rental prices being driven higher over the near-term.”


A fair translation – even more surveyors thought that rents would move upwards than thought prices are going downwards. Tenant demand is clearly smashing through its highest highs, and look at the landlord instructions to agents too! Forget the figures in May 2020, obviously significantly pandemic-induced – demand is going up massively, and supply going down. This tightness in simple economic terms, when demand is up and supply is down, means that prices go up.


GDP – the preferred measure, rightly or wrongly, of economic growth, is 0.4% down year-on-year. No recession – technically – because we’ve managed contraction, growth or flatness, then contraction – but still not the name of the game. Not a surprise – if anything, still a sign of how resilient the economy is, because GDP IS adjusted for inflation. However, if you chose to look at (say) GDP per head (or per capita, as it is named) – which is still imperfect, but perhaps better, you’d find a population up around a third of a percent (estimated) and so per head, a population with a lower output by around about 0.7%. Not too damning, but moving in the wrong direction, with limited prospects of any meaningful growth any time soon.


Why? The soft pillow approach we insist on taking these days, partially. The unwillingness and inability to take our medicine, as we did in the early 1990s. This time around is harder – because whose fault is it that the government pumped nearly £700 billion into the economy over covid, and the result is (alongside other events) significant inflation? Which economic agents should carry the can? Shrinking government spending is one way to reduce inflation, but that punishes the people for the government’s incompetence, doesn’t it?


That leaves the macro roundup for the week, with few surprises I’m sure. The balance remains teetering on the brink – the UK remains very fragile – and as I’ve said time and again, one chief issue is that the risk still remains to the upside. One more shock, invasion, war, epidemic, terrorist attack – the list sadly goes on, and that could trigger a significant economic slide. Without said black swan, we simply look like we will limp forward somewhere near a general election at some point in the next 18 months.


So, moving on to the Bank of England, and their Financial Policy Committee’s half-yearly Financial Stability report, and the summary of the data within. There’s some really interesting bits in this, and it is very handy to see the raw data presented in the way the Bank looks at these situations.

The economic outlook is definitely uncertain, and – as per my constant droning on – the risks remain to the upside. Geopolitical tensions are still higher than in most of the previous 15-20 years, and one major event could cause a real problem while the economies of the world, not just the UK, remain fragile and susceptible to inflation.


The Bank recognises that it is hard to predict the path of interest rates in the near future. This, without being alarmist, is giving them room to put base rate up above 6% or to “wherever it takes” if we get to a situation where they need to roll out those words once again. The BoE also recognises two specific challenges – businesses with lots of debt (welcome to property!) and also global commercial property markets (rightly identified, and significantly more sensitive to the price of debt since there’s much more likely to be a tradeoff between investing in commercial property versus investing in other asset classes, for institutions. A higher rate of risk-free return (the government bond/gilt rate) means that a higher premium is sought for risky assets). In the defence of commercial property, the exposure to an asset class where rents often rise with inflation, while inflation is still raging in the UK even if it looks temporarily licked in the USA (for now), is attractive – but still the risk premium argument is stronger.


There’s some great detail in the report around mortgage costs for homeowners – the Bank’s primary concern, although I would suggest this concern for homeowners above renters is a bit overblown, in honesty. 28% of the population own a house with a mortgage at an average LTV of 42%. 37% of the population rent, with 54% of those being in the private sector where landlords will, more often, have not only a mortgage but a higher loan to value and will be on interest only, magnifying the effect of interest rate increases. However, let’s follow the Bank’s train of thought through.


It was very hard to pick a chart from the entire report to use as this week’s image, and all of the charts are worth a look. The whole report is here for those who would like to read it, or at least take a look at the pictorial analysis contained within: 


However, I did manage to choose one, and that one is the number of mortgages in millions, and how much their monthly payments are going to go up, by both the end of 2023 and the end of 2026, based on current rates and futures rates. The spoiler is that very few households (compared to the whole population) are facing really significant mortgage rises – and really, as per last week, this analysis would be much better done in real terms, or at least adjusted for average nominal wage rises – the bars would then shrink really significantly.

My “plain English” translation of the conclusion is that in reality, fewer households will be having to find much more than they did to pay the gas bill last winter, even in an energy cap situation. The problem at the owner-occupier household level – as we stand at the moment, and remember yields can and may well go up further before they come down again – is compartmentalised to a relatively small number of households. 


The graphical representation of house prices, using December 2019 as a base, is looking more like a 20% nominal bump since then. CPI is up about 18% since then, so in real terms (as per last week’s epic tome), there’s been very little movement; more of a smoke and mirrors exercise as so often in an inflationary environment. Right now, though, nominal prices look to be going sideways or downwards in the immediate few months, whereas inflation will continue raging for some time yet. 


The swap rates, when graphed over the previous 18 months, are showing a narrowing spread between the 5-year mortgage and the swap (this is in the resi market, but also applies to buy-to-let) – showing that the margins are starting to get squeezed at the lending end and instead lenders are needing to get their margins from their depositors (if they have them – if they don’t, their business model is likely under significant pressure in the next 12 months). This is more a symptom of getting over the “Moron premium” as it was termed in the wake of Liz Truss and the spreads look more like business as usual for the past 18 months, in honesty. Resi mortgages remain a bit of a loss leader (or in reality, the profit comes from those who don’t, or can’t, re-fix at the end of their fixed terms). 


The next part I’ve replicated verbatim because this puts things into context very well: “The majority of mortgages taken out over recent years have been at a fixed interest rate for a period of time (most commonly two or five years), so higher interest rates affect mortgagor households in aggregate with a lag. Around half of mortgage accounts (around 4.5 million) are estimated to have seen increases in repayments since mortgage rates started to rise in late 2021. And higher rates are expected to affect the vast majority of the remainder by the end of 2026 (around 4 million accounts). For the typical mortgagor rolling off a fixed-rate deal over the second half of 2023, monthly interest payments would increase by around £220 if their mortgage rate rises by the 325 basis points implied by current quoted mortgage rates.”


Averages are dangerous. Just remember that. But, listening to the news (if you do) or the radio – did you think that figure would be £220 pcm for the average household?


The next part is more technical. The Bank has also looked at the household debt-servicing ratio. However, I think there’s a flaw in their analysis here which I will get into. So – currently 6.2% of household income post-tax is spent on mortgages. Sounds ridiculous right? Well, it is, because that is an average number including households without mortgages. So – if we take the broad data that we know – and assume they have excluded all households who are not owner-occupiers, which is surely the case but not made evidently true in their report – and we adjust it across households (bearing in mind the 28% number above, and the 33% known number for households with no mortgage) – then we would go from 6.2% to 13.5%. The number is expected to be 8% by mid-2026, which would adjust to 17.5%. Eminently affordable – bearing in mind this is post tax – and much cheaper as a percentage of income than renting.


Of course, at an average LTV of 42% this would be the case, and once again I’ll point out the danger of averages. This looks a lot more daunting for a first-time buyer, although I’m buoyed to see the number of 10-year fixed rate mortgages currently on offer which are managing to stay under the 5.5% threshold that’s been used for some time as the stress test. Cheapest today is 4.99%, taking advantage of the fact that the 10-year swaps are a considerable amount lower, as identified over the past weeks and months.


The Bank’s point, though, is that in the early 90s the number was over 9% – and in 2008 it was over 10%. So, in historical context (although – as I said, this is flawed because it would need adjusting for the percentage of households with active debt at those times) – it does not concern them particularly. Remember – they are taking an aggregate view and whilst they recognize some individuals will of course be in trouble, they are very utilitarian because inflation hurts everyone (aside from the government, as has been discussed many times in the past months and years!)


The household debt to income ratio – which was my second choice for this week’s image – is also really interesting. This measured at 118% in 2023 Q1, which does not look too dissimilar to the government’s (around 99% for Q1 ‘23). This also compares favourably to the 150% threshold that was breached around the financial crisis – and actually it is the first time under 120% since 2003, when credit was (loosely) at a fairly sustainable level or at least still near the start of an absolute crack-up boom in household debt.


There’s now one of the longer acronyms of modern times to introduce, and this one was new to me as well. Households with higher mortgage cost-of-living-adjusted debt-servicing ratios are apparently known as COLA-DSRs, and those with ratios over 70% are seen as those at the highest risk of default. The COLA-DSRs are up from 1.6% of households (but this needs adjusting for ALL households, so it would be 5.71%) in Q3 2022 to 2% (adjusted by me to 7.14%) in Q1 2023. 


The Bank expects it to reach 2.3% this year, which still compares very favourably with 3.4% in 2007. To get to that sort of 2007 situation, we would need to see another 300 basis points or 3% on the gilt/swap yields, so swaps for 5-year at about 8% and swaps for 2-year about 9%, which seems a distant probability.


Stress tests which have historically over 10 years or so taken place at 5.5% are taking place at 8.5% today – they were already up to 7% in Q1 of 2022. Mortgage lending is suffering as a result. High loan to income multiples (at or above 4.5 times salary) business has also fallen significantly.


Households are also taking the option to extend their existing mortgage terms, unsurprisingly, as they can go “to the well” here generally. New lending at terms longer than 35 years has increased from around 5% in 2022 Q1 to 11% in 2023 Q1. And of those borrowers who remortgaged in 2023 Q1, around 15% extended their existing term


We then, and only then, finally get to the portion of the report that covers the rental sector. The Bank quotes the sector at 19%, a drop in the 2021 census results which were at 20% (perhaps not surprising given what’s happened in the interim). 7% of the total UK housing stock has a buy-to-let mortgage on it. Let’s stop there. What that’s saying is – loosely, only 37% of the buy to let properties – 7/19 – are geared. I don’t believe this at all. I think this is ignoring properties that have commercial loans, or potentially even all limited company loans – I don’t believe that a larger percentage of households have mortgages on their own home compared to landlords that have mortgages on buy-to-lets. Nevertheless, all sources in the report are not cited, so this is just my gut feel.


The Bank in the exec summary only goes on to mention that buy-to-let mortgagors “are also experiencing increases in their mortgage interest payments, and other structural factors are also likely to put pressure on their incomes”. Now – in fairness – you could say that the buy-to-let sector is well outside of the Bank’s remit in terms of day-to-day management – but they (the PRA) do set the rules and guidelines on affordability and stress testing and have taken steps in the past that were proactive (for example, ensuring there is a stress rate for 2-year fixed mortgages at 5.5%, although 5-year can still be stress-tested at the pay rate – and thank goodness they did, the last time they had proper stewardship at the Bank). 


However, you’d think they’d at least pass comment on the fact that i) rental properties have a different capital stack make-up to owner occupier properties – primarily because the vast majority that are funded are funded by interest-only mortgages, and so it surely is very likely that the loan-to-values are higher in rental properties. Not just that – but also, the relatively small amount of increase in the mortgage payments for the average homeowner is much more likely to be magnified in the buy-to-let sector because of the interest-only nature of the loan. Let’s take a really simple example – if the current mortgage payment on an owner-occupier property is £1000, but that’s made up of £500 interest and £500 capital repayment, and the interest rate doubles – that moves that payment up to £1500 per month, and if I extend the term as per 15% of the cases above, I can move that payment back down to perhaps £1400 per month – an unwelcome increase, but “only” 40%.


If instead that £1000 is interest only and the interest payable doubles, then instead I am facing a £2000 per month bill, without being able to extend the term to do anything meaningful, because I am not paying down the capital anyway! That is then instead a 100% increase, or 2.5 times the magnitude. Is it then fair to extrapolate that to say if the average homeowner with mortgage is facing a £220 per month increase in payments, then the average renter whose landlord has a mortgage is facing a £550 per month increase? No, that would be too extreme; mostly because the average rental property has a lower capital value than the average owner occupier property. 


It’s difficult to put a number or a percentage on that with the available official data, so for the sake of the exercise I think it would be best to simply estimate it, and overestimate the difference between the two, so I can at least attempt to be conservative when estimating. So – if there is a 20% difference between the average rental house price value and the average owner occupier house value, then that £550 increase in payments would instead be around £440; even if we ignore the logic of being able to extend the term on an owner-occupier mortgage, we would still end up with the average landlord paying an extra £350 or so in comparison to the average owner-occupier.


This £350, using the lowest estimates we have for the UK housing price elasticity of demand (PED – PED measures just how much of the increase is passed on to the end consumer when there’s an increase in price in the supply chain of a product or service), which is around -0.6, means that 60% of this on average is likely to be passed on in the average rental. That’s £210 – even finding as many reasons as I can to bring that figure down – and so is effectively the same as the figure the owner occupiers are facing.


Oh well, everyone is in the same boat then – right? Wrong. The renters in absolute terms will earn considerably less than the owner-occupiers, and again it will be hard to put a figure on that. Still, I think we could agree it is highly unlikely that it is the other way around, and thus the effect in percentage terms on tenant household disposable income is likely to be much larger.


Also – once the owner-occupier household HAS fixed their mortgage for 5 or more years (going by rates at the moment and what’s being advertised) – it is then fixed. There can be repayment holidays and other bits of help – in comparison, rent is rocketing and likely to do so for the next 12 months at least, so one rise is simply respite for 12 months and more pressure downstream, almost inevitably.


The Bank’s conclusions, instead, are quite simple. Landlords might sell, which might put downward pressure onto house prices. Otherwise, they might seek to pass on higher costs to renters. It recognizes that mortgages in arrears are up slightly, but still low by historical standards – although it will of course take more time for anything like the full impact of these rate rises to be known.


Now – the report is 115 pages long and I could go into a lot more detail. Instead, however, I am going to move towards summarization to put some further colour around some of the points I have been making recently around corporations and the similarity of their problems to property investors who work on 5-year debt cycles.


In effect – the smaller, and also the more highly leveraged you are, the more trouble you are in. As so often when things turn, the smallest and weakest get hit first, and hardest – that goes for renters as much as it goes for companies. The recent increases in insolvencies are largely brushed aside: “While corporate insolvency rates have risen above pre-Covid rates, they remain low relative to longer-term average levels. The large majority of the increase in insolvencies has been among very small firms that hold little debt, and a high proportion of the debt they do hold is fixed at low rates and government guaranteed. More broadly, the corporate sector has been repaying debt and its near-term refinancing needs appear limited.”


The risks in the financial system are largely “nonbank” – particularly private equity, who have expanded massively under the cheap debt regimen, are more exposed to interest rate changes. That’s perhaps no surprise. There are also concerns over the hedged positions and effect on liquidity as and when parts of the system come under pressure – this was well evidenced in the long-dated gilts market back in September 2022 after the “Kwar Krash” budget – because of leverage used by some pension funds against their long-dated bonds, liquidity was a significant problem. There’s no solution proposed to this problem though, just continued monitoring. 


It does sound, though, like the Bank has solved that particular problem with LDI – Liability Driven Investment – and particularly LLDI – first L is leveraged, in that acronym – based on the Truss/Kwarteng wobble. 

The Bank also notes market expectations are that base now averages 5.5% over the next THREE YEARS (I think caps might be justified as that’s not necessarily known to the wider market as yet). I haven’t been overly impressed with the market and I do now think they are a bit bearish, but I don’t think they will be a million miles off. 

There’s a minor point of egg on face as the Bank expect unemployment to remain under 4% until the end of 2024 – on the same day the report was released, unemployment at 4% was announced – you have to chuckle, because anything else is pointless. 


When we get right into the body of the text (to be clear, there is a high level summary, then a more detailed summary, then one more level below that – hence the 115 pages) the Bank do list out in more detail how they see the landlord situation at the moment – and I’ve replicated that here; you’ll find it surprising I’m sure that some of this didn’t make the executive summary:


“Landlords are currently subject to a combination of factors that are putting pressure on their profitability: higher interest rates and structural changes – including adjustments to income and capital gains tax rules and proposed changes to building energy efficiency regulations and tenancy protection. The interest coverage ratio (ICR), which is a measure of rental income relative to interest payments, shows the extent to which a landlord’s rental income covers their cost of borrowing. A landlord with high debt-servicing costs relative to their rental income (ie a low ICR) is more likely to experience repayment difficulties. As with owner-occupier mortgages, higher interest rates mean an increase in mortgage servicing costs when fixed rate deals need to be refinanced, and most BtL mortgages are interest only, which increases the relative impact of higher rates. The average increase in monthly repayments on BtL mortgages by the end of 2025 is projected to be around £275. If landlords were to entirely absorb higher mortgage costs (ie without passing any of them on to renters), the share of BtL mortgages with ICRs below 125% would increase significantly from around 3% at the end of 2022 to just over 40% by the end of 2025. “


So – this shows my £210 was too conservative, according to Bank figures. The “3% to 40%” figure is somewhat meaningless, because we know that landlords absolutely will (and already are) putting rents up at a much faster pace than in the recent years, because of these cost base increases. Still – no commentary that this £275 is 25% higher than the owner-occupier pressure in a sector that can inevitably afford it less – yes, it is shared between landlord and tenant, but thanks to the other pressures – in what ratio……


The Bank’s final commentary on the subject is worth replicating in full I feel:


“Sales by some landlords might be offset by purchases by other landlords, and market intelligence suggests that larger-scale, professional landlords are taking up an increasing share of the market as smaller landlords exit. It is difficult to establish a comprehensive view of the net balance, as inflows are harder to measure than outflows and can be lagged. However, available evidence suggests that recent market exit by some landlords has caused a certain degree of shrinkage of the private rented sector as a whole, but not on a scale likely to have a material impact on house prices overall. A range of external estimates suggests that net sales of BtL properties in 2022 are unlikely to have exceeded around 100,000, representing up to around 8% of total house sales that year (and less than 0.4% of the total UK housing stock). Many landlords are likely to seek to raise rents to offset their higher costs. National rent inflation in the private rental market was 5% year-on-year to May, with one industry estimate indicating a 10% price increase in new lets in the year to June. Renter households tend to have lower incomes than homeowners (including relative to housing costs) and they are likely to have low savings. Higher costs relative to incomes may lead to an increased reliance on consumer credit, or difficulties paying off existing consumer credit or other types of debt. It may also increase their vulnerability to future adverse shocks.“


So – we are unlikely to have exceeded 100k net BTLs lost in 2022! I’m sure that will be seen as good news, since estimates state that we need a net 200k units in the rental sector each year at the moment……so only 300k out then, “probably”. I think what’s there is much more serious than the Bank have dwelt upon, but this is largely commentary to inform government rather than a list of actions the Bank themselves can take, of course.


As we approach the end (I promise!) there’s one more piece of the macro jigsaw that I think it is worth dwelling on. Commercial real estate (CRE).


The story is similar to resi in terms of the relative exposure compared to historical events. The Bank state “CRE in the UK is a major investment class: the total stock is estimated to be worth over £1 trillion. Around two thirds of this is held by investors, with the remainder being owner-occupied. Relative to the size of the UK economy, however, the market has shrunk from an estimated 65% of GDP in 2007 to 45% in 2022. Although the leverage of investors has also declined (with their debt relative to assets falling from around 60% in 2008 to 40% now), debt remains an important source of funding for investors, and CRE-related debt stands at around 12% of UK GDP”


40% LTV is not terrible news as an average. Lower even than the average household. Still, thinking back to the Handelsbanken Landlords Survey analysed some weeks back, it is worth sharing the following from the Bank’s report: “UK CRE prices have fallen by nearly 20% since their mid-2022 peak. Higher interest rates are a key factor weighing on prices: absent rent increases, they reduce the profitability of CRE investments relative to other assets such as bonds and increase the servicing costs on any debt. In addition, office and retail investments face specific structural challenges, and these make up around 60% of the total UK CRE stock. The post-pandemic shift to more remote working has contributed to a rise in office vacancy rates, from around 10% in 2018 to over 15% now, and retail has seen a longer-term price decline, partly as a result of more online shopping. The costs of upgrading buildings to meet stricter minimum energy efficiency standards by 2030 is also pushing down on prices. “


The stress condition in the last stress test the Bank performed was CRE declining by 45% – REITs are trading at discounts above 20% in general if assets have not already been written down (obviously, some with significant retail exposure, or office exposure, would deserve to be trading even lower) – suggesting there is more to come before it gets better.


I would not be surprised, however, if this 5.5% average base for 3 years figure is again a little too bearish. There isn’t room for too much positivity yet but that does look like an overreaction to recent data suggesting inflation has still got a lot more pace in it (in terms of core inflation) rather than us being nearly at the peak, as I’ve been theorizing in the past few weeks and months.


I hope that today’s summary has been useful to you. Once again, well done if you made it to the end. Next week I want to pick up with some more case studies of what we are doing within my group at the moment with deal structure examples, what’s working, and what’s not working! A few direct operational bullet points won’t go amiss either, I’m sure the assembled company will agree?


Until then – just make sure to Keep Calm and Carry On!


If I could please just make one more plug for my beefed up offering, and ask for some subscribers on the great video platform – I’d be much appreciative. If you’ve ever benefited from reading the supplement – and frankly, if you got to the end once again you deserve a medal – then please could you help spread the word? Links are here to Youtube: and here to the Propenomix website: – thanks for supporting, more subscribers will lead to more and better content, and that should help everyone!