Supplement 31 Mar 24 – Happy Easter?

Mar 31, 2024

“Spring adds new life and new joy to all that is.” – Jessica Harrelson, Author


Before we begin – thanks to Adam Vickers and Karen Stanbridge for having me to the Reading Property Meet this week. For those who have never checked it out before, it is a very friendly room, with a great bunch of people, professionals and support – and also has an online iteration. Reading and the surrounds is a definite hotspot for growth on my hitlist for the next decade+ and I’d highly recommend it to those thinking about new investment areas! 


Thanks also to those who booked on to our upcoming Property Business Workshop which is happening next month. Rod Turner and I will be covering due diligence, mergers and acquisitions, and joint ventures – with some real life case studies of deals we’ve done – the good, the bad and the ugly. The tickets for the workshop are here – the date is Wednesday 24th April, and if you haven’t booked your ticket yet, please grab one of the last remaining ones! 


Welcome to the Supplement, everyone. A short week thanks to Easter – and it felt quieter, as Easter holidays kicked in for many. We managed a handful of completions, with the one that was screaming the loudest turning out to be screaming loudly because their solicitors wanted to knock off early. That didn’t work out that well! 


Macro had a quiet week too, and finding four pieces of subject matter is relatively easy, because there are really only four things to discuss this week. The CBI distributive trades, GDP growth rates, business investment and the bond and swap yields (natch).


That gives us some rare room and time for reflection, which is great. We’ve got a Zoopla report to look over, which will be worthwhile – the Bank of England have also published their quarterly Financial Policy Summary which I’d like to draw a few things out of. At the same time, I’d also like to cover the ONS’ new response to rental prices since their measurement of the rental sector has been late to the party, comparatively, and also not the best in terms of methodology. Exciting stuff, for a number freak such as myself.


Onwards, then. CBI Distributive Trades – I have mentioned before, in passing, but basically an index measuring retail sales compared to the previous year. A massive +2 print this month – the first positive for 11 months, above expectations although mostly explained by Easter being a bit earlier this year. The expectation is that we will decline again in April (as Easter 2023 drops out of the figures, and an April with no Easter comes into the figures). Retailers reduced orders to suppliers again this month and expect to do the same in April. The sector continues to be somewhat beleaguered – but I understand it thus: Massive boom with 5-10 years of growth in 2020/21 as the lockdowns ruled the waves – all achieved via online sales of course – and then a correction, or a deflation of that bubble. We are not quite yet back to business as usual, although we must be very close.

Inflation hasn’t helped the sector at all, either – primarily because of their disproportionate use of minimum wage labour.


GDP – this is the first pass of the revision. For those who don’t know, the ONS gets multiple bites of the cherry in changing the figures – up to 2 years. No revision to Q4s figures for 2023 just yet, so the “recession that never was” remains in the history books. We are now safely at the end of Q1 and it would be a big surprise if we didn’t see economic growth in Q1, especially as the earlier Easter should help some figures but the Bank holiday won’t help. It might be quite close. I’m going “up 0.4%” for Q1 2024. We look in much better shape than in 2023, although progress might be quite slow.


Business Investment, then. A move to growth, quarter on quarter, for Q4 2023. That’s good news – Q3 was very limp indeed as rates peaked and businesses, instead, started to hoard cash (sensible). That sees a 2.8% increase year on year and Jeremy Hunt has thrown every tax incentive he can at encouraging business investment. However, I am buoyed by Rachel Reeves’ noises around private sector investment – we desperately need it, it will be investment on the “never never” but it is better than just servicing debt for the rest of our lives. 


We just need projects with positive net present value. Easy, right? Not at the public sector level, no. So what we need are huge margins and strong sensitivity analysis. Politics will get in the way, though, of course. Sadly.


That leaves the pet project – the ever-present – the bond and swaps market. Only 4 trading days, and I’m delighted to report as dull as ditchwater. The dullest week for some time. The needle only moved between 3.8% on the 5y gilt (open) and 3.89% all week. We closed at 3.832%, suggesting very slightly that we move up again before we move down – slowly.


The swaps – 3.77% on Wednesday’s close on the 5y SONIA swap – the mortgage market money, without any margin or operational costs applied, remember – which is still trading below the market which closed at 3.82% on the 5y gilt on Wednesday. Supply of money still exceeds demand – and it remains to be the case that rates need to get a chunk cheaper before demand for money exceeds supply again (or the property market needs to hot up – but it will only hot up if interest rates are lowered, unless there is an external incentive such as a stamp duty holiday – which looks unlikely).


Nice and easy. Steady. Boring. I love that. Give me sideways, steady and boring all day – those markets are absolutely the best to trade in, whilst others are stuck scratching their heads and the retail investors are out, on the sidelines, stuck into crypto, or whatever.


Onto Zoopla’s report then. Those regulars will know I’ve become a fan of Richard Donnell and the Rental Market Report that comes out monthly. Richard’s official title now is Exec Director at Houseful (presumably the holding company has gone through a rebrand). Their numbers are far more accurate than some of the other data that there is knocking around in real time – as you would expect, particularly on rentals, because they have significant market penetration.


Their headline stats:

  • 7.8% annual rental inflation for new lets (Homelet say 7.4%, so we are in the right region here). 7.8% is the lowest for 2 years……
  • 20% down year-on-year in rental demand. That’s huge! Rental demand was screaming last year, and this is a huge drop. Expect that to temper prices somewhat. Richard frames it as pandemic factors easing and the labour market cooling. 
  • 51% of rentals now have a rent above £1000 per month. Wow.


And then some deeper dive stats:

  • 20% more rentals available than a year ago – but still below the pre-pandemic average. Also with the sector being so much bigger in terms of demand thanks to net migration…….absolute numbers aren’t the right comparator here in my view.
  • London rent inflation slows to 5.3% as supply and demand imbalance converges and affordability pressures limit rent rises. However. This is March. BIG pay rises coming next month for many workers, remember.
  • Scotland still leads the way, not that it is stopping the anti-landlord policies from the idealogues who refuse to recognise what economics actually means. 11.6% rental growth year on year.


Some notable parts of the report as well: “Only a rapid expansion in supply will start to improve affordability for UK renters.” Good luck with that, structurally impossible let’s face it. We are back to 12 homes to rent per average agent – compared to 16 before the pandemic (and the market has got bigger, as I said, over those 5 years). There are 15 enquiries for each home there is to rent, which is still double pre-pandemic numbers.


In the East of England, 70% of properties for rent today are at over £1,000 per month. In 2020, that was 24%. Rent is up 29% since January 2020. CPI in that time period is 22.7% (for context), RPI is not far off that figure. Construction inflation is 32.4% over the same time period.


The build to rent sector completed units now number 90,000. These are driving rents upwards since they are in great locations, with super facilities, targeted at those who can afford £1000+ pcm in rent. 

At the end of 2023, Zoopla recorded rent as 29.5% of gross earnings nationwide. This speaks to how much affordability headroom there still is……as 33% is the standard score, and this figure is badly weighted by London and the South East where a larger percentage is accepted as “workable”. They are forecasting 29.9% by December 2024, comparing to the previous peak of 28.6% in December 2015 when the sector was at its peak (although wings had already been clipped by our dear friend Mr Gideon “I learned economics on the job, ha ha” Osborne, it takes time for that to filter through). The 10-year average is 27.8% for context.


Zoopla sees rental inflation at 4-5% this year, and are convinced they are on track. They are also convinced that wages will be growing at sub-4% at the end of the year or at least they believe the forecasters that are saying that (my range is 4.5-5%, so I disagree). I think rental inflation will look more like 7% this year – but they are only talking new lets as that’s the only data they have, I’m talking all rents (and that’s why we will look at the ONS rental pricing report too). 


There’s a couple of really useful sentences here that I’m going to replicate in their entirety, with some commentary. First:


“A sustained expansion in available supply would drive a faster slowdown in rental inflation than we might expect. It’s likely to result in rents falling in some city centre locations. This may well happen in 2024 but not on a scale that would impact the headline growth rate.” – So – take note of demand versus supply if you are developing or buying units in a city centre. It is a timely reminded that it is very easy for micromarkets to be oversupplied even in a time of undersupply nationwide.


Then: “Ongoing low levels of net new investment means below average levels of rental supply are set to persist, supporting headline rental inflation.” – This is persisting, with only £1 in every £14 of new mortgage debt being for buy to let (comparing to about £1 in every £7-£8 as a 10-year average – so about half the new units will be coming online compared to the 10-year average). 


Ex-London rents are up 9% (that’s new rents). The average ex-London rent is £995 per calendar month.


Quality stats and insight from Richard once more. Over to a brief segue into the Bank of England Financial Policy Summary. Four key takeaways, with my commentary after each one:

  • Overall risk outlook – conditions remain challenging. Global and geopolitical risks are high and have continued to increase. Couldn’t agree more with this! Not sure they have increased an awful lot in Q1 2024 though – more like volatile. Bits that could have bubbled over, haven’t. Anyone with half a brain would be particularly careful about attacking the USA in an election year, and with Donald Trump waiting in the wings…..
  • Financial markets – asset prices are stretched. The risk of a sharp correction in a broad range of asset prices has increased. No kidding! The short sellers have given up on the market at the moment. This is one big bull run. Inflation adjustment (which is never used on the stock market, ridiculously) does put things more into context and the revenues driven from AI (more accurately, from the hardware used to make AI-capable servers!) are much more “real” than dot com – however, you can’t help but feel there’s a correction coming, and when it does, corrections are 7-10 times faster than bull runs. So – fingers will be on triggers.
  • UK Households and Businesses – have been resilient so far to the impact of higher interest rates. So far. This leaves out the Bank’s analysis that we are 70%+ into the impact of this hiking cycle – feels too high to me – and also that the cycle actually HELPED because a lot of debt was fixed at low rates, and a lot of savings were floating and their rates became much more generous.
  • UK bank resilience – The UK banking system is strong enough to support households and businesses, even if the economy does worse than expected. They would say this – because this is their job – but there’s no doubt in my mind we are doing a 10,000 times better job than we were doing before the Bank of England was independent.


There’s one further extract that I wanted to share from this report, without commentary from me, because I believe it speaks for itself:


“In particular, the prices of houses and commercial property (such as offices and retail premises) are falling in many countries, including in mainland China, where the property sector has been under stress for some time already. Our stress tests have shown that UK banks are strong enough to withstand any direct impact. But it could hit investor confidence more generally if it has a big impact on overseas banks, for example.”


Let us go full circle, then, and round off with a look at the ONS’ rebadged “Price Index of Private Rents” (PIPR). This is the first release of this metric. It lags only a couple of weeks/2.5 weeks so it is in line with the inflation figures, effectively – a vast improvement. This simply was not prioritised over time and data proper only started in 2005, which sounds a bit crazy but don’t forget the buy-to-let mortgage proper only came about in 1996, and this is a public sector organisation, after all.


Here’s the meat of the report, with some commentary:


  • Average UK private rents increased by 9.0% in the 12 months to February 2024 (provisional estimate), higher than in the 12 months to January 2024. This is the record increase ever noted by the ONS (although this data set only goes back to 2015 anyway). Note how far it is lagging the record CPI inflation numbers of 11.1% from October 2022 – nearly a full 18 months. That’s VERY typical for rent inflation, and exactly why I expect it to go down less quickly than Zoopla seem to think it will. This compares interestingly to Zoopla and Homelet’s figures, but remember these are not new lets, these are ALL lets (about 22% turn over each year, or 2% a month as a rough proxy – so annually IF we said new rents are up 7.5% and make up 20% of the index that would be 1.5%, and so 7.5% would be coming from the 80% of existing rents which would mean they were moving up around 9.4% annualised. Sounds about right to me from what I’ve heard.
  • In the 12 months to February 2024, average monthly rents increased to £1,276 (8.8%) in England, £723 (9.0%) in Wales and £944 (10.9%) in Scotland. Note Scotland still leading the charge, with their anti-landlord rhetoric and policies. I’m sure that’s just a “fluke”, though. More like an inconvenient truth.
  • In England, private rent inflation in the 12 months to February 2024 was highest in London (10.6%) and lowest in the North East (5.7%). Now this is very contrary to the new lets information from Zoopla, so must be being driven by existing rents “catching up” or similar. 10.6% on those high rents……ouch (for the tenants)
  • Average UK house prices decreased by 0.6% in the 12 months to January 2024 (provisional estimate), up from a decrease of 2.2% (revised estimate) in the 12 months to December 2023. So, the ONS figures were 0.8% outside of my range last year. I’m furious, of course, but I was a lot closer than the bearish dart-throwers that inhabit the forecasting space. You can see here though how dramatically that would change yields – worked example:

House worth £100k, Rent £600 per month, yield 7.2% – end of 2022.

House worth £97,800, Rent £654 per month, yield 8.02% – end of 2023. 

That requires active asset management of course, but that is a relative increase of 11.14% in the yields overall. That’s some change in just 12 months, and will have bought some people back to the market – although those using leverage are still hamstrung by higher rates, of course.

Here’s another snippet that bears repeating from the report: “In their February 2024 UK Residential Market Survey, the Royal Institution of Chartered Surveyors (RICS) reported rising tenant demand and, for the nineteenth consecutive month, declining volume of new landlord instructions. Because of this imbalance, their respondents continue to expect rents to rise over the coming months.” 19 months of fewer landlord instructions on the spin for the RICS. That will take years to rectify.

Rents would typically lag inflation by about 12 months or so, but 18 isn’t unreasonable – so, we must be close to the peak if this is not it. The road down is unlikely to be particularly fast and may well look like the climbdown of CPI from its peak, but CPI was affected significantly by energy price volatility – whereas rent (outside of HMO) won’t have been. So, expect a relatively slow descent back to “normal” at some point in – what – 2026?

You can see why I am pricing in 25% rent increases in total over the next 5 years. With compounding that averages out at around 4.7% per year and I believe (actually, I know) that rents are still cheaper in real terms, inflation-adjusted let alone wage-adjusted, than they have been in recent years (2016, 2005, there are other comparables too). I wouldn’t be at all surprised if we kicked that series off this year with 7%+ as I’ve said (we have 2 numbers for 2024 so far, 8.6% annualised and 9% annualised!).

Future looking a bit brighter than 3 months ago – it probably should be. It is slow going at the moment – in fits and starts, bits and bobs. The market looks easy one week and impossible the next. Keep going, keep following up – turn up, be consistent, do what you said you were going to do. THAT is what gets the deals done – tenacity. Resilience. Drive. There you go – an Easter Egg of a pep talk. 

No 9am live this week so I’ll be back next time out in the Supplement but there will be plenty of content on the Propenomix channel between now and then. Please subscribe if you haven’t already – I’ve passed the magic 950 and 1000 is within touching distance!!!


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, as we lurch toward Q2 – Keep Calm and Carry On!