Supplement 28 Jan 24 – Bullish in a China shop?

Jan 28, 2024

“When bobbing for apples, an idealist endlessly reaches for the best apple, a pessimist settles for the first one within reach, while an optimist drains the barrel, fishes out all the apples and makes pie. Annoying? Yes. But, oh-so tasty!” – Vera Nazarian, Russian-American writer.


Before we begin – Rod Turner and I ran a Property Business Workshop this week in London on Thursday. We covered a wide range of topics – all the way from what a great investment looks like, to how to operate more than one company, why you would do that, how you might structure it, all the way down to a whole host of productivity hacks and general “January fitness” activities for your business(es). We enjoyed it, got some great feedback, and met some great people too. We are going to run another one with fresh content including due diligence (both on business partners and with a view to lending money), joint ventures, mergers and acquisitions and some accompanying case studies on some easy (and more complex) deals that we’ve done. The tickets for the next one are here – the date for that one is Wednesday 24th April, and there’s a discount for the early birds so don’t be shy………


The macro metric releases this week were far less numerous than last week, but nevertheless there were some heavyweight ones and a few surprises (as usual) – with implications for all of us. Without further ado, once again I will focus on the top 4; the PSBR (public sector borrowing requirement), the PMI flashes (purchasing managers indices), the optimism indicators (for businesses and for consumers), and the bond yield/swap rate (surprise surprise, I know).


The PSBR – how much money does the Government need to borrow every month to stay afloat. And it is borrow. Every month (45 of the last 48, anyway). The more cynical would say “how much inflation is needed in order to inflate that debt away” – a statement in which there would be an element of truth. Every time we need less than the forecasts, however, this is the “money” that adds to Jeremy Hunt and the Treasury’s coffers for the least surprising tax giveaway ever, which is coming in the Spring budget of course. The gun is being loaded – we only borrowed £6.85bn in December compared to a consensus forecast of £11.2bn, so I am sure the Treasury will be well pleased.


That money could go elsewhere of course (and likely would with a Red government in charge) – but in an election year, nothing else makes much sense. The logic will be that they will need to try and create a feelgood factor in order to, frankly, buy some votes. Will it work? Most people are generally unenthusiastic about the upcoming election when talking to them, it seems – I’ve some more commentary on this week’s puffery as far as the housing market is concerned, but will save that until after the macro is done.


Onto the PMI flashes. The purchasing managers are those who, from the big companies, report on what they do best – purchasing. It is seen as a very good real-time bellwether for how well the economy is really doing – we don’t get the GDP figures for “today” (or this month) for at least 6 weeks and so if we are in an arguable slump (headlines this week around “good chance” of being in a recession, but as discussed before, if we are it is only technical and it is 0.1% shrinkage followed by 0.1% shrinkage, literally a rounding error even at the level of our economy), a positive PMI would see us out of it. This was the second month in a row where the flashes outperformed the forecasts quite significantly, which on an economic basis is good news (perhaps not so much for the interest rate, though).


The consensus forecasts were – manufacturing 46.7, services 53.2, composite 52.2 (remember how much bigger services are in the UK compared to manufacturing, so that makes up a much larger proportion of that composite figure). 50 is the “break-even” point, where the managers are effectively saying “it’s the same as it was last month, we are not moving forward”. 


The numbers actually achieved were: manufacturing 47.3, services 53.8, and composite therefore 52.5. A healthy miss to the upside particularly on services, and the best print since May 2023. A pleasing start to the year which quashes any immediate fears of any sort of prolonged recession bleeding into Q1 2024, notwithstanding any major geopolitical or other events in the next couple of months (pandemic, anyone?).


That leads us on to optimism, and this tracks back to that point I’ve been making about recessions over the past few weeks. There is more damage done, most likely, in damage to confidence if there is a recession of -0.1% followed by -0.1%. People won’t deep dive into the data necessarily. They will just hear the R-word. This is why those annoying 3-word slogans (neither side have found their happy yet) tend to come along during election campaigns – they are easy to remember and more often than not, hit the spot. The problem on the other side is that when you don’t deliver, they also stick in the mind then: “Strong and stable” (still cracks me up today) – “Stop the boats”, say no more. (As an aside, Truss’ 3-word slogans were so bad, she just used one word and repeated it – “Growth, growth, growth” which she nicked from Starmer, and “deliver, deliver, deliver” – which she did of course, but what she delivered was a catastrophe).


How does optimism get measured in the macroeconomy? Via the CBI (Confederation of British Industry) Business Optimism Index, and also the Gfk (Growth from Knowledge) Group’s Consumer Confidence Index (so we get to see both sides of the coin). Both of these are based around 0 – so a 0 print means that there are as many optimists as pessimists, as many bulls as bears, etc.


The CBI print was -3, still negative but a far cry from post-Truss when it was -48, and -3 is one of the better prints of the past few years. I think you’d be fair to call that “cautiously optimistic” or “pragmatically pessimistic”, both of which are positions you’d rather the people running your companies are taking if you were a shareholder.


The GfK print was -19, after a consensus of -21. Minus numbers never look like good news but consumers are more confident than they’ve been in the past two years, this means. The trend is in the right direction and also ahead of where the forecasters thought it would be. It still feels a fair few clicks from “cautiously optimistic” but I’ll take ahead of consensus and best for 2 years, blind optimism would after all be a little foolish!


That leaves the bonds. On Wednesday this week there was an auction of 5-year gilts, our preferred bond of interest (if you pardon the pun). That auction achieved a yield of 3.946%, so nearly back to the 4% days I’m afraid. Nearer the top of my range (3.5-4%) for the year, which has already proven to be a bit narrow, so I should probably cheat and expand that range to 3.25% – 4.25%. The swaps traded up at 3.81% (sadly, half a percent up on the swaps from a month ago) on Thursday, below where the bonds were trading (which is speaking to the lack of demand in the mortgage market at the moment) – this compares to 3.28% a month ago (which was too low, as I said at the time), and 3.5% a year ago (when Truss was gone and the market was feeling a lot more confident, before the “big surge” in yields in the middle of 2023). 


On the subject of demand (or lack of it) in the mortgage market, it would seem to be the case that the initial flurry of those who had to refinance almost at any cost, who were on variable rate loans, has now subsided somewhat. I was surprised to read Hamptons’ report that 50,004 buy-to-let incorporations had happened in 2023 after seeing just how much the demand for mortgage money declined in the FCA/UK Finance data – but of course, not all these companies are necessarily active.


The bigger picture around companies owning buy-to-let properties is detailed nicely by Hamptons in the report, and I wanted to share a few paragraphs from it with some commentary:


The rising number of incorporations means that at the start of 2024, there were 345,426 active limited companies designed to hold buy-to-let property in the UK, up 11.6% since the beginning of 2023. 68% of current companies had been set up between 2017 and 2023 when the tax changes were phased in.


What this doesn’t say is that, if those figures are correct, 14099 property companies were folded in 2023. Did they give it up as a bad job? Insolvency? Exit (and then dissolution)? For every 10 new setups, there were 3 folds, roughly.


Overall, these companies own a total of 615,077 properties across England & Wales. This marks an 82% increase from the end of 2016 when landlords who were higher rate taxpayers started to see the share of mortgage interest they could offset from their tax bill for homes in personal names reduce. However, companies set up after 2016 still only own 38% of all buy-to-lets held in a limited company, with most investors having set up shop beforehand.


This is a good yardstick of how long it takes for a change to filter through. There have been constant arguments since 2015 – “will the Government change the interest rules on companies?” for example. One thing that has been fairly widely accepted is that anyone who wants to grow a portfolio should start growing that portfolio in terms of new acquisitions in a limited company. Even in all that time (7 years in that sample) only a shade over 275k properties have been brought into limited companies. If we assumed that was ALL completely new stock to the rental market (and of course it won’t be, there will be a lot of ex-landlord stock changing hands in those numbers) that’s a shade under 40k new rental units each year, before even considering wastage/sale/disposal. There will of course be new rental units in personal names too – but it would be very fair to assume there would be fewer of those. That’s a pebble in a pond of a rental market that’s needed around 1.1m new units in the past couple of years, even if a number of those new units might well be HMOs – again, being as bullish as possible, even if they ALL were HMOs with 5 rooms, that would still only house 200,000 people. And there’s no way that’s the net level of stock being added to the sector annually.


Of the 615,077 limited company buy-to-let properties, 458,838 (75%) have a mortgage charge against them. This means that limited company landlords are more likely to have a mortgage than investors who own buy-to-let property in their personal name. The number of outstanding limited company mortgages has risen 10% over the last 12 months, despite the total number of buy-to-let mortgages falling 3% over the same period.


I thought it was interesting to see that 25% of these were unencumbered, but of course it doesn’t say when these unencumbered ones were purchased. Why bother with the company structure if you are unencumbered? Well, estate planning would be one valid reason. Control of drawdowns and lower tax rates would be another.


Most of the growth in buy-to-let incorporations over the last year has come from smaller landlords. Over the last 12 months, there was a 21.9% increase in the number of homes held in companies with a single property. This compares to a 3.8% increase in the number held by companies owning 20+ homes. Given the upfront costs associated with setting up a new company, this suggests a long-term commitment from landlords.


The small are still optimistic, and they still believe in property! The larger companies have been more likely, I’d argue, to want to hoard cash, be cautious, and also are perhaps in a weaker debt position. One property landlords almost exclusively will have to get their money from elsewhere, of course, and are likely looking at BTL as a side hustle/pension scheme.


Many of these new incorporations by smaller single-property landlords reflect young co-investors. Data from GetGround shows that 60% of all new shareholders in 2023 were aged 45 or below, up from 51% in 2019. While 10% of companies set up in 2023 had at least three shareholders, up from 7% in 2022. Companies with multiple shareholders are disproportionately likely to be owned by younger investors, those aged under 35.


This age data is also interesting. Of course, some of this could well be estate planning and/or succession planning in Family Investment Companies, but this would be a fairly small minority I’d imagine. Many are, also, clearly clubbing together to build something meaningful over time and well done to those under-35s who are clearly putting time, money and effort into building a future for themselves and their current or future families.


Some good articles on the Hamptons International research site and I’d recommend having a browse – I shared an interesting one on my LinkedIn in the week that was about the decline of flipping. 


I couldn’t let this week go without passing comment on the election lunacy hotting up. In what can only be described as a “stupid-off” between the two major parties, their bribes for those looking to get on the housing ladder were announced, and both were as crackers as each other, let’s face it.


In the blue corner, the chat was around “99% mortgages”. How wonderfully gimmicky. As usual, let’s see the detail – but these “radical” plans are about as radical as a radish. As recently as the 9th May 2023, the Skipton building society launched a 100% mortgage product (1% better or 100% better, you decide) exclusively for renters, zeroing the need for a deposit (although there are still frictional costs, of course). The response was lukewarm – principally because they seemed to wait for the highest bond yields in over a decade before launching this! How frustrating for renters. 


They can’t lend to people who can’t afford it – the banking system and the PRA, the Bank of England, and the general public are just not going to let them do it. This isn’t a silver bullet – indeed, not even a tin bullet – it’s more of a pea in a pea-shooter.


But fear not! The hot betting favourites for the next election will have done something altogether more sensible, pragmatic and realistic, ready to solve all these problems…..won’t they? No. Of course they haven’t. As we glance over to the Red corner – their equally-asinine efforts are instead in the form of 25-year fixed rate mortgages!


This brought back memories of Gordon Brown, selling off the gold reserves at $275 per oz (in comparison to today’s prices of $2000+ per oz recently – but of course there has been inflation). Quite literally forgot the first rule of investment – buy low, sell high – or if you already have it – still sell high, you fool!


This seems like the equivalent. Wait for a near-20-year high in bond yields, then fix a mortgage for 25 years. Does anyone even understand the basic mechanics of how mortgages are priced in Labour party HQ? I suspect not. Time they started reading the Supplement.


Not to be outdone, they managed to dredge up this plan which has ALSO been done before, and is already being done today, and re-badge it. Habito already knocks out mortgages at 30 or 35 year fixed terms if you want them – which people don’t. You don’t get people to change their culture without educating them, AND in the days of a yield curve that is inverted, gets cheaper in years 5-10 and then goes right back up at years 12+, fixing outside of that 5-10 year range is, frankly, just stupid.


So – we know what we already knew. Both sides are blithering idiots. One guarantee – an idiot will be running the country at the end of 2024, just as they are today. 


Easy to criticise though, isn’t it. How about producing another idea, rather than dredging up all the same nonsense that’s already been done to death before (or is already being done and offered in the marketplace). OK then. How about this:


Facilitate loans for Bank of Mum and Dad, and Auntie and Uncle. Provide debt at the appropriate bond yield, actuarially, as you would in an equity release mortgage. Secure the government’s interest at the gilt yield plus a margin (shock, horror – the Government could even make some money out of this. What a dirty idea that is).


Let me give you a worked example.


Mum and Dad are 55. Little Johnny isn’t so little any more and he’s 25. Mum and Dad own their house, but still have a mortgage against it at 20% LTV. Big Brother (very big brother, HM Government) comes in and releases another 20% LTV so that Little Johnny has his deposit. They can’t spend it on anything they like – it HAS to be for Little Johnny’s new house. All little Johnny needs is a mortgage at a rate he can afford, so therefore needs income and a reasonable credit score. 


There’s no payment attached to this – it is redeemed when Mum and Dad move, or when Little Johnny pays it back (that’s up to Mum and Dad), or when Mum and Dad shuffle on. Mum and Dad are in decent nick and so this is a 30-year bond, effectively/best guess (in large numbers, the numbers would look after themselves), and instead of it being at the 4.5%ish 30-year rate, it would be at 5.5% (and would be rolling up).

The maths are irresistible. It only works for people who have Mum, Dad, Auntie or Uncle and those people own properties with suitable headroom already – or really, really good older friends who own houses already, and only when they are willing. However, it could be great for IHT planning, great for Little Johnny, and Mum and Dad might be willing to pay the “tax” to get their property back and Little Johnny to move out!


Chances of a sensible solution like this, or with tweaks, being proposed or adopted? Zero, I’d say – you know, Bob Hope or no hope and Bob’s already left town. Politically of course there would be criticism for not helping those whose families don’t own property or don’t have Mum or Dad – whereas in reality, that’s really unfortunate but it could have been worse – you might not have been born in one of the very best countries in the world (even if that feels like it has been slipping away, put it into context – go on “holiday” to Guyana for a bit, or the Yemen, if you are feeling short on gratitude!)


Sometimes it feels like banging your head against a brick wall, analysing these also-rans – the sad state of political ability in the UK really is close to an all-time low in my lifetime, or it certainly feels like that anyway.


I’ll just round off by saying one thing that I perhaps haven’t articulated enough, because the message isn’t getting through as yet to regular Supplement readers and listeners. I’m particularly bullish on capital growth prospects for UK property at the moment. If I took a stab at a 5-year capital growth figure, I’d say 25%, and if I had to be over or under on that figure, I’d actually be leaning on “over”.


Why? Because of the real-terms, inflation-adjusted environment. We are where we are – as soon as energy has its wings clipped in July this year after the price cap after the next is revised, we will basically be in a place where wages are up 25%+, prices are up 25%+, energy is up 25%ish, and houses are up 20-25%ish. On the back of what was a limp decade in the 2010s, and in the face of ever more demand just in terms of numbers of people to house. There’s a lot of catching up to do, and in an environment where over the next 5 years the interest rates should decline (all else being equal) the recipe is there, with all the ingredients needed, for a bull market.


Or – if you believe Fred Harrison’s PR team – then of course there’s a crash coming in 2026, because of the “18-year property cycle”. I was reminded on Tuesday when presenting the day one keynote at the Platinum Property Partners national conference, just how much I don’t think of the 18-year cycle (even though I’ve got a soft spot for Fred). His marketing strapline, his “thing”, is just a data-mined piece of nonsense, no more meaningful that the next arbitrary allocation to something that’s sort of happened a couple of times on the same-ish timeline. Rant over. And breathe.


Congratulations as always for getting to the end – don’t forget the Property Business Workshop on Wednesday 24th April – tickets for you, or anyone you know who might want one, here: . Onwards, upwards, and we leap into February – Keep Calm and Carry On!