Supplement 27 Oct 24 - Passive Income
“Rachel Reeves ain’t ‘working people’, says Starmer” - Financial Times Headline, Friday 25th October 2024
Before we get started, this week I wanted to just outline the Boardroom Club with Rod Turner that I’ve been running alongside Rod for 4 and a half years now.?
The Boardroom Club is a group set up to help take property businesses to the next level. Rod and I often get asked about 1-2-1 mentoring and it isn’t something we provide or have the appetite to provide in the near future. However, there is a 1-2-1 element to the Club and it includes the following:
If you are interesting in joining - drop Rod or myself a message on LinkedIn:
Wasn’t it lovely to get a reminder this week, those of us who have sacrificed income in order to save and invest - those of us who have answered messages and calls at 11pm, 2am, 4am, and everything in-between - those of us who have had the temerity to work 70, 80, 90, 100+ hours a week to better ourselves - that we are not “working people”?
Luckily, neither is the Chancellor of the Exchequer, under the PM’s definition. The same problem again and again it seems - definitions. Or - doing what you said you would do. This looks like a good way of getting around the manifesto promises - by the slimy side door, leaving a bad taste in EVERYONE’S mouth.?
Where’s the speculation now? Tax on property income to “change”. National insurance on rents/rental profits (in personal names)? I mean there’s loads of room for that, isn’t there, after section 24……
I had a fabulous chat with a Tax Advisor this week and he put it very succinctly indeed. We agreed that this new administration’s communications have been horrifically planned and executed. He said they need to get all of the bad news out of the way in this budget, and then communicate that they’ve done that, so that they can get on with these growth plans.
I reflected on it. I think he was absolutely right. WILL they do that? Who knows, since they are so tone deaf. We will see how good - or clueless - they are. Wednesday. If you haven’t signed up yet……I’m doing a budget night special alongside Ahmad Abdul Qayyum (https://www.dhirubhai.net/in/ahmadqayyum/) - it’s completely FREE and you can register here: https://www.eventbrite.com/e/budget-special-discover-what-lies-ahead-crucial-budget-breakdown-tickets-1027380973147?
?Here was the Google experimental Generative AI Summary: “The Partners in Property Budget Night Special 2024 is a free, online webinar that will take place on Wednesday, October 30, 2024 at 7 PM. The webinar will discuss how the first Labour Budget in 14 years will impact businesses and individuals. The event will feature Adam Lawrence, a well-known property and business economics commentator and author of the Sunday Supplement, and Ahmad Qayyum, a tax specialist.”
Generative AI gets a thumbs up, right?
So - will it all be “onwards and upwards” from here after the 30th? I guess you’ll have to join Ahmad and myself to find out!
Back to business - for the deep dive I want to do something similar to last week - a look at a few of the real-time reports that I don’t cover with regularity - just to build my case about exactly what the budget has done to the rest of the economy before it is even announced. I’m not going to go into a full Kier rant. Well I might.
Over to the staple diet, then.
Chris Watkin asked himself that question once again - What is currently happening in the UK Property Market?
Chris - property stats guru - analyses the UK portal data which is aggregated for him by TwentyEA on a weekly basis. I love real-time (or as real-time as possible) snapshots and pictures of the market that we can piece together. Nothing better for staying informed.?
Listings cooled slightly to 32.5k in the past week. Listings are still 7.5% higher than pre-pandemic levels, but luckily gross sales are 7.9% higher than pre-pandemic levels!
Nothing new on the SSTC figures front, still suggesting we sit between 4 and 5 percent for 2024 as a whole. Let’s see!
The fall-throughs stayed at about 1 in 4 sales at the moment, which is very much in line with the 7-year average.?
Average asking price for reduced stock is now ￡389,912 - against the 2024 weekly average of ￡400,199 for reduced stock. Pricing looks keener than it has been for most of the year!
I left this in from last week - just because there was such a good suggestion….shoutout to Paul Million (https://www.dhirubhai.net/in/paul-million-79a56b60/) - my point was that the metric “Pipeline/total stock” tells us quite a bit about market heat, if I put that together (so this is stock that is sale agreed, to be clear, divided by (total stock sale agreed plus total stock on the market yet to be agreed)):
Sept 2017: 38.2
Sept 2018: 35.8
Sept 2019: 36.2
Sept 2020: 41.4
Sept 2021: 55.7
Sept 2022: 50.5
Sept 2023: 38.3
Sept 2024: 40.1
I suggested the “Lawrence Thermometer” but Paul won the contest with the suggestion of the Adamometer. Nice work Paul! Remember - the higher the number, the hotter the temperature in the market by implication.?
The real time market take remains the same as last week, but ever MORE urgent - if you are looking to sell, this market looks OK, but I’d get anything on PRONTO, because even though November looks like it might be OK this year, we all know December is a waste of time for selling (and a fabulous, fabulous month to buy in on the other side of that coin).?
Macro time then - the calm before the new month storm. The PMIs were out (the flash numbers, anyway). My favourites. The Optimism (or lack thereof) indices were also out and they are worth tracking. Andrew Bailey also spoke and he gets his own slot in here, given the influence that he wields. That leaves just the crown jewel (or the thorn in the side), the gilts and swaps yields of the 5-year variety.?
PMIs - real time stuff. Guess what? 11-month lows for the composite index (51.7) and the Services PMI (51.8). Budget paralysis. I’m grateful we stayed over 50 but this sort of number suggests perhaps 0.1% growth for October if we are lucky. Manufacturing “only” slipped to a 6-month low, printing 50.3. JUST ahead of the game.
Can you guess the contents of the report? Of course you can. Business confidence and spending dampened. Policy clarity is important, with worldwide conflicts also causing concerns over the economy. Headcounts have also been reduced with it not being seen as the time to do anything on the hiring front. The final bit of positivity - more cooling of input cost inflation, at its lowest for 4 years - supporting an interest rate cut at the next Bank of England meeting.
Optimism yet, and I look at the usual suspects but also the CSI from S&P Global who produce the PMIs each month. The Consumer Sentiment Index in October is close to July’s 37-month high, with a positive outlook for household finances over the next 12 months and the one major outlier as a component of that index was a 24-month low in the need for unsecured credit, as the cost of living crisis continues to ebb away as wages and household income in general moves upwards in real terms.
The analysts look at this as a sign of confidence in the labour market, with job security and rising wages, alongside an easing of inflation fears. There’s also a strong expectation of an interest rate cut amongst the households surveyed.
Little changed in the more widely regarded GfK Consumer Confidence index - slipping to -21, which was exactly as expected by the consensus. Overall - everything looks more miserable than August and there seems to be a higher desire to save being indicated as the consumers seem to forecast “rain” on the horizon. It looks good compared to 12 months ago (the middle of a “recession”, remember), but poor compared to 2 months ago.?
Sentiment also looked miserable in the CBI industrial trends survey for October - output unlikely to grow over the next 3 months, new orders falling domestically in the sharpest decline since 2020, and a further decline being expected. Cost pressures (on the bright side) are downwards but you know that the firms would prefer rising order books and rising costs!
The expectation is that the last quarter of the year is a miserable one and then things improve - it certainly appears to be a self-fulfilling prophecy, mostly.
Business optimism, as measured by the CBI, came out alongside this dropping from -9 in September to -24. It all looks very “budgety”, and in real terms we are learning just how expensive it is to have a new Government who as yet are very naive in the way they communicate with business. They have not earned trust yet, and have not yet understood that they need to deliver results before they are trusted. Indeed, many have picked up how they say one thing and do another - and they’ve got to decide what they really mean, and then communicate it, rather than expecting everyone to believe them, parrot-fashion.
Rant over, and onto a subject which guarantees another one - Andrew Bailey. The Guv’nor delivered a speech this week in Washington (a memorial speech about an influential person in the world of clearing houses) and one in New York about financial stability. In the latter he cited Hyman Minsky, the father of financial stability theory - and talked of how important that stability (or perceived stability) is to economies.?
He talked of the movement of cash from liquid to illiquid assets (and back again) in the time of crises and how it can behave (or even cause) a crash. He was keen to point out that taking a prudential approach matters (what else would the Americans expect from a Brit?); that although the financial crisis is behind us, everything that led to it is “sorted” - it isn’t, and he urges everyone not to be complacent.
He also cited the growth of non-bank finance. This is the part that should resonate with property investors - pre-crash, banks went “all the way” often in property transactions. The removal of such products has led to a growth in “non-bank” lending - whether that be private money, bridging providers, or a blend of the two.?
Bailey continued to talk of surveillance - how does the central bank or the government keep an eye on this activity and the stability of it - and tools of remedy (when something goes wrong, how do we fix it?). The Bank is trying to develop better models of what actually happens when a crisis happens, rather than living too theoretically (some would say 20 years too late of course, but better late than never).?
His final point was around looking at the provision of liquidity to non-banks by the central bank; they cause much more concern because they are less tightly regulated and scrutinised of course, but also the central bank appreciates their importance. It was a heavily theoretical but nuanced speech, which made me very pleased and confident that someone at the Bank knows what they are talking about - and they must have written it for him (couldn’t resist, sorry).?
His perhaps most pertinent contribution to the day-to-day, right now, though, came this week when he commented that inflation was falling “faster than expected”. We have had some more positive month-to-month movements despite not seeing enough downward pressure in the other indicators (everything other than CPI). I am not sure yet that we deserved that statement, if I am honest, because as I analysed the most recent figures, there was a perfect storm of a stronger pound and a dropping oil price as well, for September.
We really need to hold interest rate analysis until after the budget - because there’s been plenty of speculation in the gilt markets this week……and that takes me to the yields. We had a “slow death” week of constant but slowly climbing yields. The market opened at 3.926% and was happily testing 4.1% and above, and closed at 4.105%. What’s going on - the speculation that Rachel Reeves will change the fiscal rules to spend more money is meaning that a few actors in the bond markets are having a bet that this is “another Truss”.?
Whilst I have no faith at all in Labour’s communications strategy, I have not yet lost faith in the Chancellor. She’s a more than capable economist with some good people advising her. The speculation is that she will find ￡50bn for investment and make a good case for spending it - small beer compared to ￡2.5+tn of debt, and I would be surprised if it moves the needle in the way that she frames it on Wednesday. Famous last words?
The impact on the base rate - almost certain now that there will be a 0.25% cut at the start of November’s meeting. There is speculation about 0.5%, and also a back-to-back cut in December - I still don’t agree with either of those as the likeliest outcomes. Does this mean a guaranteed drop in the bond yields of the same amount? Absolutely not - but still I would expect it to move downwards 0.1-0.15% in that week (a couple of weeks’ time)
Thursday’s 5-year gilt close was 4.093% and the swap closed at 3.781% still preserving this massive 0.3% discount. Target mortgage pricing 5.8% with investment grade yields at 8.26%+ on buy to let properties (based on a 30% cost base).
Deep Dive time. Reports I want to look at this week, as we get to the end of a month and start to get more data on the third quarter of the year:
Business demography - births and deaths at the business level in Q3.
UK house building - starts and completions of permanent dwellings (Q2 data now available)
Real time business insights and impact (just released, but about September 2024).
So - congratulations sir or madam, it’s a bouncing baby business! But, there were 3.7% fewer business creations in Q3 compared to 2023 Q3. The significant decreases are in construction, transport and storage. Good news though - business “deaths” were down 4.2% over the same period.?
The number of business births in the quarter was 75,405, with 65,180 deaths. The “population” continues to grow at the business level too, it seems. The direction of travel on both looks clear though - fewer starts, and fewer finishes. Now doesn’t seem to be a time that’s particularly inspiring entrepreneurs.
The house building data, then. 51,960 completions - and only 31,660 starts. The past year - the first whole year we have since significant building regs changes in 2023, which have not been reported that much that I have seen - has seen only 114,110 housing starts.
Now. You don’t get completions when you haven’t started them. Let’s state the obvious. The delivery of 192,530 homes in the past 4 quarters - still well below Labour’s target - compares to 220,310 starts between Q3 2022 and Q2 2023. If that same percentage persisted for the next 12 months, you are looking at 87% of 114,110 which would only be 99,275 homes. You can guarantee Labour will get the blame for this or at least look very silly when these figures do play out - 200,000+ homes below target (especially if you use Rayner’s 370k figure that was bandied around for a bit). It isn’t their fault - the regs changes at a time when the market also couldn’t handle another price rise - alongside weak sale prices - is the reason.?
Your “rule of thumb” figures are private developers completing 75-80% of the output, with 18-20% being housing associations and the rest - 2-3% - being local authorities. It is this 2-3% that Rayner wants to target, as you know.
The figures look very glum for the next 12, and I’m not sure where the rocket in new starts is coming from. The PMIs have finally been making positive residential noises in Q3 - so we can expect better starts, but the volume of improvement needed is triple what’s been achieved in the past 12 months. It feels like a very, very big task indeed in the sober light of day.
The real time business impacts, then. I wonder if it feels like I am simply reporting misery, time and again, at the moment - in reality, I am searching across all the sources that I possibly can to find alternative viewpoints and not dwell on the bearishness in the overall economy. Or at least - I’m trying. I’ll draw this together in the conclusion.
There tends to be a couple of these reports a month from the ONS - one about business from the month before (at this sort of time of the month), and one about alternative insights nearer the beginning of the month. The headline is that 15% of businesses reported increased turnover - whereas 24% reported decreased turnover.?
Expectations for growth for November looked similar - 16% expecting better turnover, with 12% expecting to achieve better prices. 8% of all businesses reported worker shortages - rising to 19% in businesses with 10 or more employees.
It seems, underneath the uncertainty of the budget, competitive forces are also coming back into play as prices stabilise. This hurts the firms, of course, but helps the consumers and perhaps explains why there’s some increased confidence at least in the S&P consumer numbers.?
Overall, though, you’d have to conclude the economy has stalled. Should we ONLY blame Labour, and the budget? It’s difficult to do anything else. Inflation has been subsiding. Consumers have been getting paid more. Interest rates have been coming down and are expected to do so a little more, although the mortgage rate needles really haven’t moved that much this year when you look closely at the gilts and swaps.?
I’m still searching for the other reasoning, and coming up short, without trying to be political. But what does this all MEAN for us as property investors and developers?
It means exactly what I’ve been reporting for the past weeks. This is an incredible time to be involved in property. If you are happy to adopt my mindset for a moment - pieced together by bits of Buffett, Munger, and other business titans - the market has seemed to want to turn left, so I’ve been turning right. Cranking up volume. The one single metric I’d point to in the past month is how far under “maximum bid” we’ve been picking properties up for. It’s a big number at this stage.
Auctions have been trappy - the traders have bought well, but struggled to sell. Lots are selling vacant rental properties - a record number, according to the portals - on the open market, which are much less likely to go to another landlord than a tenanted property at an auction. Tenanted stock is selling terribly as no-one wants the risks, and who wants to buy into a regulatory environment that is tightening? Me, that’s who - because the risks are being more than priced in.
The gaps in underlet property are ever-increasing, because market rents have just been ploughing on in the background on existing stock. The time is now. I heard a conclusion that I disagreed with, this week. “Once the budget is over it will all be back to normal.”
I’ll tell you why I disagree. Firstly, the Renters’ Rights Bill. This will continue to generate scary headlines until it is passed. Once it is passed, it won’t fix the supply and demand problems, and the temporary accommodation situation will continue to absolutely blow up until there is true delivery of a significant number of social homes. I don’t see this as up for debate. There’s thought to be another 6-8 months before it gets through the Houses of Parliament.
Next, the NEXT budget. Regardless of how good - or not - the communications are on the back of whatever occurs on Wednesday 30th, there will be a decent slug of the population who didn’t panic before this one, but as yet have no faith or trust in the Labour party. They will still sell - perhaps in January, but likely before the 2026/27 tax year. This is more “death by a thousand cuts” than the activity we’ve seen in the past 6-8 weeks or so - but the direction of travel isn’t going to change.?
Bearishness is here to stay, for a bit. It will suppress our economic growth - which is a tragedy, especially when the 3-word slogan Labour got elected on the back of was actually one word - Growth. However, it is an incredible environment for the entrepreneurially-minded property investor, who does work (and shoulder a gigantic amount of risk, for that matter) - thank you very much, Sir Kier. Or, to say how I really feel after the intergalactic ignorance that he displayed in Friday’s chatter - “Up yours”. There’s still an open invite to look around my portfolio any time you like - I promise you it will be a real learning experience and you’d end the day a better leader than you started it. Let your people talk to my people (or just to me!)
Before I call it one more time, tickets for the next Property Business Workshop are OUT - Thursday January 16th 2025 (Yikes), with some great subject matter - planning, efficiencies, and also financial accounting and bookkeeping - not “how to use Xero” but how to ensure reporting is SET UP correctly and how to monitor it on an effective, ongoing, monthly basis.
SUPER Early Bird tickets are available with a 25%+ face value discount on them - once they are gone they are gone, Rod and I hope to see you there. Buy one here: https://bit.ly/pbwfive
There’s only one way to deal with all of this ongoing noise and excitement - Keep Calm, ALWAYS read or listen to the Supplement, and Carry On!
TV Anchor | I'm leveraging my journalism to help 1 time pressed woman leader give a TEDxTalk in 2025 | Currently interviewing candidates for my 2025 Mastermind
1 个月Love the agenda-free approach... it keeps things real
Turning organizational challenges into thriving work environments with sustainable HR solutions | HR Transformation Specialist | HR Consultant | Ex-GAP | Ex-Cipla | Ex-Schindler
1 个月Authentic as you can get - have been talking to some friends in the UK. They are suggesting positive outlook towards real estate too! Sharing these with them for their views Adam Lawrence
Amplify your social impact by joining a community of changemakers | Husband & Father | Helping founders build impact in their business | 2 strategic exits | Admitted Executive Education Participant at Harvard University
1 个月Excellent information right, perfect sunday night read for me
4x Founder | Generalist | Goal - Inspire 1M everyday people to start their biz | Always building… having the most fun.
1 个月I’m all in for de-dollarization... let’s see it.
? Business Development Manager Talbots Law and Professional Property Investor?
1 个月Adam Lawrence another fantastic supplement, you've got quite a good handle on things for someone that doesn't work! I wholeheartedly agree that now is an incredible time to be in property, IF you are willing, and are prepared, to operate at scale. I think that we are looking at a once in a decade opportunity, if not once in a lifetime. The government are building the moats around our property businesses for us, something that Buffet would no doubt approve of. Post RRB and compulsory Ombudsman registration etc it will be much more difficult to enter the PRS, that really only means one thing from a business perspective for those of us already embedded in the sector. Portfolio landlords are disposing of stock like never before. That stock seems to be massively underlet, even using LHA rates as the comparison rent so the opportunity is huge. It's a good time to build a sustainable and profitable business providing good quality and compliant homes to people that want and need them. It certainly won't be without its challenges over the next few years but that is what keeps it interesting. Ultimately we keep calm and carry on don't we!