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  • Writer's pictureAlastair Hoyne

Finanze® Weekly Roundup - 05/11/2022

Here are this week’s highlights in the UK economy.

BoE delivers largest interest rate hike. The central bank raised the rate by 75 basis points to 3%. BoE Governor Andrew Bailey stated, “If we don't take action to bring inflation down, it gets worse”.

BoE chief economist: more hikes to come. Huw Pill warned that UK interest rates will further rise in the coming months though not as sharp as the 5.25% hike that financial markets forecast. This is to ensure that the central bank hits its 2% inflation target.

Property prices dropped in October. Nationwide Building Society announced that the average value of UK homes dipped 0.9% to £268,282 in October, which is the sharpest drop since the beginning of the pandemic.

Mortgage approvals decreased in September. The BoE reported a total of 66,800 mortgage approvals for home purchases in September, down from 74,400 the previous month. This reflects the pull-out of some mortgage products by lenders after the mini-Budget announcement.

BoE warns of half a million job cuts in the country. There’s a high possibility that the UK will lose 500,000 jobs should it go into a deep recession. The central bank estimates that unemployment may hit above 5% even if borrowing costs are sustained.

UK real estate funds rush to meet redemption requests. Financial Times reports that some of the largest property funds are marketing at least 18 commercial assets with a collective value of £1 billion in London, which is higher than normal levels as observed by property agents who commented in the interview.

Finanze® Foresights:

Investor concerns over rising interest rates and economic uncertainties have prompted the country’s open-ended property fund market to meet pressures from redemption requests. As market volatility continues to expose them to liquidity mismatches, short-term redemptions almost seem impossible to meet, especially this time when the BoE has announced that there will be more base rate hikes to come so it can tame inflation to its 2% target.

Property funds risk investors’ appetite for funding should these groups offer longer redemption periods. Thus, most are left with no choice but to sell off their commercial property assets to meet redemption requests. Some, however, are forced to suspend redemptions since they cannot keep up with the current pace of liquidity tightening across the sector — a repeat of what transpired after Brexit in 2016 and another in 2019.

The pension industry, which is exposed to gilt volatility through liability driven investments (LDI), has been pulling its contributions from property funds at an accelerated pace since the mini-Budget. When the collateral calls spiked, the BoE was compelled to intervene through its buying scheme to soften the pressure.

Although the Financial Times report revealed that fund managers (which include M&G, Legal & General, CBRE, Schroders and Aberdeen) claim the reason behind the fire sale worth £1 billion of commercial assets is due to portfolio rebalancing, we believe that a part of this is still being driven by pension funds’ need to secure their hedges and make sure they have enough reserve cash. For their part, property funds, whose transactions involve bricks and mortar, may not take so much time to close unlike before, since they’re ready to take a cut in prices.

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